The government has been under strong pressure to deliver on electoral promises made two years ago to better the conditions of Venezuela's economically marginalized.  The timing of the wage hike is a clear indicator that the Chávez administration acted out of political considerations rather than economic necessity, given that national elections are less than a month away.  The Chávez administration hopes that the wage increase will drive a consumption rebound and help generate the economic recovery. 

However, the likely benefit of the minimum wage increase is limited.  In fact, some 65% of the economically active population, that remains either unemployed or relegated to the vagaries of the informal sector, is unlikely to benefit from the hike.  Thus, the intended consumption push is likely to remain absent.  Additionally, since domestic demand remains contained by a slack labour market (Q1 Unemployment 15.3%) and economic insecurity, businesses are likely to be hard pressed to assimilate the increase in payrolls and may be forced to further cutbacks once the two month lay-off freeze expires. 

Inflationary pressures up. Given that the increase in minimum salaries exceeds the government's stated 15% inflation target for this year and the likelihood that the government's budget increase will raise this year's fiscal deficit, inflationary pressures are likely to mount. 

Election campaigning underway. According to the current timeframe elections are slated for 30 July 2000.  In the so-called mega-elections voters will elect representatives for 6,241 public offices including president, congressmen, governors, mayors and local council members.  Even though opposition presidential candidate Francisco Arias Cardenas has gained some ground in the past month, the delay is not anticipated to substantially improve his chances at ousting incumbent Chávez.  The most recent polls still give Chávez 48-54% of the vote to Cardenas' 35-37% and indicate that voter preferences are moving towards Chávez's Movimiento Quinta República party.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Venezuela.  For more details please click here.

For five-year forecasts, please click here.