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Consumer prices well behaved amid exchange and price controls but pressure
remain
In March, consumer prices rose 0.8%, which was a significant decline
compared to the record 5.5% increase recorded in February. In fact, the
March increase in consumer prices was the lowest monthly increase observed
since January of last year. As a result, the annual inflation rate
declined from 38.7% in February to 34.1%. Price declines in food and
non-alcoholic beverages of 3.7% and 0.8% respectively were the key behind
the moderate March increase. Prices for alcoholic drinks and tobacco along
with entertainment and household equipment provided strong upward momentum
with monthly increases of 8.6%, 6.9% and 5.3% respectively. Wholesale
price developments show that underlying inflationary pressures remain
present, as the variation in the wholesale price index (which includes
prices on imported goods) rose a whopping 6.0% over February. The March
increase brought the annual wholesale inflation rate to 61.8%. The current
controls are serving to avert a severe spike in inflationary expectations.
However, once foreign exchange becomes more readily available and the
black market matures, domestic price setting is likely to be dictated in
this market rather than by the official exchange rate. Also, faced with
declining oil revenue and mounting public debt service costs, the
government is likely to undertake an adjustment to the official exchange
rate. In fact, participants see an exchange rate adjustment of 25.9% from
current levels. The resulting pass-through of the currency depreciation to
domestic prices is likely to prompt a rebound in inflation. In fact,
participants expect inflation to rise sharply this year.
Government suggest bond swap to ease debt payment amid oil revenue
shortfall
Last year, taxes and royalties from oil sales accounted for 43.5% of total
government revenue and the current production shortfall is increasing
pressure on fiscal balances, already strapped by the economic downturn. To
ease the government’s current debt servicing burden on its estimated US$
22.3 billion in foreign debt, the Finance Ministry has decided to offer
international bondholders a swap of existing obligation for longer term
securities. The swap is part of the government’s international finance
plan, which also envisions obtaining direct bank credits and
project-specific financing. The government has approximately US$ 5 billion
in debt service payments coming due this year.
To manage its US$ 9.0 billion in domestic debt, officials have initiated
voluntary debt exchanges intended to extend bond maturities. Since
November, the Finance Ministry has executed six domestic National Public
Debt (DPN) bond swaps totalling approximately $2.8 billion.
Even though the current debt burden is considered manageable, the
international rating agencies have emphasized that the international debt
swap will have to remain voluntary and that forcing bondholders into the
exchange or into accepting a loss on their holding would represent a
default. The spread to US Treasuries of the benchmark composite J.P.
Morgan EMBI+ Venezuelan sovereign bond closed March at 1,419 – some 301
basis points above its year-end 2002 level. At current levels, Venezuelan
sovereign bond spread are at a three year high, a trend that runs contrary
to the more generalized tightening observed in the spreads of other
regional economies amid an increased appetite for risk among international
investors.
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