Venezuela's risk rating continues to deteriorate - imports up 46.8%, oil and industrial production down

Out in the open

The alarms have gone off internationally. Venezuela’s country risk rating, measured by the difference between the yield on U.S. Treasury Bills and the yield on Venezuelan bonds, has increased by nearly 1% in six months. If in January Venezuelan bonds were paying nearly 2% more than Treasury Bills, today that difference is nearly 3%, making it practically the highest rate in the region, surpassed only by Argentina.
And, as VenEconomy has been saying repeatedly, there are more than enough reasons for this:
Everything points to the economic boom coming to an end. In the first quarter of the year, Gross Domestic Product (GDP) rose by 8.8%, down 1 percentage point from the expansion posted in the first quarter of 2006. Of that amount, the non-oil economy rose by 10.6%, whereas the oil sector plummeted by 5.6%.
Manufacturing grew by only 7.8%, way below the 12.9% of the first quarter 2006, while private consumption was up by 19%. This, in turn fed the demand for imports, which hit a new record (46.8%) in the first quarter of the year.
Private investment has been discouraged by the implementation of controls on foreign exchange, prices and interest rates, as well as by the creation of a series of laws governing business that are highly discretionary and punitive.
Added to this, there is a lack of transparency in the administration of fiscal inflows and outflows and reported oil production levels differ by at least 500,000 barrels/day from figures indicated by international agency. Then there is the discretionary handling of the reserves (for which there was an amendment to the Central Bank Law that impaired its autonomy), which has resulted in a drop in the reserves of $12.3 billion between December 31, 2006 and June 7, 2007.
Not only that, the government performs a parallel budget estimated at being 50% of that sanctioned by the National Assembly, over which there are no controls, with the result that no one knows where these funds go. All this has increased the demand for essential goods and services, which, exacerbated by the disincentives to production, has contributed to Venezuela having the highest rate of inflation in Latin America and being ranked among the five countries with the highest inflation in the world.
Added to this series of blunders in handling the economy, there is a climate of disregard for civil rights, freedom of expression, the right to work and free enterprise. On top of that, there has been the arbitrary nationalization of large foreign-capital companies such as CANTV and La Electricidad de Caracas, the forced appropriation of equipment belonging to RCTV and the taking control of the Oil Belt, breaching contracts and infringing laws.
The last straw was the recent announcement by the President that the country might withdraw from the IMF and the World Bank. Were this to happen, the terms of a large portion of the country’s foreign debt would be affected, rendering it payable immediately.
The magnitude of these errors has already had repercussions internationally, while all the Finance Minister can find to say is that this is a “media thing,” forgetting, as Abraham Lincoln said,” You may deceive all the people part of the time, and part of the people all the time, but not all the people all the time.

 

June 11, 2007 www.veneconomy.com