Venezuela - Economic Briefing March 2003

Exchange And Capital Controls Likely To Further Undermine Economy (continued)

Inflation spikes amid rising scarcity induced uncertainty over price and currency controls
Consumer prices rose 5.5% in February, the highest monthly rate observed in seven years. The February price spike drove up the annual inflation rate from 33.8% in January to 38.7%. The strongest monthly price increases were observed in household services, restaurants/hotels and transportation. Rental and communications costs remained subdued. Participants expect inflationary pressures to remain high despite the likely downside pressure resulting from slumping domestic demand and a fixed exchange rate. Annual inflation is expected to reach 39.0% by the end of the year, which is up 2.1 percentage points from last month.

Annual current account surplus more than doubles in fourth quarter
In the fourth quarter, the current account incurred a surplus of US$ 2.1 billion, while the capital and financial account exhibited a deficit estimated at US$ 1.6 billion. The current account surplus was significantly above the balance observed in the same quarter last year, when the current account incurred a deficit of US$ 675 million. The improvement of the current account over the fourth quarter 2001 was due to the strengthening trade surplus, which widened as a result of 13.5% growth in total exports versus a 41.0% contraction in imports.

However, the nationwide strike that laid production lame for the full month of December prompted a strong slowdown in exports, which dropped a staggering 27.1% in the fourth quarter over the previous quarter. Oil exports led the slowdown, experiencing a 29.0% contraction over the prior quarter, compared to 17.3% for the non-oil sector. Nevertheless, given a generally favourable oil price setting - the price for the Venezuelan basket of crude oil averaged US$ 22.11 per barrel last year – and the strong domestic demand slump, the annual trade balance registered a surplus of US$ 13.9 billion (US$ 9.3 billion in 2001). The widening of the trade surplus helped raise the annual current account surplus, which rose to US$ 7.6 billion from US$ 1.8 billion in 2001.

Participants expect the persistence of healthy oil prices to continue to favour the export sector and to generate a healthy trade surplus in 2003 amidst faltering domestic demand for imports. Nevertheless, the current account surplus is anticipated to decline to US$ 5.0 billion this year.

Exchange rate guidelines considered onerous
The new Foreign Currency Administration Commission (CADIVI, Comisión de Administración de Divisas), which is charged with coordinating, administrating and controlling the new exchange rate regime adopted on 6 February, has released initial guidelines for companies to obtain foreign currency. Individuals and firms alike are required to register as users of the Registry for Users of the Aministrative System for Currencies (RUSAD, Registro de Usuarios del Sistema de Administración de Divisas). Registrants are required to submit a host of documentation including: copies of tax registration, property holdings, rental contracts and three years of tax statements among others. Businesses consider the administrative burden very onerous and are concerned that the sluggishness in which CADIVI has acted so far to implement the new measures will stall the process of foreign currency delivery and delay a pickup in economic activity further. Under the currency regime, companies must first apply for foreign currency at banks, which receive the funds from the Central Bank within ten days. Furthermore, the government is currently only permitting importers of basic goods and services to apply. The business community has voiced concern that the new measures could be used by the government as a political tool to squeeze out firms considered in opposition to the government. Moreover, the restrictions could drive many companies, forced to buy foreign currency for needed raw material inputs in the black market at a premium of 30% to 40%, into bankruptcy. While the Ministry of Planning estimates that the exchange controls will remain in force for four to six months, the slow establishment of administrative procedures forebodes a longer term than promised by the government. In fact, some participants expect the controls to remain in place for the better part of a year.