VÍCTOR SALMERÓN
EL UNIVERSAL

Awash in cash from booming oil prices and thriving consumption, seasoned by low interest rates, the Venezuelan economy is partying good time, but a number of structural gaps and poor expectations suggest that the effervescent period is coming to an end.

Undoubtedly, in Venezuela the middle class is getting heavy financing to purchase vehicles, apartments and home appliances. Meanwhile, unemployment is dropping and Hugo Chávez' administration is expanding expenses by granting scholarships, subsidies, and has increased wages to encourage consumption. However, in parallel, inflation is skyrocketing; the country risk is soaring; the unofficial exchange rate is mounting unstoppably; the public finances show a deficit and imports have climbed to alarmingly high levels.

Yet another recipe
Besieged by growing prices, Gastón Parra Luzardo, President of the Central Bank of Venezuela (BCV), last June 8 announced that -once again- he is designing, together with the government, a new plan allowing Chávez administration to meet this year's annual inflation goal of 12 percent.

The economic adjustments made in February failed. The Venezuelan government cut the Value-Added Tax rate, sped up and expanded allocation of foreign currency at the official exchange rate for imports and travels abroad, and issued debt bonds to absorb liquidity. However, inflation in January-May was 5.9 percent compared to 3.6 percent in the same period last year.

Over the last 12 months, food prices have jumped 30.2 percent, non-alcoholic beverages soared 19 percent, transportation fares jumped 25.2 percent, and healthcare services increased by 18.2 percent.

"We are assessing the moves, as they are structural and monetary measures," Parra Luzardo said, adding that they are "certain that the inflation goal is about to be met and will be met. We are looking for every solution to keep the goal unchanged."

However, private firms believe the major reason behind inflation is the fact that there is a booming demand and supply is poor. Simultaneously, they think growing public expenses are unlikely to be restrained. Research firm Ecoanalítica says the "fiscal voracity is a distinctive trait of the present administration and this situation will not change. We are forecasting 20.7 percent inflation this year and 26 percent in 2008."

Stumbling
While the board of directors of BCV has a monetary reconversion process under way -to adopt a new legal tender called strong bolivar as of January 1st next year-, monetary stability has come under fire.

International reserves -which represent the monetary support for the Venezuelan bolivar- plummeted 46 percent in January 1st-June 7, because of transfers to the National Development Fund (Fonden) -a mechanism to finance government projects-, increased imports and a moderate decline in oil exports.

Simultaneously, the Venezuelan government's expenses in the first quarter were USD 3.6 billion higher than revenues. Experts believe the Venezuelan government will be forced to resort to devaluation in 2008 to obtain more bolivars for petrodollars.

Research firm Econoinvest in its latest report notices that "in 2007 anything different is unlikely to happen, but in 2008 devaluation is quite possible, to make adjustments in the economic environment."

Meanwhile, research firm Ecoanalítica underscores: "We do not expect a depreciation of the official exchange rate this year. However, we believe the government is implementing devaluation in 2008, primarily because of fiscal reasons."

Another signal that the Venezuelan bolivar is under pressure is the fact that the unofficial exchange to the US dollar -which in the first quarter afforded 15 percent of imports- continues to climb. While state oil firm Pdvsa made attempts at appeasing the demand for US dollars and sold USD 7.5 billion in debt bonds in the domestic market, the unofficial exchange rate has remained unchanged at VEB 4,200 per US dollar -97 percent above the official exchange rate of VEB 2,150 per US dollar.

According to Ecoanalítica, next year, the official exchange rate will be adjusted up to VEB 2,500, while the unofficial exchange rate would be up VEB 5,600.

Looking risky
Venezuela's risk perception has started to increase in foreign markets, which both reduces the country's possibility to attract foreign investment and increases the interest rate Venezuela has to pay when seeking foreign financing.

Country risk -the barometer that shows the gap between the yield of the US Treasury bonds and that of Venezuelan titles- has soared 98 points since January 2, and is 167 points above that of Colombia, 137 higher that Brazilian country risk, and 177 points above the country risk of Peru.

vsalmeron@eluniversal.com

Translated by Maryflor Suárez R.
msuarez@eluniversal.com