record of incompetence
In 2010, Venezuela's economy contracted for the second year running and was one of the only two countries in the region that failed to post growth (the other was Haiti).
And that is not all. Everything indicates that the government is not considering implementing the necessary corrective measures, but that the economic crisis will get worse.
On January 1, there was a partial devaluation of the bolivar “fuerte” (strong bolivar) with the elimination of the Bs.F.2.60:$, which was applicable to food, medicines, and capital goods, so establishing a single official rate at Bs.F.4.30:$.
The devaluation of the preferential rate was 32.5% (equivalent to a 65% increase in the “price” of the preferential dollar), which will inevitably be reflected in the production costs of food, medicines, and other essential products. And the signs are that the government is reluctant to authorize any increase in the prices of the basic basket products, so much so that official spokespersons claim, absurdly, that Agropatria (formerly Agroisleña) is supplying the inputs that will make it possible to cover the basic basket without increasing prices.
The government apparently thinks that the additional Bs.F.20 billion that will enter the country's coffers thanks to this partial devaluation will be more than sufficient to cover its needs, which is why the President announced that he will not raise value added tax or levy a bank debit tax.
The President himself has said that PDVSA could generate an additional US$3 billion for housing construction. Apart from that, he will continue to scrape out what is left in the Macroeconomic Stabilization Fund (FEM); the order has already been given to transfer US$500 million to finance the construction of housing and it is assumed that the remaining US$332 million will be transferred in the near future.
The problem is that the government is planning to cover its needs through fresh borrowing.
That is not realistic. The international markets are simply not able to absorb large amounts of Venezuelan debt. According to the British consulting firm CMA, Venezuela is ranked as the second country in the world (after Greece) most likely to default on its debt. What is more, last year, new issues of Venezuelan debt reached the market with yields of 15% or 16% on maturity; in other words, they classified as junk bonds.
This suggests that Venezuela will find it extremely difficult, not to say impossible, to place large amounts of debt on the international market.
And if the government tries to raise funds on the domestic market, this will increase inflationary pressures and also take up the scant credit available for productive activities.
In short, the forecast for 2011 is another contraction in the economy and more inflation.
VenEconomy has been a Venezuela's leading specialized publisher on financial, political and economic data since 1982. VenEconomy's Points of View on the issues of the day, as seen by VenEconomy during the last week. Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by Veneconomy , on January, 11, 2011. Petroleumworld reprint this article in the interest of our readers.
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Petroleumworld News 01/12/2011
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