Venezuela’s economy is in tatters, with sky-high inflation and mass shortages fuelling protests. While banks have made provisions for loan delinquencies, they are hugely reliant on deposits for funds and hamstrung by regulations. Lucinda Elliott reports from Caracas.

Venezuela

Patricia Díaz has visited her third ATM in Caracas and it is not past midday. Her bank, like those across Venezuela’s banking sector, limits how many bolivar notes she can take out. But the daily withdrawal limit is not keeping up with the country’s triple-digit inflation, and a single trip to the cashpoint barely covers the cost of a sandwich and two cups of coffee.

Ms Díaz is increasingly relying on her debit card, instead of cash, as a form of payment. “I had to ask my cleaning lady to open an account because it’s becoming impossible to take out enough money to pay her salary on time,” she says.

Such an increase in bank account holders is a rare potential bright spot for Venezuela’s banks in an otherwise sad and shrinking economy that will have contracted by more than one-third between 2013 and the end of 2017.

Throes of recession

News from Venezuela so far in 2017 is of a relentless disaster. South America’s key oil exporter is in the midst of a recession akin to being at war, with almost daily anti-government demonstrations from the Amazon to the Colombian border, brought on by acute shortages of the most basic goods and medicines.

The economic crisis, triggered by 2014’s fall in global oil prices and exacerbated by price controls, corruption and chronic mismanagement, is spurring protests against president Nicolás Maduro. Under his authoritarian regime, more than 125 people have died and 676 been imprisoned between April 2017 and mid-August, according to the Foro Penal, Venezuela’s criminal prosecutor.

The International Monetary Fund (IMF) revised down forecasts for Venezuela’s gross domestic product (GDP) in July to a 12% slump for 2017, from a 7.4% decline forecast three months prior and an estimated 10% downturn in 2016. The IMF's outlook for the Andean nation is worse than all estimates of economists surveyed by Bloomberg. Venezuela has failed to publish official GDP figures since 2013. Balance of payments, national income accounts and inflation data were last published in mid-2015, further increasing uncertainty about the depth of the ongoing crisis.

“The political crisis poses significant downside risks for growth if it escalates further or remains unabated for a long period,” said Alejandro Werner, the IMF’s Western Hemisphere director, in a report. The battle over power and policy in Venezuela that began when former president Hugo Chávez was first elected in 1998 has reached a critical point. The country now produces little except oil, and imports almost everything else.

Popular support for Mr Maduro, who narrowly defeated the opposition candidate in presidential elections in 2013, has collapsed to about 20%, spurring near-daily demonstrations since April. Meanwhile, political opponents accuse his government of being increasingly authoritarian and incompetent. Poverty rates have dropped to levels below those that fuelled Mr Chávez’s so-called Bolivarian revolution in the late 1990s.

In July, 40 countries around the world, including most of the larger Latin American nations and the UK, refused to recognise a controversial vote organised by Mr Maduro to elect candidates to a “constituent assembly”, a quasi-parliament that will have the power to rewrite the constitution. Critics say the election is a sham designed to perpetuate the rule of the president, and bring to a close 60 years of multi-party democracy.

In this scenario, it was no surprise that all six of Venezuela’s largest private sector banks declined or did not respond to requests for an interview with The Banker.

Inflation wipes out deposits

But having a bank account – or three in the case of Ms Díaz – is more important than ever. “Venezuelans are opening multiple bank accounts,” says Russ Dallen, managing partner of Caracas-based investment bank Caracas Capital. “It is safer to have several cards because of delays when processing cheques, achingly slow chip-and-pin machines and prohibitive withdrawal limits. This will leave Venezuelans with numerous accounts after the crisis.”

Spiralling queues outside supermarkets, which have become a defining feature of the country’s chronic food scarcities as the government slashes imports, are exacerbated by a creaking card payment system. Venezuela’s communications infrastructure is long neglected; cables regularly ripped up for resale as the recession ensues.

Cashiers must process more payments across a crawling dial-up connection, asking each shopper for their ID number, pin number, “checking or savings account?” before they can set off with the handful of items in their trolley. The fast-track 'Ten-Items' isle could apply to nearly all customers, unable to afford a weekly shop as inflation bites into bolivar earnings.

Fitch Ratings analyst Mark Narron, who specialises in private sector banks, reiterates that deposits are growing, in part due to new account holders, saying: “In nominal terms, the savings at Venezuelan banks have grown in 2017 because deposits are up some 172%.” But with inflation running several times higher, he says the banks’ savings are ultimately wiped away.

In July, Mr Maduro raised the monthly minimum wage by 50%, to 97, 531 bolivars, the 13th increase since he became president in 2013. The modest hike comes in the midst of galloping inflation that is running at about 1660% in 2017, according to the IMF World Economic Outlook – three times faster than the 475% estimate last year.

At the unofficial exchange rate, Mr Maduro’s new measure for the working classes, as he struggles to win popular support and includes an additional 153,000 bolivar food ticket, is equivalent to a measly $30. This black market rate is used almost everywhere in Venezuela. From restaurants and kiosks to car mechanics and dry cleaners, the exceptions are government price-controlled goods and state-run services such as petrol stations. These lamentable earnings are fuelling months-long protests and distort balance sheets.

“One branch of Mercantil in the US has more on its book in dollar terms than the entire banking system,” says Mr Dallen of Caracas Capital.

Private sector Venezuelan bank Banco Mercantil has a Miami affiliate that has roughly $6bn in assets, according to analysts, which is the size of all the Venezuelan banks put together if exchanged at the unofficial rate.

Distorted picture

In July, the black market rate for the bolivar traded at 9300 per US dollar for the first time, according to dolartoday.com – the most popular Miami-based currency website that speculates the illegal dollar rate – compared with the official rate of about 10 and a more widely used alternative rate of 2970. “The economic distortions mask the underlying crisis,” says Richard Francis, director of sovereign debt at Fitch Ratings. “For foreigners observing the country’s banks they look like they have trillions of dollars.”

Venezuela’s stock market appears to be bigger than those of Germany, France, India or Canada, valued at $2670bn – but is only worth $3bn based on the black market rate. Assets held in Venezuela are widely described as 'Monopoly money', after the currency used in the popular board game. “Monopoly money is only good if you are playing the Monopoly game,” quipped one banker in Caracas. “As soon as the game is over, you have nothing.”

For cash-only shopper Carlos Ramirez, new notes of larger denominations in violet, crimson and emerald were meant to help ease the fistfuls of near-worthless notes he needed for even small purchases.

Up until this year, the muddied 100 bolivar bill (the equivalent of $0.01 at the unofficial rate) was the biggest denomination available. Cardboard boxes stuffed with cash were a common sight behind tellers. The government has threatened to remove the 100 bolivar bill from circulation eight times since December, creating havoc among cash holders such as Mr Ramirez.

But since bigger banknotes began circulating in February, the 100 bolivar bill remains the primary denomination. “The tills don’t have enough change for the large bills,” he says. “Two electric money counters have been installed in some shops just to store the change, still in hundreds, instead of the two, five and 10 thousands needed.”

Making preparations

Unlike previous economic crises or sovereign defaults where the financial sector takes the brunt of the impact, four years into a major recession the banks in Venezuela are prepared and are making provisions.

“It’s a small, hunkered down system. No one here will be caught by surprise if there are changes,” says Mr Narron, referring to a potentially imminent regime change as Mr Maduro clings to power. The banks are taking provisions on loans. The ratio of non-performing loans over total loans at Venezuela’s 18 banks was 0.26% in December 2016, according to The Banker Database, and they have reserves varying between 2.4% and 3.2%, according to Fitch Ratings data.

A restrictive regulatory framework significantly limits banks’ ability to manage risk and optimise loan portfolios. Lending rates are kept well below inflation. The long-standing cap on interest rates – of a maximum of 28% annually for credit card loans – and caps on fees are deemed one of the biggest challenges for the banks in Venezuela because inflation is so much higher. “The banks are in deeply negative territory on their interest income,” says Mr Narron. While nominal Venezuelan banking credit and asset growth rates are the highest in the region, he says, the banking system is contracting in real terms.

A further challenge is the compulsory loan requirement. A percentage of bank loans must go to priority sectors set out by the government. Banks are obliged to lend about 55% of the previous fiscal year’s loan portfolio to these sectors. The banks cannot charge rates that are appropriate for the risks involved when lending out to certain borrowers. Any policy changes regarding interest rates, allowing them to float, would have a hugely detrimental impact on the ability of borrowers to pay off their loans, and delinquency rates would rocket.

Unusual funding

Unable to borrow from other sources, Venezuela’s banks rely almost entirely on income from depositors. At the six leading private sector banks, customer deposits represented a median of 99.6% of total funding in April 2017, according to the bank superintendence, Sudeban. A minority have government securities but for the majority, cash is kept on hand. For every bolivar deposited at a private bank, about 40 cents is kept in the bank’s coffers, compared with about 20 cents or less for each $1 deposited at a US bank.

Sizeable sums of cash could be interpreted as positive because the banks have almost no foreign debt or liabilities. On the other hand, it speaks of the lack of opportunities for banks in Venezuela.

“My feeling is that the system is more transactional than a pool of savings. A high percentage of cash on the books would imply there are savings and not a lot of loans,” says Mr Narron. But he suggests customers are simply putting in what they can for the day to day. “It’s hard to see through the numbers,” he adds.

Caracas shopper Ms Díaz would agree. “Any savings I have I immediately try to turn into dollars. What’s in my account is to cover expenses,” she says.

Next steps

Venezuela’s banks need to recapitalise. Some private sector local banks, such as Mercantil and Banesco, have diversified abroad, with affiliates that will continue to provide them with foreign currency income and insulate them from any future regulatory changes at home. These foreign assets would also appreciate in value and help the banks’ equity position if the bolivar exchange rate begins to normalise.

For the moment there is uniformity among the large private banks as they are all subject to the same regulatory environment. Any changes to interest rates, or a normalisation of the exchange rate, would have a direct impact. What is unclear is what will change, how and when.

“Politics is driving the economic story,” says Fitch’s Mr Francis. “The way [the banks] will recapitalise has a lot to do with what the corporate structure will be going forward.”  

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