Concerns about the precipitous decline in international reserves and the accelerated depreciation of the Bolivar in the past two months prompted the Central Bank to introduce capital controls.  Meanwhile, the new Finance Minister will be confronted with the challenge of maintaining fiscal stability in the face of declining oil prices if the recent OPEC cutback does not provide a sufficient boost to oil prices and a less robust economy.

Bolivar deteriorates and Central Bank intervenes.  In July, the pace of Bolivar depreciation relative to the US$ accelerated with the monthly depreciation reaching 0.9%, which was well above the monthly depreciation rate of 0.58% envisaged by the current exchange rate regime.  The currency continued to weaken at the beginning of August, losing an additional 0.6% of its value through 10 August.  The accelerated deterioration forced the Central Bank to intervene in the foreign exchange market to boost the Bolivar.  As a result, international reserves (excluding the US$ 6.5 billion in the Macroeconomic Stabilization Fund resources) declined from US$ 13.5 billion at the end of July to US$ 13.2 billion.  Concerned about more accelerated capital flight, the Central Bank decided to introduce capital controls on 9 August by raising commercial bank reserve requirements, prohibiting the sale of US$ by banks to firms not domiciled in Venezuela and lowering the maximum amount of US$ that banks may hold from 15% of equity to 12%.  Nevertheless, authorities are confident of their ability to defend the Bolivar from speculation.  International reserve levels provide ample coverage for the equivalent to 10.0 months of imports and 89.1% of M2.  Participants expect the Bolivar to regain stability towards the end of the year and to remain below the annual depreciation rate of 7.2% under the current exchange rate mechanism.

Central Bank revises economic growth forecast downward.  The government’s preliminary estimates for economic growth in the second quarter indicate that GDP expanded 3.2% over the same quarter last year, down slightly from the 3.5% registered in the first quarter.  While growth remained healthy in the first half of the year, the Central Bank has expressed concern about the likely downside pressures that declining oil prices, lagging investment and high unemployment (13.1% in May) will have on economic activity.  As a result, monetary authorities have revised downward their forecast for GDP growth from 4.5% to 3.5% - 4.0% this year.

Government banks on OPEC cutback to boost oil prices and fiscal balances.  On 25 July, OPEC decided to cut its production quota by 1 million barrels per day (bpd), the third cut this year, despite the fact that the OPEC basket of crude oils has not closed below the bottom of the target range of US$ 22 barrel this year.  As part of the agreement, Venezuela’s production quota was cut by 116,000 bpd to 2.67 million bpd.  OPEC’s decision to cut production should serve to bolster the oil price this year but concerns remain that further deterioration could force the government to adjust to lower oil income, which represents some 75% of revenues.  The price of the Venezuelan mix has deteriorated substantially in the past month and even dropped below the 2001 budgeted US$ 20 price per barrel at the end of July.  The oil price recovered some lost ground at the beginning of August, closing at US$ 20.57 per barrel in the week ending on 10 August.  The government remains firmly committed to its 3.0% of GDP fiscal deficit target for this year, strengthened in its conviction by the July tax revenue data.  According to the National Tax and Customs Authority (SENIAT), tax collection in July exceeded the target.  Tax collection from January through July reached 4.5 trillion Bolivares (US$ 6.4 billion), up nominally by 21.2% over the same period last year.  Authorities believe that tax collection could exceed this year’s goal by some 600 billion Bolivares (US$ 853 million), a welcome boost for fiscal accounts.  Nevertheless, participants do not share the government’s optimism that the increased tax take will offset oil revenue declines, expecting the fiscal deficit to close the higher this year.  In fact, some panellists even foresee the possibility of spending cutbacks or increases in the coverage of the VAT, which currently exempts educational, food, health and transport items.  The government expects the oil price to drop to US$ 18 per barrel next year, which will require a more stringent budget.  However, participants remain sceptical about the government’s ability to contain the fiscal deficit, expecting the fiscal gap to widen next year.

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