Venezuela on the brink of recession

The scarcity of products and an escalating inflation rate have Venezuela mired in economic turmoil. (Juan Barreto/AFP/Getty Images)

The scarcity of products and an escalating inflation rate have Venezuela mired in economic turmoil. (Juan Barreto/AFP/Getty Images)

By María Fonseca Sevillano for Infosurhoy.com — 20/05/2010

MARACAIBO, Venezuela – Venezuelan economic analysts forecast the country’s inflation could reach 30% by the end of the year and the economy could fall 6%.

Jesús Casique, director of the private firm Capital Market Finance, said the Andean nation is experiencing “a strong period of economic ‘stagflation’ – the combination of contraction and inflation – that is the product of an obsolete and primitive model.”

Financial analyst Henkel García said “the Venezuelan economy is experiencing a special economic climate today,” which is characterized by “a significant fall in production accompanied by the highest inflation in the world.”

The Central Bank of Venezuela (BCV) is expected to release the gross national product for the first quarter of 2010, and it is expected to fall between 5% and 7% compared to the same time last year, García said.

García said two main reasons have caused the decline.

“The first is related to our dependence on oil,” he said. “Although the prices remain at a relatively high level, the growth rate is far from what we experienced in 2007 [and] 2008. The second has to do with the continued attack on the productive and private sector. This has deterred internal and external private investment, not to mention the close of many businesses due to the current level of hostility and risk in the country.”

García said the “hostility” refers to what appears to be reflected in the new foreign exchange regulation. The Venezuelan government hopes to regulate the U.S. dollar-denominated parallel currency market, which is used by companies and individuals to access U.S. dollars at a rate that is several times higher than the official rate of 4.30 bolívares per dollar. Brokerages are the vehicles by which consumers obtain U.S. currency by trading Venezuelan bonds.

Planning and Finance Minister Jorge Giordani said the value of the dollar in the parallel market was artificially high due to “political groups” with economic interests attempting to destabilize the country and impact the value of the bolívar fuerte.

But Giordani said the recently ratified Law on Foreign Exchange Crime is expected to prevent brokerages from meddling in the market.

“Elites set an exchange rate that had nothing to do with macroeconomics, affecting the people,” he said at a recent media conference.

Analysts said the government’s strategy is wrong.

“The government wrongly believes that the increase in prices of goods and services and the exchange rate for the parallel dollar market are due to speculation,” García said. “The latest measures are directed at “minimizing” and not at attacking the real causes of said problems.”

García added inflation and the exchange rate are closely related.

“It is impossible to maintain a fixed rate of exchange if the internal inflation is greater than the inflation of your main trade partners,” he said. “As Venezuela’s inflation is considerably higher than its partners’, the exchange rate should be adjusted and the bolívar fuerte should be made weaker. The government will be able to keep the official rate overvalued, but the rest of the market understands the reality of our inflation and incorporates the price of the dollar.”

The regulations mandate only the BCV will set the spectrum for the parallel dollar market, as it is the lone financial institution permitted by the government to negotiate trading in dollar-denominated securities.

“For the mechanism of [the currency spectrum] to work, it requires that PDVSA sell at least 85% of its foreign currency to the BCV (in 2009 it contributed only 44%) and attract foreign investment, a fundamental factor in the inflow of foreign currency,” Casique said. “The parallel currency market was very important oxygen for the country’s private sector. If the BCV does not quickly pump foreign currency into the market, it will create an alternate market.”

Venezuela instituted the bolívar fuerte as currency on Jan. 1 2008, in an attempt to lower the inflation rate under 10%. Two years later, Venezuelan President Hugo Chávez devaluated the currency and inflation has continued to escalate.

Since the bolívar fuerte inception, inflation has increased 82.2%, Casique said.

“There is a close relationship between the parallel dollar market and the relation between liquidity and international reserves, weakening the bolívar fuerte against the dollar given that liquidity has grown at a rate much more accelerated than the International Reserves,” García said. “We have a lot of bolívares, [but] few U.S. dollars available in our economy.”

“The lack of confidence in the country’s monetary policy during the last decade makes people and businesses inclined to readjust year to year their expectations for earnings and to raise them,” García added. “This has created a perverse and vicious cycle that can only destroy confidence in the economy.”

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  • orlando escalona | 2011-07-12

    This is a fallacy, here in this country we have enough of everything, it's just that the speculators take full advantage and so does FEDECAMARA, they steal as much as they like and then they say there is scarcity. They are tremendous hoarders from the day they are born. Since they get used to stealing they keep on doing the same thing, but they will have their 15 minutes because everyone falls. Everything under the sun has a set number of days.

  • jose reyes | 2010-12-11