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Growing pressure on external
accounts prompts devaluation and new measures
Mounting political uncertainty, growing
prospects for lower oil prices this year and a persistent decline in
international reserves, prompted investors to withdraw capital at a more
accelerated pace in the first two months of this year. As a result,
capital flight is expected to have exceeded US$ 2 billion in January and
February. Despite the capital flight, the Central Bank had been
successful in maintaining the currency stable through the end of January
by continuous intervention in the exchange rate market. The toll in terms
of international reserve losses however was high. In just four and a half
weeks, international reserves declined by US$ 1.6 billion, or 12.9% of
total reserves. In addition, the Central Bank was forced to raise
interest rates (Central Bank discount rate) five times, by a stifling
total of 15 percentage points, between 13 December and 7 February.
In order to curtail the brisk erosion of
international reserves, the government announced new economic measures,
which include the adoption of a new exchange rate regime, the
implementation of fiscal adjustments and increased social outlays.
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Exchange rate adjustment warranted.
On 12 February, the government decided to abandon its five-year old
exchange rate band system in favour of a floating currency. The rate of
depreciation was adjusted annually but always remained significantly below
the inflation differential to the US$. Prior to its abandonment, the
crawling peg regime had permitted the bolivar to depreciate at an annual
rate of 10%, fluctuating 7.5% around the central parity. The Central Bank
stated its intention to intervene in the foreign exchange market in the
future only to provide for the normal functioning of the economy, which
authorities claim will be limited to sales of a maximum of US$ 60 million
daily. Since the government’s announcement to devalue, the currency has
been highly volatile. On 8 March, the currency closed at 958 bolivares to
the US$ or 19.3% weaker than on 12 February. Further capital flight and
exchange rate market intervention by the Central Bank have caused
international reserves to dwindle by an additional US$ 641 million over
the same period.
Consensus participants have undertaken
substantial adjustments to their exchange rate forecasts to reflect the
adoption of the new currency regime. The currency is now expected to
depreciate 36.1% this year, which puts the year-end exchange rate at 1,193
bolivares to the US$ or 25.4% weaker than the exchange rate forecast in
the February 2002 edition of the LatinFocus Consensus Forecast.
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Fiscal adjustment as currency anchor.
In the past two years, healthy oil prices
have helped the Chávez administration to finance a populist agenda and
boost the economy. However, mid-last year the oil price began to
deteriorate sharply and in the first two months this year the Venezuelan
mix of crude oils averaged just US$ 16.23 per barrel, well below the US$
18 per barrel price used to calculate government revenues for the 2002
budget. To adjust for the likely decline income, the government decided
to cut spending by 22.2%, or 1.9 trillion bolivares. The government now
expects oil revenues to reach just 6.1 trillion bolivares, 19.7% below
original revenues assumptions in the budget, as the budgeted oil price was
lowered to US$ 16 per barrel. This is still above the Consensus figure of
US$ 15.74 average per barrel. However, the depreciation of the currency
under the floating exchange rate regime should serve to bolster fiscal
accounts, since public revenues rely heavily on US$-based revenues,
principally from oil income, which finances predominantly bolivar-based
expenditures. Officials are confident that the public sector will benefit
from the new measures, expecting the fiscal deficit to drop to 3.5% of GDP
from 4.5% in 2001. Panellists share the government’s perception that
devaluation will favour fiscal accounts, even though the Consensus sees
the fiscal deficit this year at 3.8% of GDP, down from 4.9% in last
month’s publication.
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Increased social outlays to compensate for effects of new economic
measures. The inability of
the current government to live up to ambitious campaign promises in the
social area has led to a sharp decline in popularity. In fact, the
president’s approval rating has plummeted from 58% two years ago to just
21% in December 2001. The government is now attempting to prop up
popularity by increasing benefits for Venezuela’s poor and unemployed
(11.0% in December). In a follow-up to the fiscal and exchange rate
announcement, the president announced a new US$ 2.4 billion social
spending agenda on 28 February. The government plans to dedicate US$ 1.3
billion in government funds to construct new public housing for some
137,000 families nationwide. Additional resources of US$ 1.1 billion will
be targeted at financing government financial institutions that provide
subsidised loans and credits with preferential conditions to small and
medium sized companies.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Venezuela. For more details please click here. |
