CARACAS, Friday August 09, 2013 | Update

Venezuela's central bank records 30% drop in liquid reserves

The bank begins to mirror the impact of the decline in the price of gold

The semi-annual balance of the Central Bank of Venezuela (BCV) reflects the economic imbalances (File photo)
Friday August 09, 2013  09:48 AM
The Central Bank of Venezuela (BCV) has published its balance sheet for the first half of 2013, showing a decline in international reserves, which is the reservoir of foreign currency the country uses to pay for imports and repay the foreign debt, as well as to support the currency.

The decline of liquid reserves is the result of a scenario where dwindling production prompts higher dependence on imports; Venezuela has agreements under which it sells other countries oil at discounted prices; the oil output of state-run oil giant Pdvsa continues to decline and the foreign debt has climbed significantly.

Liquid reserves have plummeted by 30%, from USD 4.51 billion in December 2012 to 3.12 billion in June 2013.

In order to increase the amount of dollars in cash, the central bank sold a significant portion of the bonds, certificates of deposit and structured notes that are part of the reserves. Therefore, they plunged by 48%, from USD 1.44 billion to USD 748,570.

But there is more. In Venezuela, 70% of reserves are gold bars. This exceeds by far the average of 8% in Latin American countries. Therefore, the decline in gold prices is taking a heavy toll.

To set the price of gold reserves, the central bank calculates a six-month average. In December 2012, it established a value of USD 1,686 an ounce, but ever since then gold prices have declined on a monthly basis.

Consequently, the 11.76 million ounces of gold comprising the international reserves have a lower value. At the end of the first half, the central bank set a price of USD 1,529 an ounce. Therefore, the value of gold ingots fell 10%, from USD 19.98 billion to USD 18.07 billion.

In assessing the performance of the international reserves as a whole, including cash, bonds, gold and the position in the International Monetary Fund, the BCV records a plunge of 13.6%, from USD 29.88 billion at the end of 2012 to USD 25.80 billion in the first half of 2013.

But the decline continues. The central bank discloses detailed reports on international reserves only at the end of each semester. However, it discloses the total amount on a daily basis, and on August 7 international reserves stood at USD 22.96 billion, thus taking a 23% nosedive compared to the end of December 2012.

On the wane

Gold has continued to decline because investors expect an interest rate hike in the United States, which is taking the bite out of gold.

If gold prices do not rebound, the central bank will have to continue to reflect the impact on reserves. In the short run, this would undermine Venezuela's capacity to meet debt payments. Further, if the Ministry of Finance decides to issue bonds abroad, the Republic would have to pay a high interest rate.

However, Bank of America is optimistic. It believes that this year Venezuela will curb imports, financial assistance to other countries and capital flight, thus leading to the stabilization the government's foreign exchange assets.

Bank of America also projected that the gold price will take some oxygen and end the year at USD 1,495 an ounce.

Therefore, Bank of America forecasts that economic adjustments in Venezuela would translate into a stronger foothold to meet debt obligations.
The end of a cycle

Hundreds of thousands of demonstrators took to the streets of Brazil on March 13 to demand the ouster of embattled President Dilma Rousseff, carrying banners expressing anger at bribery scandals and economic woes. A banner read "We don't want a new Venezuela in Brazil."