Morgan Stanley predicts dollar crunch in Venezuela

In its latest report on Venezuela, dated March 29, investment bank giant Morgan Stanley estimates that the South American country will face a foreign exchange crunch and could be approaching a turning point where the oil wealth would not be sufficient to offset macroeconomic distortions.

The US investment bank, one of the most important financial institutions in the global economy, uses a model that takes into account Venezuela's upward trend in imports, higher capital outflows, declining oil production and rising domestic consumption of fuel, as well as stable oil prices, to make estimates of supply and demand of US dollars.

Considering both rends in these variables over the last three years and the Venezuelan government's estimates with regard to the positive impact of foreign investments in Carabobo block, Orinoco Oil Belt, Morgan Stanley predicted that Venezuela could face a cash crunch amounting to up to USD 7.9 billion in 2010 and up to USD 11.7 billion in 2011.

In a second less critical scenario, Morgan Stanley predicted that Venezuela would have a foreign exchange surplus in 2010 and 2011, but it would have a dollar crunch in 2014 of at least USD 7.7 billion.

The investment bank said that even if assuming that oil prices will remain at USD 80-85 per barrel, they are likely to fall short of offsetting declining in oil production, climbing capital outflow and the growing dependence on imports.

Link:
http://english.eluniversal.com/2010/04/06/en_eco_esp_morgan-stanley-predi_06A3698135.shtml

The multinational oil companies are sitting this out, waiting for the international arbitration clause before they make big investments. I have two clues for this:

a) The Russians did manage to include international arbitration in their agreement. This was done via a Bilateral Investment Treaty Putin signed with Chavez. The treaty protects Russian investments by giving the Russians the ability to take PDVSA to court in a foreign country. This is a big deal for the government, and giving up their "sovereignity" this way must have been like swallowing a reindeer's antler.

b) Repsol is finding a lot of gas offshore Paraguana, but there's nothing going on about them forming the JV to develop it. The terms, as they are now, spell out that PDVSA will have minority rights in the JV, and the two foreign partners will share the majority. This they see as a method to control PDVSA. I bet the Joint Venture isn't getting done because PDVSA is having to swallow another reindeer antler if they form a JV this way.

I get a lot of this information from newsletters like Business News Americas. I wonder if Morgan Stanley and those investment analysts read the same newsletters I do? Their model is probably factoring in a slow down in foreign investment while PDVSA and the government choke over the terms demanded by the multinationals. These multinationals are private companies, have a high focus on profits, and are going to protect these profits...and given the recent nationalization record, they're probably going to ask for very strong protection to make sure Chavez doesn't take their fields after the investment is made.

So, I guess they'll have to devalue the currency again to keep their cash flows. And this will mean more inflation. There has to be a way to make more money out of this...