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A ticking economic bomb waits for whoever wins next Sunday in Venezuela

Tuesday, April 9th 2013 - 02:17 UTC
Full article 13 comments
Empty shelves in the supermarkets and not enough dollars to go around Empty shelves in the supermarkets and not enough dollars to go around

Whoever wins next Sunday’s presidential election in Venezuela faces an economic time bomb with food shortages, insufficient US dollars to pay for imports and honour the country’s debt, a devastated economy full of inefficient nationalized companies and non productive farms plus mounting promises of further handouts from the government and inflation.

“In a way, Chávez left at the zenith of his success” says Orlando Ochoa, an economist at the Andrés Bello Catholic University in Caracas. “And his legacy for his successor is an economic bomb”.

In an effort to stem the problems the government created a new foreign-exchange agency that auctions dollars to help imports and reduce shortages of basic goods. The black market dollar currently is traded at four times the official exchange value.

However analysts say the new exchange mechanism, launched in March and jointly administered by the central bank and the Finance Ministry, is little more than a band-aid for the country's economic woes.

The Venezuelan economy, which grew at 5.5% last year amid heavy government spending ahead of Chávez' successful October re-election bid, will run into major problems with inflation if the new president keeps his foot on the gas, analysts say. But the economy could slow sharply if there is a pullback in state expenditures.

Cutting spending on a clientele accustomed to generous housing, food and gasoline subsidies would also be painful and almost certainly result in social upheaval, analysts say, prompting a vicious cycle.

“Because of inflation, the government has to spend more in real terms, which then fuels inflation,” said Mr. Ochoa.

Poorer households are feeling the bite of more expensive goods and services, despite government price controls. Annual inflation is above 22% and could top 30% this year, analysts say, after the government devalued the Bolívar in February.

“The exchange rate control system has distorted the economy making Venezuela ever more dependent on imports to the extent that if the price of oil falls there won’t be enough dollars to buy milk and flour overseas” says Roberto Leon, president of Anauco, from Venezuela’s Consumers Defence Association.

According to economist and professor at the Preston University Jesus Casique “of the 698 billion dollars obtained by Venezuela from oil in the last fourteen years, most of it has gone to imports”.

Another percentage of the dollars “remains overseas to honour Venezuela’s growing debt and thus does not reach Venezuelan pockets or companies” says Joe Guerra, former Central bank board of governors’ member.

In this context of ‘strong shortage of hard currency’ Venezuelans daily plight is affected in two ways: they have to tour several supermarkets or shops to find imported goods and when they wish to travel overseas they must appeal to the State for a limited amount of dollars, in exchange for their Bolivares, says Leon.

Venezuelans can change a maximum of 3.000 dollars per year for travel overseas that can only be spent with credit cards in the period of time marked by the tickets, plus 500 dollars cash in hand.

“Oil revenue is not enough since the expanding state is drowning the economy and because oil is the only item exported”, said Guerra who added that things worsened since 2009 when “basic industries and farmland were taken over by the State and ceased to produce”.

Venezuela’ oil company PDVSA which nos manages anything from food imports to building houses can’t face the growing demand for dollars particularly since the supply of oil is stagnant in 3 million barrels per day while in 1998 it was 3.3 million and Chavez promised should reach 5 million by 2013.

Imports in the meantime have soared from 15billion in 2003 to 56 billion last year, and this because the overvalued Bolívar makes it easier to import than to produce, says Casique.

Currently the official exchange rate for the dollar is 6.3 Bolivar, however in the black market companies must pay four times as much, and “this has a direct influence on inflation which last year was 20.1%”. Besides most food items are linked to the non official dollar and the few rationed items, such as rice, sugar or milk, are very scarce.

The new system of auctioning dollars to try and bring down the price in the black market, apparently delivered 200 million dollars but demand was estimated at 700 million dollars, revealed Casique.

Analysts speculate that if acting president Nicolas Maduro wins on Sunday he will replace the country's finance minister, Jorge Giordani. A devoted Marxist Giordani had the ear of the deceased Hugo Chávez and is considered among the main architects of Venezuela's economic system.

Should Giordani leave the new government, it could give Maduro the leverage to moderate currency controls that were imposed a decade ago by Chávez to curb capital outflows, and could ease shortages and correct some fiscal imbalances.

Former Finance minister José Alejandro Rojas, seen as more pragmatic than Giordani, is one person who could replace him, according to several people close to the government. In an email, Rojas said it is “expected” that he will have a new role within the new government but declined to be more specific.

Yet Maduro or opposition candidate Henrique Capriles or any other Chávez successor, will still face serious economic difficulties defusing the ticking bomb and few options to resolve them.

Tags: Venezuela.

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  • manchesterlad

    This is the result of 14 years of left wing, socialist, Bolivarian didn't work in the USSR, China, Cuba & is not working in Argentina

    But try telling that to CFK & her Kirchneristas, she seems determined to follow the path to self destruction.......& as a famous British PM once said 'the trouble with socialism is that eventually you run out of other peoples money'

    RIP Maggie Thatcher!!!

    Apr 09th, 2013 - 03:25 am 0
  • Anglotino

    Wow I'm laughing so hard today I don't know where to start.

    So you can have US$3,000 per year to travel overseas with. PMSL. Admittedly I have travelled for months on this amount, but try spending time in many countries and it would be a bloody short holiday.

    Then to find out that nearly US$700 billion dollars from an oil bonanza has been sent out of the country is incredulous. With a huge deficit and increasing debt, it would have been better to leave the oil in the ground. The new Chinese overseers are not going to be pleased if payments stop. They're not like a vulture fund and take you to court.

    I've been saying for a while now that I want Maduro to win. Chavismo will collapse and it is better that it collapses while “Chavez's son” is in power to hasten the de denazif.... I mean dechavisification of this poor blighted country.

    “We are all Chavez”? Hahahahaha I'm not. I'm too rich and smart to fall for that stupidity. Pity many Venezuelans aren't.

    Apr 09th, 2013 - 06:06 am 0
  • Stevie

    Your problem is that you can't understand how come South Americans don't want to be like you.
    Probably you never will, and that is all fine.

    Apr 09th, 2013 - 10:05 am 0
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