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According
to the government, the resulting higher cost of borrowing continues to
stifle a more pronounced economic recovery and the current 994 basis point
intermediation fee does not reflect the actual cost banks are incur.
As a result, the Chávez administration has introduced a legislative
proposal, as part of the current Central Bank reform bill that would seek
to enable the Central Bank to fix the upper and lower limits on the
interest rates for loans and deposits. The direct impact of interest
rate controls could be a further weakening of the Venezuelan financial
system as bank profitability would be undercut by Central Bank
intervention and further foreign investment in the banking sector is
curtailed. However, indirectly the more important result is a
further undermining of the credibility of the Chávez government’s
commitment to free market economic policies, which is likely to continue
to hold investment at bay and stifle long-term growth prospects.
Oil
production and exports.
The average price for Venezuela's basket of crude and refined products has
dropped off considerably to US$ 22.77 per barrel in the week ending 2
March from the US$ 26.59 per barrel average at the end of last year.
The current price still remains above the 2001 budgeted US$ 20 price per
barrel but has begun to raise concerns in the government. In fact,
increased worries about the possible effect that a decline in
international demand for oil may have on price levels, particularly if the
current economic downturn in the United States persists, have prompted
Venezuela along with Mexico and Saudi Arabia to consider a second round of
oil production cutbacks for this year. In January, Organization of
Petroleum Exporting Countries (OPEC) members cut production by 1.5 million
barrels per day (bpd), which brought down the Venezuelan quota from 2.9 to
2.7 million bpd. OPEC is currently attempting to implement a system
of cutbacks and increases in production to maintain the oil price between
US$ 22-28 per barrel. Continued healthy oil prices alone, however,
will not be sufficient to provide for sustained economic growth since
investment will remain depressed and economic activity restrained as long
as the government adopts interventionist policy measures and persists in
maintaining economic policy ambiguous.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Venezuela. For more details please click here.
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