That sinking feeling: the Venezuela economy getting closer to reckoning

Venezuela's economy has always gone through a boom/burst cycle. And under chavismo it is no exception. Since all cannot be about elections, this lazy Saturday evening is a good time to review where is Venezuela's economy headed.

What happened in past cycles is that there was an unusual entry of oil money (sudden increase in production and/or sudden price increase) and the governments decided that they could manage their budget, and political career, as if this sudden increase would be forever and ever. After a very few years the price of oil went down or the production dipped some and suddenly we had major devaluations and depressions, or at the very least a significant recession. We have seen two major crisis, one under Herrera Campins and one under CAP II. But lesser catastrophes of a related phenomenon did appear over time.

According to the Veneconomy editorial that I post below, it seems that we are about to get into another deep crisis if some correctives are not taken soon. The only difference this time is that the price of oil will remain elevated while the financial crisis will wreck havoc with us anyway. The reason? The constant increase in government spending is not backed by an increase in non oil private investment and this will result in an "artificial" price of oil drop. That is, the price of oil will need to drop slighlty for the reckless government financial polices to come home and roost. The house of cards that Chavez built based on bond trading, corruption and hand outs to people who express their support for his regime will be blown away as if nothing. Then, well, we will see.

Sometimes I think that it is all deliberate. Chavismo cronies are pulling out of the country millions and millions of dollars though bond trading as Miguel as often explained (recently here and here). Perhaps they actually want to have an economic crisis AFTER Chavez is reelected to be able to buy dirt cheap flagship companies in the hand of opposition businessman. In that case it says little of their social commitments as the crisis will create years of hardships for the workers of these industries before they can return to full production. That is, if chavismo cronies are able to make them work.

Before I paste Veneconomy's editorial a little note: CADIVI has been holding several of my business importation payments. That is, some imports that have been duly and legally approved, including the required "solvencia laboral", have reached our stock room, have been sold in large part and yet CADIVI is not giving us the USD to pay our providers. One particular provider, who sells laboratory equipments forced us to get a letter of credit and all sorts of collateral guarantees before delivering the stuff because simply, they got tired of the constant CADIVI delays on the equipment and spare parts they sell. In other words, as a business manager I can live exactly, daily, what that editorial narrates. My good credit rating is useless when the government does not allow me to pay for what I buy.

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VenEconomy has been insisting that the price control policy combined with this government’s ever increasing public spending is unsustainable and that, sooner rather than later, the whole house of cards will collapse with serious consequences for the economy and the country.

There are already several signs that the collapse is nearer than was thought.

To begin with, the dollars being authorized by Cadivi are getting more and more scarce. It would seem that Cadivi underestimated the increase in the demand for foreign currency this year and, apart from that, it lacks the necessary flexibility to adapt to the present situation. Because of the lack of dollars at the official rate, businessmen are being forced to meet their urgent needs on the parallel market. This, in turn, has meant that the parallel dollar has been registering sustained increases, even going as high as Bs.3,000:$ at one point. Another factor that has influenced the foreign exchange market is the low volume of bonds denominated in dollars but that can be paid for in bolivars. What is more, according to analysts, the Southern Bond issue of $1 billion announced recently by the Finance Ministry is insufficient to revive the market.

A second indicator of how near the crisis is is that there are increasing shortages of goods. During these eight years of “21st Century Communism,” Venezuela’s manufacturing industry has lost production capacity owing to the lack of investment incentives. The combination of a limited production capacity and the lack of foreign currency is increasing the scarcity of products such as sugar, milk, meat and even the “Venemobiles,” to mention just four of an ever broader range of products in short supply. According the ANSA, the National Supermarkets Association, latterly, three out of every 10 products have disappeared from the shelves.

The third indicator that the debacle is imminent is the stepping up of inflation. According to the Central Bank, prices rose at an annualized rate of 29.3% in the third quarter of 2006. If this pace is maintained, we would be talking of inflation of nearly 19% by year-end and a much higher rate for 2007.

The icing on this economic cake is that it looks as though oil prices will not continue to rise, the trend being rather for them to come down.

The present situation has many features in common with the last year of the Jaime Lusinchi administration. That year, excessive public spending combined with strict price and exchange controls led to the collapse of the economy in the first year of Carlos Andrés Pérez’ second term in office. That year, the economy contracted by 95%, inflation was 81%, and there was a devaluation of 16%.

Sadly for Venezuela, the Bolivarian government has not learned from the past.