Dire economic days ahead for Venezuela

January 3, 2010

By Daniel Duquenal
Troy Media

CARACAS, Venezuela, Jan. 3, 2010/ Troy Media/ – Venezuela’s economic performance in 2010 was one of the worst in the world. In fact, to find an American economy which has performed worse we have to look to Haiti, which at least had the excuse of a devastating earthquake.

How is it possible that Venezuela, with a steady income and improving prices from its oil exports, performed so poorly? Let’s look at the data.

Two devaluations

Last year President Hugo Chavez’ administration twice devalued the Venezuelan currency (VEB), the first from a rate of 2.15 VEB for one U.S. dollar to 2.6 VEB to the dollar. This rate, however, is reserved exclusively for the government and for the importation of essential goods such as food (Venezuela now imports 60 per cent of its food) and medicine. A second rate, 4.3 VEB to the U.S. dollar, a de facto devaluation of 100 per cent, was also established for all other items deemed “justifiable”, such as the importations of electronics, cosmetics and the like.

While you may think two devaluations in one year would be enough, it doesn’t end there. A third, with a floating rate of between five and six VEB to the dollar, is used for everything from “personal savings” to the importation of what is deemed non essential or justifiable. A fourth, an illegal, black market exchange rate of eight+ VEB to the dollar (due to the risk premium associated with it being illegal) is used by those who have U.S. dollars but need to convert them into VEB.

In fact, since Chavez took power in 1998, the VEB has fallen from of 0.64 to the U.S. dollar to today’s 4.3, an almost 600-per-cent depreciation and a damning testimonial to a failed regime.

The government was optimistically, and wrongly, hoping that last year’s dual exchange rate would reduce inflation to below 20 per cent (20 per cent!). On Thursday of last week, however, the Central Bank, in an unusually early announcement, stated that Venezuela’s official inflation rate for 2010 would stand at 26.9 per cent, 1.8 per cent above 2009’s 25.1 per cent.

At the same time another announcement stated that Venezuela’s GDP dropped by another 1.9 per cent in 2010, after a 3.3 per cent drop in 2009. Venezuela has now had more than eight consecutive quarters of falling GDP, a record among other South America countries which are enjoying very respectable growth rates.

Unfortunately for the government, their numbers are being questioned by experts who maintain that the real inflation rate actually stands above 30 per cent and the drop in GDP will match 2009’s.

Add in the tight political controls on the private sector and continued industrial nationalization – which is accompanied unfailingly by incompetence and corruption – and it is easy to see why Venezuela’s economy is failing.

The most recent example of such a failed nationalization occurred in the cement industry, which was recently nationalized even though it produced enough to satisfy the home market. It isn’t surprising, of course, that Venezuela has now had to start importing cement from Cuba, of all countries.

Next year isn’t looking much better. The regime unsurprisingly is not considering reversing any of its negative policies, in place since 2003. In fact, more productive land was confiscated by the government and more industries were nationalized on 2010 and more economic restrictions are in the offing, as a consequence of the new enabling law passed three weeks ago.

GDP drop for third year in a row

It is difficult to see how Venezuela can get out of its current recession. Thursday’s dramatic devaluation will fuel an inflation rate that could reach at least 20 per cent just for the first semester of 2011 and, making matters worse, the government is set to increase its sales tax by at least two per cent and will probably implement a tax on bank cheques that could be as high as 0.5 per cent.

Contrary to the regime’s “rosy” forecast for GDP growth in 2011, we are likely to see a third year of falling GDP, even higher inflation and zero investment from the private sector. And that is an explosive social situation.

Due to the situation in Venezuela, Daniel Duquenal is a pseudonym. A former scientist now living in the Venezuelan countryside managing his small family business, Daniel edits a very popular blog called Venezuela News and Views.