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Last week, the government announced the Budget for 2007 with a disorganized, confused message in which more was kept back than was revealed. Besides, and as is now customary in Venezuela, the projected revenues and expenditures are grossly underestimated.

It is traditional for Venezuela’s Finance Ministers to underestimate anticipated revenues, first and foremost so as to have a “cushion” in the event of an unexpected deficit, but the Chávez administration has taken this tradition to new extremes. Now, the oil revenues are also being underestimated by a wide margin, the idea being to avoid having to pay the amounts out of the Budget mandated by the Constitution to opposition governors and mayors and, at the same time, to allow PDVSA and the recently created National Development Fund (Fonden) to accumulate resources, which can then be used to finance the “missions” and other pet government projects without having to go through the National Assembly.
The point is that the government maintains that spending will remain the same in current bolivar terms (i.e., less in real terms). However, experience dictates that spending is likely to increase yet again next year, although less than in the period 2004-2006, when revenues rose at a rate of 53.3% a year.

The 2007 Budget is based on absurd assumptions, including the barrel of oil at $29 (offset in part by an overestimation of export and production volumes) and average inflation of 12% (compared to a more likely 17%-19%). In addition, it assumes growth of 5% for GDP (reasonable) and that the exchange rate will stay at Bs.2,150:$, which is unlikely. VenEconomy is of the view that the rate will go up by 10% to Bs.2,400:$.

Strange numbers result from applying these assumptions. Forecast spending (0.1% less, without taking account of interest) remains practically the same or 13.6% less in real terms (based on the government’s assumptions). It is also forecast that revenues will drop by 14.8% in real terms, giving a modest deficit of Bs.5.9 trillion (current bolivars), equivalent to only 1.5% of GDP.

According to VenEconomy’s calculations, forecast revenues could be underestimated by Bs.24.6 trillion (23.1%), while Onapre’s estimate for spending falls short by some Bs.25.9 trillion (25.1%), giving a deficit of approximately Bs.7.1 trillion (1.8% of GDP), which looks to be manageable if it were not for an estimated Bs.10-12 trillion that are not included in the Budget and, according to reports, are to be disbursed by Fonden and PDVSA’s Social Fund.

One perverse consequence of this underestimation of the Budgets is greater discretion in the handling of the public purse, apart from the fact that it makes impossible for there to be sound planning, which would tell people where the country is headed.

VenEconomy is a Venezuela's leading specialized publisher in the economic and financial area. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by VenEconomy, on 10/25/2006. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 10/27/06

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