By Benedict Mander in Caracas Published: August 23 2007 22:36 \
President Hugo Chávez’s tightening grip over Venezuela’s economy is generating distortions that economists fear could, paradoxically, eventually lead to a loss of control.Price controls, currency controls and negative real interest rates are just some of the elements that have contributed to one of the highest rates of inflation in the world and a substantially overvalued exchange rate.
“This regime is not sustainable. It is only propped up by the high price of oil,” says Jose Guerra, a former director of research at the central bank. “Venezuela has already experimented with these policies in the past and it ended up going broke.”
The controls introduced by Mr Chávez are, in part, an attempt to offset the inflationary effects of large-scale government spending, afforded by record oil prices, to boost economic growth. ( note: the government's income from the petroleum
market is 800% of what it was before Chavez was elected in 1998) In this, the government has succeeded: growth has averaged 12 per cent in the past three years, leading to a drop in the rate of poverty from 43.9 per cent when, Mr Chávez was first elected in 1998, to 30.4 per cent in 2006.
This has won Mr Chávez increasing levels of support from the electorate, who are expected to vote in favour of his proposed reforms to the constitution in a referendum that would allow him to be re-elected indefinitely.
But his economic policies have triggered high levels of consumer demand that now far outstrip the economy’s productive capacity, with negative real interest rates providing consumers no incentive to save their cash.
Unbridled spending combined with price controls that are intended to check the inflationary effects of such policies has lead to scarcity of basic goods such as milk, eggs, beans and beef.
To counter this, imports have tripled in the past three years in an effort to make up for the economy’s inability to support demand. But rising inflation and an increasingly overvalued exchange rate will continue only to make imported goods even more attractive, just as non-oil exports become too expensive on world markets. This would make Venezuela ever more dependent on oil, which accounts for almost 90 per cent of exports.
Ironically, one of Mr Chávez’s key policies is to stimulate “endogenous development” to steer Venezuela away from its dependence on oil.
“If the price of oil suffers a significant world decline, the retail sector will not be able to support the current level of imports without the country sliding into immediate trade deficit,” says Mark Turner, an analyst at Hallgarten, who adds that central bank reserves would not last long under such pressure. “Recession would be a real threat to the economy as well as the administration running it.”
But (Chavista) Mark Weisbrot, an economist at the Centre for Economic and Policy Research, argues that the Venezuelan economy “does not fit the mould of an ‘oil boom headed for a bust’.” He says that a large current account surplus, rising foreign exchange reserves, and low levels of external debt are enough to insulate the economy from any imminent danger, although he concedes that the currency is at least 30 per cent overvalued in relation to the dollar. “This is something that will have to be remedied if Venezuela is going to pursue a long-term development strategy that diversifies the economy away from oil,” he says. However, he concedes that the government is reluctant to devalue due to the effect this would have on inflation.
Also, what seems like a postcard from 1977, when people would have scoffed at the idea of a Viernes Negro in February 1983, so Let The Good Times Roll!
Boom signals take-off for Venezuela’s jet-set By Benedict Mander in Caracas
Published: August 23 2007 22:36
From a wealth of picture-postcard Caribbean beaches to the magnificent table-top mountains that inspired Sir Arthur Conan Doyle’s The Lost World, Venezuelans have no shortage of domestic holiday destinations to choose from.
However, surging oil wealth and the restrictions of a dollar-pegged, overvalued currency are driving unprecedented numbers of Venezuelans to travel overseas on holiday, with the number of international flights jumping 45 per cent last month over the previous year.
“It’s never been like this, it’s extraordinary,” says Maria Falvay, a sales executive for Pegasus Travel in Caracas. “If you want to fly out of Venezuela over the next few weeks you might as well forget it, we’re fully booked. At the moment we’re taking bookings for December.”
Flight sales so far this year have risen by 28 per cent to $428m (€317m, £215m) compared with the same period in 2006, while the number of tickets issued is 40 per cent greater.
That far exceeds the number of overseas travellers when previous records were set during Venezuela’s last oil boom in the late 1970s, when Concorde used to fly to Caracas.
According to Alejandro Grisanti, an economist at Ecoanalitica, the increase reflects the growing affluence in Venezuela pushing up overall consumption. This in turn is feeding the highest inflation rate in the region – 17.2 per cent in July.
Venezuela’s consumption is being fuelled by inflation that is outstripping interest rates so fast that consumers prefer to spend rather than see their money eroded in bank accounts. Banks are providing a further stimulus to spending through cheap credit.
Mr Grisanti argues that rising overseas travel is also a consequence of Venezuela’s overvalued currency, which has been fixed at 2,150 bolivars to the dollar since March 2005. On the parallel “black” market the dollar is now worth more than twice as much.
“The government is subsidising people to travel, effectively giving away the difference between the official and the parallel exchange rate,” he says.
Although currency restrictions have caused the parallel market value of the dollar to shoot up over the last year, tickets with international airlines are paid for at the official rate, so have dropped in cost compared with other consumer goods. Despite the scarcity of dollars at the official rate locally, Venezuelans travelling abroad can take advantage of an allowance provided by the government of up to $5,600 at the official exchange rate.
Travel agents point out that travel to Venezuela’s high-priced top destinations is now more expensive than a trip to the US, a favoured destination for Venezuelans. Nevertheless, internal flights so far this year have still increased by 37 per cent from 2006.
The problem is compounded by insufficient supply to keep up with demand for flights. Although international carriers such as American Airlines have asked to increase the frequency of their flights to keep up with demand, permission has not been granted by the government, which is seeking to protect local airlines.
Fewer international airlines now operate in Venezuela, with leading carriers such as British Airways and KLM having ceased to fly the route in recent years.
Umberto Figuera of the Venezuelan Airline Association admits that local carriers are unable to fill the gap in demand.
“The fundamental problem is that there aren’t any big local airlines that can cover the routes run by international airlines.
“Not a single one flies to Europe, for example. They just can’t compete,” he says. He believes that Venezuela’s airline sector needs a proper government policy to resolve its problems.
Copyright The Financial Times Limited 2007
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