miércoles, diciembre 03, 2008

Arcaya y Asociados comenta la Economía de Venezuela

While many other governments in Latin America have undertaken measures to cushion their economies from the onset of a global recession, the response from the Venezuelan authorities has been to make light of recent developments and the threats posed to the domestic economy. This has heightened concerns that the government is ill prepared to respond to a sharp economic decline in 2009.

Far from showing worry about an imminent global recession, President Hugo Chávez argued in October that Venezuela's capital and exchange controls offered protection against an economic crisis. The minister of finance, Alí Rodríguez, has also asserted that Venezuela's "is one of the most stable economies in the world". Moreover, the president has given little indication that his policies will shift in response to sharply declining oil prices, insisting that international reserves are sufficiently ample to allow Venezuela to withstand a financial crisis even if the oil price falls to US$7/barrel.

Haiman El Troudi, the minister of planning and development, has confirmed that the government has not adjusted its GDP growth projection for 2008 (of 6%), and says he is confident that oil prices will rise to US$80-100/b in 2009. The recent release of the 2009 budget revealed that the government expects growth to remain stable at 6% next year. Mr Rodríguez also has pointed to new trade and investment ties to Russia, China and Iran, which the government believes will help protect against an economic slowdown.

Reality will strike

The reality, however, is that Venezuela will be sharply affected by the global economic downturn. The economies of Russia and Iran themselves are already experiencing severe difficulties, and there are growing risks of a sharper slowdown in China. And after peaking at around US$130/b in July, the Venezuelan oil mix (which trades at around a US$10/b discount to Brent) was down to US$46/b in mid-November. Given that oil revenue accounts for 95% of total export earnings and over one-half of government income, Venezuela's public finances and external position will deteriorate in what remains of 2008 and during 2009, assuming that oil prices do not return to the levels of earlier this year.

Although the banking system is not directly exposed to the financial crisis in the US, the Venezuelan economy is being affected by the drying up of international finance. One example is the impact it is having on the movements of the currency on the parallel exchange market. Until now the government has attempted to narrow the disparity between the official fixed exchange rate and the black-market exchange rate by selling bonds purchasable in local currency but denominated in dollars.

By selling on the instruments in the international capital markets, buyers had access to dollars (albeit at a weaker implicit rate of exchange) and the government managed to drain liquidity from the financial system. While capital controls and still-expansionary fiscal spending mean that there is still captive liquidity in the domestic financial system, notwithstanding rising capital flight, the problems in international financial markets has weakened appetite for these transactions. The Global 2027 bond, broadly representative of Venezuelan paper, has lost around 50% of its value since the beginning of the year.

As a result, the black-market exchange rate has weakened sharply in recent weeks, reaching around BsF6:US$1 in mid-October before strengthening slightly to BsF5:US$1 in mid-November, indicating that the bolívar is overvalued by more than 200% (the official rate is BsF2.15:US$1).

Wishful thinking

The unveiling of the 2009 budget, based on a set of unrealistic macroeconomic assumptions, has deepened fears that the government is turning a blind eye to the fallout from the global downturn. The authorities are forecasting GDP growth of 6% (compared with the Economist Intelligence Unit's forecast of a 3% contraction), average inflation of 15% (compared with levels of nearly 40% currently), an increase in oil production to 3.7m barrels/day (we anticipate production stagnating at 2.4m b/d) and an average oil price of US$60/barrel.

The increase in the oil price forecast is significant. Previous budgets were underpinned by unrealistically low oil price assumptions (the 2008 budget was based on an average price of US$35/b, compared with an estimated outturn of US$90/b while the 2007 budget was based on an average US$29/b, compared with a full-year average of US$65/b) but this tended to offset an unrealistically high forecast for oil production. Independent calculations suggest that the current forecast output of 3.7m b/d is far above current capacity, which is estimated by the International Energy Agency (IEA) at 2.6m b/d. Venezuela's current production quota set by OPEC is 2.34m b/d, while the IEA estimates output at an average 2.37m b/d during January-September 2008.

With the budget now overestimating both oil production and prices, government revenue is bound to fall far short of projections. Non-oil revenue is also likely to come in below projections, as weaker GDP growth affects tax income.

Spending cuts not likely

To make matters worse, the erosion of Mr Chávez's political position following local and state elections on November 23rd (with the opposition taking five of 22 state governorships, up from two previously, as well as the mayoralties of Caracas and Maracaibo) will make the government reluctant to cut social spending. Such spending, through a range of transfers, food, health and education programmes and the "misiones" community-based programmes, now accounts for around 50% of public expenditure. There are also increased spending pressures arising from the enlargement of the public sector following a wave of nationalisations during the past year, with personnel expenditure (comprising wages, bonuses and financial compensation for workers) accounting for 23% of total government spending.

Meanwhile, debt servicing is forecast to rise to BsF15bn (9% of total spending), reflecting higher interest costs and extra government issuance to absorb liquidity. Given problems in the international financial markets, plans to buy back debt have been suspended, meaning that the public debt stock is likely to rise sharply.

According to the budget assumptions, the government is forecasting a deficit of BsF7.3bn (1.7% of GDP). However, with oil prices and production set to come in significantly under budget projections, the authorities will face a much wider fiscal deficit. As an indication of the potential mismatch between revenue and expenditure, the IEA has calculated that oil prices would need to average US$91/b in 2009 to balance the budget.

Given the political difficulties of cutting spending, there is a growing likelihood that the government will have to resort to devaluing the bolívar and/or raising taxes as a means to boost fiscal income.

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