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Inflation continues downward, as price and exchange controls remain in
place
Consumer prices rose 1.8% in July over the previous month. The highest
monthly increases were observed in transportation and household equipment
prices, while controlled prices of health and housing remained well
contained. The July figure brought the annual inflation rate further down
from the previous month’s 34.2% to 31.9%, which is now below the
government’s year-end inflation projection of 35% to 36%. As a result of
the downward trend in inflation observed in the past two months,
participants have again revised their forecast for this year. However,
despite the 3.8 percentage point downward adjustment over last month, the
current year-end inflation forecast of 40.8% still remains well above the
government’s estimate, as the anticipated devaluation of the exchange rate
in the second half of the year is likely to exert upward pressure on
consumer prices. Inflation is not anticipated to rebound next year,
despite the pick up in the economy and further currency devaluation. In
fact, panellists anticipate that inflation will decelerate to 30.9% - 2.5
percentage points above last month’s figure.
Government executes successful Brady bond buyback
On 30 July, the finance ministry successfully completed a purchase of US$
1.5 billion in outstanding Brady bonds. The July debt buyback is estimated
to have lowered the government’s debt servicing burden by US$ 1.4 billion
over the next five years. The government is financing the debt buyback
with a seven year maturity, domestic bond issue denominated in US$ to be
priced based on sovereign bond spreads in international markets. Key
behind government officials’ decision to issues new bonds is the recent
drop in spreads on Venezuelan sovereign bonds. Through the end of July,
the spread to US Treasuries of the benchmark composite J.P. Morgan EMBI+
Venezuelan sovereign bond has narrowed by 286 basis points. At the current
870 basis points spread to comparable US Treasuries, the Venezuelan
benchmark is at levels not observed since April 2002. As a result of the
buyback, the international rating agency Standard and Poor’s decided to
upgrade Venezuela’s long-term foreign currency rating from CCC+ to B-.
Further international bond refinancing, which are estimated by the finance
ministry at US$ 3.0 billion for this year, if successful, would serve to
ease Venezuela’s debt servicing burden and fiscal balances strained by
diminished oil revenues.
Political stalemate persists as date for possible referendum approaches
Under the current 1999 Constitution, a referendum over a president’s rule
can be held half way through the six year mandate. In the case of the
current administration the first date for a possible referendum would be
19 August. However, efforts to organize the referendum have been stalled
for a couple of months due to a congressional indecision over the
composition of the 15-member National Electoral Council (CNE, Consejo
Nacional Electoral). Given the long delay and the political necessity of a
solution, the Supreme Court has decided to set a deadline of 14 August
after which point the judiciary will designate an electoral authority.
Once the CNE is in place, the opposition will have to collect 20% of
eligible voter’s signatures to move ahead. If the administrative process
needed to organize the referendum is left to proceed unimpeded by
government stalling, then a vote could be held by the end of the year.
However, even if the presidential mandate is revoked by referendum,
political uncertainty induced by new elections will continue to shroud the
economic policy outlook. |
