The scale of the troubles facing Hugo Chávez,
Venezuelas president, is hard to overstate. The country
is still mired in recession its first since 2003
while many other Latin economies are rebounding strongly. Oil
revenue, which accounts for 94% of export income, has dropped
off substantially, limiting fiscal spending; inflation is
running at the highest rate in Latin America; and an energy
crisis has forced widespread electricity and water
Chávezs government has tried to address some of
these problems, most recently with a devaluation of its
currency, the bolívar. But while the move will likely
benefit public coffers before Septembers parliamentary
elections, it may also undermine the countrys growth
prospects and push up inflation in the medium term.
As a result, Chávezs government may find itself
up against even weightier trials in the lead-up to the
presidential elections in 2012.
On January 8, Chávez announced his government would
implement a dual exchange rate of Bs2.6/$ for goods considered
a priority, and Bs4.3/$ for non-essential items. Since 2005,
the bolívar had been pegged at a fixed rate of Bs2.15/$.
But dollars which are severely restricted under
government currency controls have been selling for three
times that rate on Venezuelas parallel market, making the
currency highly overvalued.
There was a very high demand for dollars and a very
reduced supply because of the shortage of oil money, says
Domingo Maza Zavala, a former central bank director. It
Chávez has relied on Venezuelas state oil
company to fuel his self-styled revolution, funding social
programmes that provide everything from literacy to subsidized
food. But when world oil prices dropped to roughly half their
2008 peak, so did the countrys income. During the first
half of 2009, net profits at state-run Petróleos de
Venezuela SA, or PDVSA, fell 67% over a year earlier to $3.15
Meanwhile, oil production fell 8% over the year to 2.16
million barrels per day in 2009, according to the International
Energy Agency, a Paris-based advisory group.
Chávezs government disputes these figures, saying
Venezuela has been producing 3 million barrels a day following
Opec (Organization of the Petroleum Exporting Countries) cuts
of 364,000 barrels per day.
Regardless, there have been fewer dollars to go around
and, when exchanged at the former overvalued rate, fewer
bolívars. This was a problem for PDVSA, which
desperately needed local currency to meet national obligations
such as outstanding debts with oil contractors, salaries for an
expansive payroll and social obligations such as food
All of these national components require income in
bolívars, says Andreas Faust, an economist at
Banco Mercantil in Caracas. PDVSA couldnt
Now, thanks to the devaluation, Barclays Capital estimates
that the government will obtain an additional Bs78 billion in
income this year, and will likely issue no more than $6 billion
in debt. This money can be used to pay off PDVSAs debts
and also boost public spending on social projects before the
parliamentary elections, and invest in key sectors such as
Hydroelectric power supplies some 70% of Venezuelas
electricity, but months of sustained drought have forced
Chávezs government to implement water and
electricity rationing. Critics accuse the government of failing
to invest sufficiently in thermoelectric power plants, and have
organized occasional protests. Analysts, meanwhile, warn the
energy crisis will only deepen the recession due to a sustained
loss of productivity.
Even with investment in the electricity sector this year,
analysts say, such spending will do little to stimulate growth
in Venezuela. The economy contracted by 3.3% in 2009 and,
because Venezuela exports little other than oil, its
unlikely to benefit from the usual productive stimulus of a
devaluation. While Chávezs government has said
its aiming for GDP growth of 0.51% this year,
analysts predict Venezuelas economy will contract
anywhere from 1.7% to 6%.
The effect on the real economy is rather recessionary
and not expansive, says former central bank president
Ruth de Krivoy, who heads the financial consultancy
Síntesis Financiera in Caracas. The big challenge
is to get the country into a pattern of sustainable growth with
low inflation, because thats the only way to improve the
well-being of the citizens.
Venezuelas inflation is running at 24% Latin
Americas highest and the devaluation will
contribute to inflation by raising the price of imports, upon
which Venezuela is heavily reliant. Nevertheless, says Pavel
Gómez, a professor at the IESA business school in
Caracas, price gains will also likely be mitigated by the
effects of the recession. Devaluation has an inflationary
effect ... but, consumption has slowed, he says.
Finance minister Alí Rodríguez has said that
the devaluation aims not to increase government income, but
rather to limit price gains for imported goods purchased with
dollars at the inflated parallel rate. The devaluation should
only boost inflation, which the governments budget
estimates at 2022%, by three to five percentage points
this year, Rodríguez said recently.
But analysts predict Venezuelas 2010 inflation will
exceed last years rate, reaching anywhere between 29% to
36%. That figure will largely depend on the success of
government efforts to boost the bolívars value on
the parallel market, where dollars still sell for more than
double the official rate of Bs2.6/$.
While the central bank is able to intervene in the parallel
market by selling short-term securities, such efforts have so
far had little effect. From the point of view of the
government, inflation isnt a priority, says
Alejandro Grisanti, an analyst with Barclays Capital in New
York, pointing out that Venezuela has had years of moderately
high inflation with relatively little political cost.
Still, sustained inflation has had a severe impact on
citizens in Venezuela, where cars and apartments are viewed as
long-term investments, and day-to-day price hikes are common.
To prevent prices from rising still further, Chávez has
threatened to intervene in businesses that
speculate by raising prices following the
devaluation. The state electricity company, meanwhile, has said
it will suspend services to businesses that fail to comply with
rules reducing electricity use by 20%.
Such strict controls, however, along with the
governments penchant for expropriations, are exactly what
many analysts say is preventing Venezuelas economy from
recovering. Currency controls have put pressure on the
bolívar, diminishing its value in the parallel market.
Price controls on basic goods make it difficult for farmers and
other producers to make a profit, leading them to seek other
lines of employment.
Since 2007, Chávezs government has nationalized
major electricity, cement, steel and other companies, as well
as four major oil projects. Chávez regularly announces
such moves during his lengthy televised speeches, ordering,
Gómez says the government must now restrict this
vocabulary, and instead encourage private investment to spur
growth. The government needs to correct some distortions
in terms of price controls and threats to the private sector,
so that the private sector can have some trust, he says.
A more hostile attitude will likely have an even stronger
effect on the economy given the current recessionary
The government has made attempts to attract foreign
investment, most recently with an auction for private and
state-owned oil companies eager to exploit heavy oil reserves
in its Eastern Orinoco region. Two consortia of companies
one led by Chevron Corp. with a 34% stake and the second
by Repsol YPF, with an 11% stake have agreed to join
PDVSA in two $15 billion projects that aim to boost oil
production by some 800,000 barrels per day by 2016. But these
are extremely long-term projects that will do little to
encourage growth in the medium term, Gómez says.
The governments decision to devalue at this moment was
likely political, aimed at avoiding the unpopular move closer
to the 2012 presidential elections, Grisanti says.
Chávezs popularity has dipped slightly in
opinion polls, even before the devaluation and electricity
rationing, and could be further threatened if the opposition
makes gains in parliamentary elections. A devaluation was
preferable to other unpopular methods of raising funds, such as
hiking heavily subsidized gasoline or electricity prices,
because it was the most beneficial for the government and PDVSA
financially, Grisanti says.
But the question remains: What options are left for
Venezuela if next year it finds itself in a similar situation,
at a critical moment in Chávezs presidency?
I would say that next year is a big challenge,
says de Krivoy, pointing out that unemployment which
reached 10.2% in January, up 0.7 of a percentage point from a
year earlier is also on the rise.
Still, the dual exchange rate system has left the government
with some flexibility. Grisanti says he expects the government
will implement covert devaluation next year, selling fewer
dollars at 2.60 and more at 4.30. Its another way
of making an adjustment, he says.
Maza Zavala claims that while Venezuela has faced lower oil
prices and recessions in the past, it is todays climate
of discouraging private investment that makes the situation now
so critical. The Venezuelan economy is at its worst
moment, he says. The government should aim for
cooperation, collaboration and understanding to create a
climate of security, a climate of optimism.
Otherwise, he says, another devaluation may be
the governments only option.