The Venezuelan economic crisis
Editorial
Stabroek News
February 21, 2003
President Chavez of Venezuela has survived this round of the struggle with his opponents, but the question remains as to how he will weather the economic turbulence now visible on the horizon. As long ago as last September, a leading banking analyst, Oscar Garcia, speaking to Dow Jones Newswires said that Latin America’s third largest economy was showing some of the same red flags as Argentina. Among other things, in the latter country the banks’ holdings of public securities was 25-30% of assets whereas in Venezuela it was 40 per cent.
President Chavez, Garcia said, not only wanted a roll-over of maturing domestic debt, but had also requested that the banks raise their holdings of it on terms more favourable to the government. Their refusal had caused him to accuse them of undermining his presidency, and he had appealed to depositors (in vain) to put their savings in public banks and not private ones.
A Venezuelan banking analyst at Moody’s, Phil Guarco, was quoted on the same occasion as saying that the private banking sector was well managed, in contrast to the public finance sector. The Industrial Bank of Venezuela, for example, the major public lending bank, had a non-performing loan ratio of almost 50 per cent. Even last September the analyst described capital flight as “massive,” and said that deposit levels at Venezuelan banks were the lowest of South America’s largest economies at 13 per cent of GDP. (This compares with Brazil, for example, at 34 per cent.)
According to the analyst, it was higher oil prices in the last quarter which insulated Venezuela’s “international reserves from pressure on the bolivar [Venezuela’s currency] by financing capital flight.” Last Sunday, Reuters reported the country’s foreign reserves as now standing at $11B, and it quoted analysts as saying that with this President Chavez could possibly hold out for months.
Even if that is so, the question arises at what cost. If capital flight was “massive” before the strike, it got even worse during it, placing the bolivar under huge pressure. In response, President Chavez last week announced foreign exchange controls and the pegging of the exchange rate, promising that his opponents would not be given access to foreign currency, whose allocation would be supervised by him personally. Since the country imports more than 60 per cent of its goods, it is not difficult to foresee that many businesses will be in financial difficulty.
The President has since declared that he also proposes introducing restrictions on commercial bank lending rates, because the poor cannot afford credit. And as if that is not enough disastrous news for the economy, there are also the price controls which have been slapped on 106 basic food items and 60 other commodities - everything from “tomatoes to funeral services,” as Reuters put it.
Guyana has been down this road before, and we don’t need any economist to tell us what the consequences will be - the contraction of the private sector, a burgeoning black market, corruption (already entrenched in Venezuela in any case), and inflation. Far from giving President Chavez greater control over the economy, as we know only too well on this side of the Cuyuni, the opposite will happen. There will be an additional consequence in Venezuela’s case, and that is heightened unemployment, which will carry a heavy political price in the current circumstances. It is hardly a formula for peace and tranquillity even without the disturbing signs of possible growing violence which have appeared in the last two days.
Of course, President Chavez is probably banking on continuing high oil prices and the resuscitation of the national oil company, PDVSA, to see him through. However, according to the Christian Science Monitor (CSM), the oil industry may be irreparably damaged. Before the strike, Venezuela produced 2.8 million barrels per day (bpd). The company’s president, Ali Rodriguez, clearly optimistic, said recently that production levels had reached 1.9 million bpd and would be back to normal by mid-March.
Petroleum analysts quoted by CSM, however, did not agree. President Chavez has laid off 12,000 workers from a force of 38,000, the vast majority of whom are scientists, economists and senior managers. President of the International Petroleum Research Foundation Larry Goldstein, was reported as saying that a skeletal staff headed by retirees called back into service was now faced with complex engineering tasks and the reconfiguration of computer systems. Restarting an oil well, said the CSM, was not a simple matter of flicking a switch.
Half of Venezuela’s petroleum, it was reported, comes from very viscous oil deposits, and many wells filled with sand after oil pressure was reduced during the strike. An IDB petroleum consultant, Ramon Espinasa, said that some fields which should never be shut down, were shut down, so that a large number of wells would have to be redrilled. Goldstein’s estimate was that 400,000 bpd of oil may be permanently lost.
Furthermore, achieving pre-strike production levels would require further explorations as well as capital. Yet PDVSA has announced, said Espinasa, that it would cut back by $2.7B this year, representing about one third of its capital and labour needs. With a battered credit rating, he continued, borrowing would be expensive, so that PDVSA might be forced to sell assets abroad, including part of Citgo in the US.
CSM reported analysts as predicting that President Chavez may eventually have to resort to privatization, and that the large multinational oil companies already operating concessions in Venezuela, were waiting to see what might fall their way. In addition, it was said, the law requiring that Venezuela retain a 51 per cent holding in all foreign oil operations on her soil, might have to be revised.
In the ultimate of ironies, therefore, not only might President Chavez be forced to face the prospect of privatising a portion of the largely state-owned oil industry, but analysts said that decreased production would probably also affect social programmes designed to benefit the poor. CSM reported that it was estimated that the Venezuelan economy might contract by as much as 25 per cent this year, which would hardly be good news in any society, but would be potentially catastrophic in one as politically polarized as Venezuela.
It will clearly require far greater political flexibility than has been displayed by either government or opposition to date, if the country is to recuperate from the economic blow which the December strike delivered.
