Using a linear forecast of Venezuela foreign exchange reserves, and accounting for roughly $3.8 billion in debt payments through the government and state-owned PDVSA through December 2017, I am projecting the level of foreign exchange reserves to end up at just under the $5.3 billion mark on 1/1/2018.
As of July 22, 2017, Venezuela's foreign exchange reserves stood at $9.971 billion, the lowest level of reserves seen during the current crisis. As the chart above shows, the country's foreign exchange reserves have been broadly falling since the start of 2017, from a few ticks under $11 billion at the beginning of the year to the $9.971 billion level we are at now.
I took these two data points and, to satisfy my own curiosity, used the data points to create a linear projection of foreign exchange reserves for each day through the end of 2017. Using these data points, the linear equation was calculated to be:
where Y is the level of foreign exchange reserves in millions of USD, and X is the date in basic number format. For example, July 21, 2017 was assigned the number 134, as it was the 134th data point in the foreign exchange reserves data set as provided by the Central Bank of Venezuela. I have filtered out all weekend dates, so the linear projection does not create an artificially-low ending forex reserve level by incorrectly lowering reserves on weekends. It should be noted that this model does not account for holidays or other days off during the workweek.
January 1st, 2018 was the 250th data point in this data set, so the projection was calculated to be Y = (-7.75*250) + 10,995. This resulted in $9.055 billion of foreign exchange reserves to start 2018. When we account for sovereign and PDVSA debt that will be paid from August 2017 through December, however, we subtract $3.8 billion to receive an estimated foreign exchange reserves level of $5.26 billion on January 1st.
There are many caveats to this forecasting methodology, of course, a primary flaw being that the world of finance (and the world as a whole) generally does not move linearly. If it did, we wouldn't need posts like this trying to make predictions, because everything would be so linear we could forecast decades and decades into the future. An additional threat to the integrity of this model is that Venezuela could strike further bond deals, as it did controversially with Goldman Sachs earlier this year.
However, using duct tape to fix a crumbling building can only do so much, per se. Venezuela will continue to struggle amidst this economic, political, social and broadly-humanitarian crisis. With the Venezuelan bolivar recording a 750%+ depreciation over the last year as of this typing, a currency crisis appears to be blooming. This is quite ominous, as currency crises historically have been seen to precede sovereign debt crises. Investors appear to be baking such a potential credit event into their investments, with the Venezuela five-year credit default swap spread reaching levels not seen since 2016 this past Thursday (Figure 1 below).
The vultures continue to circle around Venezuela, and while a credit event may not occur for some time, it's quite apparent that the economic & financial situation, much less the social and political situation, is unsustainable.
Andrew
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| Data source: Central Bank of Venezuela Chart source: Author's creation |
I took these two data points and, to satisfy my own curiosity, used the data points to create a linear projection of foreign exchange reserves for each day through the end of 2017. Using these data points, the linear equation was calculated to be:
Y = -7.75x + 10,995
where Y is the level of foreign exchange reserves in millions of USD, and X is the date in basic number format. For example, July 21, 2017 was assigned the number 134, as it was the 134th data point in the foreign exchange reserves data set as provided by the Central Bank of Venezuela. I have filtered out all weekend dates, so the linear projection does not create an artificially-low ending forex reserve level by incorrectly lowering reserves on weekends. It should be noted that this model does not account for holidays or other days off during the workweek.
January 1st, 2018 was the 250th data point in this data set, so the projection was calculated to be Y = (-7.75*250) + 10,995. This resulted in $9.055 billion of foreign exchange reserves to start 2018. When we account for sovereign and PDVSA debt that will be paid from August 2017 through December, however, we subtract $3.8 billion to receive an estimated foreign exchange reserves level of $5.26 billion on January 1st.
There are many caveats to this forecasting methodology, of course, a primary flaw being that the world of finance (and the world as a whole) generally does not move linearly. If it did, we wouldn't need posts like this trying to make predictions, because everything would be so linear we could forecast decades and decades into the future. An additional threat to the integrity of this model is that Venezuela could strike further bond deals, as it did controversially with Goldman Sachs earlier this year.
However, using duct tape to fix a crumbling building can only do so much, per se. Venezuela will continue to struggle amidst this economic, political, social and broadly-humanitarian crisis. With the Venezuelan bolivar recording a 750%+ depreciation over the last year as of this typing, a currency crisis appears to be blooming. This is quite ominous, as currency crises historically have been seen to precede sovereign debt crises. Investors appear to be baking such a potential credit event into their investments, with the Venezuela five-year credit default swap spread reaching levels not seen since 2016 this past Thursday (Figure 1 below).
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| Figure 1: Venezuela's 5-year CDS spread. Chart from http://www.boursorama.com/bourse/cours/graphiques/historique.phtml?symbole=3xVENZ |
Andrew
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