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Currency on accelerated depreciation path
The bolivar continued losing ground to the US$ in June with the currency
depreciating 16.6% in nominal terms to reach 1,316 bolivares to the US$ by
the end of the month. The June depreciation rate was slightly better than
the 23.7% loss in May but confirms that the temporary strengthening
observed in March and April was sustained only by tax season induced US$
selling and Central Bank intervention. The currency has now lost 41.3% of
its value since the February decision to let the currency float. The
bolivar strengthened by 2.4% through 5 July, closing at 1,286 to the US$.
However, a combination of continued political uncertainty, a perceived
lack of sound macroeconomic policies and increased concerns about the
regional contagion from Brazil continue to be key drivers behind the
bolivar stability. Participants have revised their forecasts to reflect
the recent weakening in the currency but remain optimistic that the latest
softening will subside.
Currency weakening not yet
reflected in higher inflation trend
Even though the pass-through of increased currency weakening to domestic
prices can be noted in the consumer price trends, inflation has not yet
accelerated as rapidly as expected initially following the February
devaluation. According to the National Statistical Institute (INE),
consumer prices rose 2.0% in June. The June figure raised the annual
inflation rate to 19.6% from 18.3% in May. The finance ministry expects
price pressures to remain subdued this year with inflation reaching
between 23% and 27%. The Consensus is less optimistic than government
officials, expecting inflation to rise.
Government revises fiscal targets after
IMF visit
In June, economic officials met with the technical mission members of the
International Monetary Fund (IMF). Following the discussions, the finance
ministry announced that the government was revising its fiscal deficit
forecast for this year to 3.8% of GDP from 2.7% of GDP, as the economic
downturn is expected to undermine fiscal balances. In order to meet this
year’s target, officials have announced their intention to raise the value
added tax from the current 14.5% to 16.0%, which is expected to generate
some 800 billion bolivares (US$ 709 million) in additional revenues. In
addition, the government announced on 2 July that it would adopt a 5%
primary public spending cut, approximately one trillion bolivares (US$ 887
million). The government’s fiscal deficit figure still remains well below
the IMF’s estimate of 4.4% of GDP but is on target with this month’s
Consensus figure. Authorities have some degree of flexibility with regard
to management of the fiscal deficit, given that oil revenues are likely to
remain healthy throughout the year. Fiscal balances also benefit from the
currency depreciation, as principal government revenue source derived from
oil is US$-based, whereas expenditures are predominantly bolivar-based.
Furthermore, the investment Fund for Macroeconomic Stabilization (FIEM)
could be drawn down further, even though the resources technically at the
disposal of the central government have been largely depleted – the
remaining funds are made available to state-run oil company Petroleos de
Venezuela S.A. (PDVSA) and local governments. Currently, the FIEM balance
stands at US$ 4.1 billion. Finally, the government could attempt to narrow
the fiscal gap via extraordinary income from additional dividends paid by
PDVSA or Central Bank profits.
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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