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Venezuela's Economy: Fact and Fiction
January 21, 2002
Summary
The government of Venezuela is assuring foreign creditors and investors that it is in good economic health. However, the Chavez administration's own official data indicate that a major financial crisis and currency devaluation are likely in 2002.
Analysis
On Jan.11, Venezuelan President Hugo Chavez told a group of bankers, utility company executives and rating agency analysts in New York City that his country has a "stable and solid" economy. Chavez assured the group that Venezuela would not, under any circumstances, suspend foreign debt payments, devalue its currency, the bolivar, or impose capital controls.
However, data from Venezuela's Central Bank and other government entities do not support Chavez's description of economic health. Instead, the numbers indicate Venezuela likely will suffer a major fiscal and financial crisis this year that will force the government to devalue the bolivar and impose capital controls.
A devaluation of the bolivar would hurt mainly poor and middle-class citizens, aggravating social and political tensions. Devaluation means higher inflation and falling real incomes. It would make Venezuela's non-oil exports more competitive but also would depress demand for local goods and services, hurting corporate sales and profits. However, foreign banks and multinationals would not suffer even remotely as much from devaluation of Venezuela's currency as they have from Argentina's financial crisis.
The circumstances pushing Venezuela toward financial crisis are similar in some respects to the forces that triggered the one in Argentina. For example the government has a large and growing debt. Government spending at all levels is growing more rapidly than tax revenues. In fact, non-oil tax revenues are falling, indicating that the economy is slowing rapidly, and new corporate investments have virtually stopped. The government also is running a large fiscal deficit that likely will grow this year, and its currency is overvalued by as much as 50 percent against the U.S. dollar.
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Dan
Venezuela's Economy: Fact and Fiction . . .