Saturday, April 24, 2004

A Chavez séance on the Venezuelan Economy
Rewriting the history books, in three parts (II)

Saturday 24, April 2004

The growing economy

Yes indeed, the economy is growing. But when the country dug a hole with a 25% drop, a 6 % increase still leaves you in the hole. Let’s look at some indicators that Chavez highlighted.

The Venezuelan stock exchange has been the most performing one in South America. True. But why? Very simple. When the currency control exchange was installed, it did happen that the stock of CANTV, the Venezuelan phone company was freely negotiated in Caracas or New York. In other words, one could buy CANTV stock in VEB and sell it in USD. Traders of course took advantage of this way to go around the currency control and imposed a price far higher than the official exchange rate. Thus was born the street value of the VEB, now around 3,500 to the official 1,929 VEB to the USD. Of course this stimulated extraordinarily the trading of CANTV to levels that made the Caracas stock exchange quite "performing". Without forgetting of course bond issues that can be negotiated in US markets for USD after having been bought first in VEB.

Venezuela has the highest growth rate of South America. Tue again, although for the last 6 months only. But why? Well, Venezuela is getting out of the worst GDP drop of South America through 2002 AND 2003. No wonder! But how "good" is this growth rate?

Unbelievably, one of the directors of the Central Bank declared to the official State news agency, Venpres, that the growth rate was real and was not a recovery! In other words Venezuela does not need to recover from the 25% drop. All the business that went bankrupt do not matter. The high jobless rate is a fiction.

And all of this in open contradiction to the words of the Central Bank President, declaring to ALL the press that the present numbers were just a recuperation of productive capacity that had stopped since 2002. Do they read the same reports?

And let's not even discuss what other economists say.

Not to be left behind, the finance minister Nobrega states poker faced that the Venezuelan growth rate will be above 6.5% for 2004, perhaps even reaching 9%.

I suppose that the official explanation is that the business that went belly up were not "Bolivarian" and their dismissal just brings the economy to its just bolivarian value. The growth would be, I speculate, because good bolivarian companies can now operate in a real bolivarian market. Only growth in a bolivarian market is real growth, the rest only a product of the globalization evil.

Of course this is only official propaganda that his underlings feed to Chavez whose understanding of the economy is rather rudimentary and definitely ideological. The fact is that the observed recovery is just due to the fact that the businesses that survived the calamitous decline are now slowly edging back to a level of production that is still below their full potential. The businesses that did close are not reopening. Investment is limited to maintenance. Earnings are weak, when they exist. There is no way to sustain even a 5% growth rate if private investment and new business creation are not in the picture. The 9 % of this year, if we reach them, could become quickly a 0%, or less, next year! As long as Chavez refuses a political settlement, there will be no confidence in the prospects of the Venezuelan economy. It is really quite simple and quite independent of any good numbers that might circumstantially happen today.

Investments are coming! Partially true at best. The only ones that are coming from outside are the ones that are required for governmental business. Oil production and some public works. These will only favor the business class that Chavez is trying to create by selecting who gets government contracts. I use the term selecting as the word "bidding" seems to have disappeared from the Venezuelan lexicon. And when one will discount the "commissions" paid to selected officials so as to get the business one can wonder how much of this will trickle down to the Venezuelan economy.

The only investments made by Venezuelans these days are the bond issues that the government is emitting. By losing some of their investment in VEB due to a conversion penalty, people do get to take legally out of the country a few thousand USD and hide them overseas. The government meanwhile does manage to grab 1 billion USD from its reserves and dispose of these dollars without having to go through CADIVI and without significant budgetary constraints. This of course fuels inflation, and people are not fooled. Each time a bond issue comes to the markets the street value of the dollar drops. But within a very few days it increases again. The last bond was no exception: the street value of the VEB by Wednesday had dropped to 2,900 from a high of 3,500. Friday it was back at 3,000 and by mid to late May I reckon it will be again at 3,500.

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