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Venezuela Hangs On To
Unorthodox Policies As Oil Rebounds
By Darcy Crowe, DOW JONES NEWSWIRES
Caracas - A wave of optimism appears to be cascading
over President Hugo Chavez's administration thanks
to the recent surge in oil prices, buoying hopes
that Venezuela can handle the global recession
without devaluing its currency or undertaking
painful economic reforms.
But, although crude prices have somewhat recovered,
they're still at about half of their 2008 peaks, and
the overall decline in oil revenue threatens to
unmask weaknesses in the country's economy and push
it toward a bruising economic contraction.
While the worst may be over for some of Latin
America's largest economies, Venezuela is only
starting to feel the whiplash of the global
recession that drove down the price of oil.
"The government's response has been to wait and hope
for oil prices to go back up," said Maikel Bello, an
analyst with Caracas-based research firm
Ecoanalitica. "Oil is rebounding, but things are
still going to get worse."
The price for Venezuela's oil basket has more than
doubled since bottoming out at $31.36 per barrel in
December. The recent surge could be seen as
vindication of the government's response to the
plunge in oil revenue, which accounts for more than
a third of gross domestic product, around half of
government income and 93% of export receipts.
The government has resisted the pressure that
shriveling oil revenue creates to devalue the local
currency: The bolivar is pegged to the dollar, which
fetches about three times as many bolivars in the
parallel currency market as it does in the official
market.
The government has also sought to boost public
spending, despite the decline in oil windfalls.
Chavez-allied lawmakers recently approved additional
spending worth $6 billion, even as the president has
been pledging that public spending will be austere
despite the rise in oil prices.
To cope with the income shortfalls, the government
has boosted its local debt issues, which are
programed to surpass $17 billion this year. It has
also hiked the value-added tax to 12% from 9% and
implemented some cosmetic measures such as salary
freezes for top government officials.
These efforts to keep up public spending have done
little to hold up the economy.
In the first quarter, gross domestic product rose an
annual 0.3%, the lowest figure in five years and
well below analyst expectations. Venezuela's fiscal
and external accounts are also clearly stressed.
Earlier this month, Standard & Poor's, which rates
Venezuela BB- and has a negative outlook on the
credit, said it expects the country's economy to
contract 2% this year and the general government
deficit to hit 6% of GDP, swinging from a 1.4%
surplus in 2008. The ratings agency reckons the
current account will post a 1% deficit this year,
from a surplus of 12.5% of GDP last year.
Public spending has been the motor of Venezuela's
economic activity in recent years, so oil prices
have to be high to sustain it. "Oil prices need to
be much higher for the government to keep up with
its commitments and maintain the same level of
public spending," said Pedro Palma, an economics
professor at the IESA business school in Caracas.
But even if oil prices continue to climb, last year
showed that higher public spending was not
triggering the same levels of economic growth. "The
model of state-driven growth is worn out," said
Palma. Venezuela's gross domestic product grew 4.7%
in 2008.
Despite the oil boom of recent years, the private
sector has languished under Chavez's economic
policies. Nationalizations in several parts of the
economy - from energy to telecommunications to
building materials and farm lands - have caused
private investment to dry up.
To compensate for the drop in oil and nonoil
revenue, the central bank, following plans from the
executive branch, has lowered interest rates to make
borrowing for consumption cheaper. The government,
meanwhile, has been offering a little higher return
on local public debt issues to finance its spending.
Banks have been purchasing government debt, though
lending, which in theory should increase thanks to
the low interest rates - indeed, real rates are in
deeply negative territory, hasn't taken off. The
extremely loose monetary policy only spurs already
galloping annual inflation of 27%.
The decline in oil prices had also put real pressure
on the government's foreign-exchange policy. Lower
dollar inflows pushed officials to starve some
industries by denying them greenbacks at the
official rate, driving them to pay the high dollar
premium in the parallel currency market. As a
result, companies, such as General Motors Corp. (GMGMQ),
Venezuela's largest assembler, have been forced to
halt operations.
"At this point, Chavez has only one terrible choice:
Devalue," writes Miguel Octavio, head of research at
BBO Financial Services, in his blog, called The
Devil's Excrement, in reference to the effect of oil
on Venezuela's economy.
A devaluation, however, would be deeply unpopular
given its impact on inflation. The recent rise in
oil prices gives the government hope that it can
avoid resetting the bolivar's peg at a weaker level
against the dollar, or at least buy the government
some time.
"We do not expect a devaluation of the bolivar in
2009," wrote Diego Sasson, an analyst with Credit
Suisse, in a recent research report.
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