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VENEZUELA: STORING UP ECONOMIC TROUBLE

VENEZUELA: STORING UP ECONOMIC TROUBLE

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Prospectiva económica sobre Venezuela.
Prospectiva económica sobre Venezuela.

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Published by: http://www.animalpolitico.com on Jan 17, 2013
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11/11/2013

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www.controlrisks.com
PRIME@controlrisks.comShould you wish to discuss this issue with the analyst, please contact Nicholas Watson:nicholas.watson@controlrisks.com| + 57 (1) 423 2933
Information Minister Ernesto Villegas on 13 January reported that President Hugo Chávez’s ‘respiratoryinfection is under control’ and that he is ‘conscious’, while the president’s brother and governor of Barinas
state, Adán Chávez, last week denied that his brother was in a coma.
 
The uncertainty surrounding the president’s health is leading to economic
drift as majorpolicy decisions remain effectively on hold
. A devaluation to correct the massive appreciation of the real exchange rate and improve the fiscal accounts was expected to take place in early 2013,but is now likely to be postponed either until Chávez recovers or until after any election in the eventof his death.
 
A recent clampdown on sugar refineries and the government’s confiscation of priv
atelyowned sugar stocks last week points to the incoherent moves that will fill the policymakingvoid
. If Chávez dies and Vice-President Nicolás Maduro faces a presidential election, governmenthostility towards private sector operations would increase. In this context, we expect the businessenvironment to remain highly complex.
 
Although the government has trumpeted its range of economic options to tackle imbalances,the outlook for the economy remains highly challenging
; price controls, a lack of foreigncurrency, costly subsidies and government attacks on the private sector are likely to continue tocause distortions and imbalances, and the longer the delay in taking corrective steps, the greater the economic cost.
Health of the economy
The president’s h
ealth is not the only uncertainty gripping Venezuela. The state of the economy, and theimpression that the government is postponing important economic adjustments, are the subject of mounting concern. The latest economic data released by the Central Bank (BCV) on 11 January highlightthe depth and range of distortions in the economy. The figures were worse than expected. Inflation inDecember 2012 reached 3.5%, the highest monthly rise since April 2009. Following the unexpectedlypoor monthly rate, the BCV adjusted its inflation total for 2012 to 20.1%, down on 2011, but still strikinglyhigh.
Meanwhile, the BCV’s scarcity index, a monthly monitor of the supply of food and basic goods, rose to
16.3% (in other words, in a standardised basket of 100 basic goods, 16.3 were not available in December 2012). This was the highest recorded rate in 55 months, though still lower than the record set in 2008.The scarcity index points to the persistent problem of inefficiency in the state-run food sector (see textbox below), the negative effects of price controls, and also to the inadequate supply of foreign currency topay for imports. The average amount of US dollars released by the government-run SITME tradingplatform was $20m a day in the last quarter of 2012, a 50% drop from the levels seen in the previousquarter.
17 January 2013
VENEZUELA: STORING UP ECONOMIC TROUBLE
 
Confidential
www.controlrisks.com
PRIME@controlrisks.com
2
Devaluation
But the real elephant in the room is the pressureto devalue, pressure that is increasing as thedisparity between the official and black marketexchange rates continues to grow. Devaluation
would boost the value of Venezuela’s oil earnings
via a weaker exchange rate, while helping to plugoverblown budget and fiscal deficits. Under normal circum
stances, and if Chávez’s condition
had not worsened, the government might havebeen expected to slip in a devaluation in lateDecember 2012 after the gubernatorial elections.But the fact that the president may be on hisdeathbed and Maduro could face an election
within 30 days of Chávez’s death means the
government is likely to postpone unpopular economic adjustments until after any vote.One of the principal downsides for thegovernment is that devaluation would increaseinflation. Furthermore, in the longer term, andassuming the government
 –
led by Chávez or Maduro
 –
maintains economic policy continuity,inflation would eat away at the depreciation thatfollows any devaluation, and a further devaluationwould then become necessary before too long.For businesses, it would increase the flow of dollars to the private sector. However, even if more money were made available, the lack of 
contractual guarantees and the government’s
record of arbitrary interventions and hostility towards the private sector would continue to undermine thebusiness environment.
Other options?
Other funding sources to alleviate economic pressures come with strings attached. Further bondissuances by the government or state oil company PDVSA would increase the debt burden, which has
risen significantly over recent years. Venezuela’s borrowing costs are also rising, making this an
expensive escape valve. Another option is China. Oil minister and PDVSA president Rafael Ramírez on10 January revealed that PDVSA is in line to receive a further $4bn in financing from China. However,this is not enough to avoid devaluation altogether, and the announcement was most probably made todemonstrate that the government has options, even if in reality the opposite is true. The
government’s
extensive opaque off-budget funds are unlikely to bridge the gap, even if nobody actually knows howmuch money they contain.Meanwhile, Maduro would be reluctant to countenance ending energy subsidies or tampering with thecontroversial fuel subsidy, the cost of which is starting to bite. Venezuela has the cheapest fuel in theworld. Seared on the memory of Venezuelans is the
Caracazo 
, a bloody few days of riots, looting and
SWEET SIXTEEN
There are 16 sugar refineries inVenezuela, ten of them owned andoperated by the state and the rest by theprivate sector. Despite repeatedgovernment claims that the state shouldbe running food production, the sixprivately run refineries account for 80% of production. Moreover, although thegovernment claims that production grew4.3% in 2012, the country still importsmore sugar than it produces. Theshortage of currency for imports isundoubtedly contributing to sugar shortages on the shelves. The
government’s response has been typically
heavy-handed. Last week it deployed theNational Guard (GNB) to the refineries in
an effort to crack down on ‘hoarders’ and‘speculators’
, and also confiscated nearly9,000 tons of sugar that had beenimported by the local unit of soft drinksmaker Pepsi to re-distribute in state-runsupermarkets.

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