The economy remains stuck in a deep depression. Despite oil prices
hovering at over three-year highs in recent months, oil production
continues to fall, plunging by over a third in July in annual terms
according to OPEC secondary data. Moreover, although the number
of oil rigs—a leading indicator of oil output—ticked up in the same
month, it remains close to historical lows. This suggests a continuation
of declining production, and with it, diminishing vital oil revenues. On a
somewhat positive note, on 20 August, the state-owned oil firm PDVSA
reached a payment agreement with ConocoPhillips to settle the USD
2 billion arbitration it was awarded back in April. If PDVSA meets the
agreed payment schedule, it could enable the firm to regain control of its
Caribbean oil facilities and potentially recoup some of its export losses,
as the U.S. company had already moved to seize these assets to enforce
its claim. Meanwhile, a series of economic measures started to come
into effect that same day with President Nicolás Maduro’s latest attempt
to contain hyperinflation and stabilize the freefalling currency. Although
it includes moves in the right direction, the reform package is unlikely to
achieve its objectives according to analysts.
• The outlook remains bleak. The economy will continue to be
beleaguered by spiraling inflation, collapsing oil output and exchange
rate misalignments. Upcoming hefty external debt repayments and the
government’s constrained ability to access financing due to international
financial sanctions further compound the country’s woes. Given the
severity of the crisis, conditions may emerge for a political transition, a
scenario that some of our panelists have already begun to factor into
their forecasts. FocusEconomics panelists see the economy contracting
12.1% in 2018, which is down 0.8 percentage points from last month’s
forecast. In 2019, the panel sees GDP falling 4.2%.
• Panelists estimate that inflation ended 2017 at 2,532%. The authorities
have introduced a new currency, the bolivar soberano, by knocking off
five zeroes from the previous bolivar fuerte, and anchoring it to the petro,
the government-created cryptocurrency whose value is linked to the
price of the Venezuelan oil basket. However, this is highly unlikely to
stem rampant hyperinflation. Our panel forecasts inflation will surge to
679,849% by the end of this year but fall to 456,772% by the end of 2019.
• The bolivar underwent a massive devaluation following the recent
monetary reconversion, which brought the official exchange rate roughly
up to par with that of the parallel market. Nevertheless, the gap between
the two has again started to widen. The official DICOM exchange rate
ended the 7 September auction at 61.7 VES per USD while the parallel
market rate declined to 90.5 VES per USD on the same day. Our panelists
expect the official rate to end 2018 at 90.5 VES per USD and 194.0 VES
per USD at the end of 2019.
POLITICS | Government enacts sweeping reforms in latest attempt to
revive crisis-stricken economy
On 20 August, a series of far-reaching economic reforms came into effect
as President Nicolás Maduro once again strived to tackle spiraling inflation,
stabilize the freefalling currency and overcome the deep economic crisis
gripping the country. His economic recovery plan seeks to address various
dimensions of the economy, most noteworthy among which are proposed
measures for monetary reconversion, an epic devaluation and a substantial
minimum wage hike. Although some policy moves could certainly be considered
steps in the right direction, inconsistencies, ambiguities and implementation
risks of the reform package are likely to compromise its effectiveness, thus
suggesting that the laid-out objectives will not be met.
As its headline reform, the government overhauled the currency system by
knocking off five zeroes from the bolívar fuerte (VEF) and renaming it as the
bolívar soberano (VES). The new currency has been anchored to the petro,
the government-created cryptocurrency which is pegged to the price of the
Venezuelan oil basket. There are serious doubts, however, over the feasibility
of the petro’s use among the public as well as its intended purpose of raising
desperately-needed hard currency.
Firstly, the petro remains inaccessible to the general population and, while
authorities state that sales have already raised USD 3.3 billion for the
government, no verifiable evidence has been presented to support these
claims. Furthermore, there is little evidence of buoyant trading activity of the
petro and it is not sold on any major cryptocurrency exchange platform. The
monetary confusion was increased by the announcement that in addition to
the exchange rate, the system of prices and wages will also be tied to the
petro. It is not clear, however, what this means in practical terms as prices
have been linked to a token which selling price is unknown, and thus lacks
market value.
Despite the ambiguities, the value of one petro was set at USD 60 and VES
3,600, implying a VES 60 per USD official exchange rate. This massive
currency devaluation of roughly 95%—one of the largest in history—brought
the official exchange rate roughly up to par with the one offered in the parallel
market, marking the first time that the government recognized the black-market
exchange rate. However, given the significant dependence of the economy on
imports, such a steep devaluation will have an enormous impact on prices.
Imports will become even more expensive, pushing domestic prices higher
via pass-through effects. Finally, despite an attempt to unify the official and
black-market exchange rates, recent data shows that the gap has continued
to widen, indicating that rampant inflation will persist.
Maduro also announced a minimum wage hike, taking effect this month in
a bid to shore up household purchasing power, to VES 1,800 (equivalent
to half a petro or USD 30), representing a whopping 6,000% increase from
the minimum wage last set in June. Monthly pensions were also set at this
amount. However, the huge nominal gains are likely to be wiped out in real
terms amid the hyperinflationary environment. Moreover, businesses would
likely pass on the substantially higher costs to selling prices, thus pushing
up inflation. On the other hand, the sudden and sizeable hike in labor costs
also runs the risk of squeezing businesses, particularly small- and mediumsized
enterprises (SMEs), likely forcing them to lay off workers or shut
down operations, especially considering the context of depressed private
consumption. Thus, although the measure can be deemed sensible in that it seeks to support buying power for households, it can backfire as it could
lead to higher unemployment, lower domestic demand or further inflationary
pressures.
Moreover, Maduro pledged to pay the difference between the new minimum
wage and private sector salaries in SMEs for a 90-day transition period
while holders of the government’s Fatherland Card will receive a one-time
reconversion bonus of VES 600 (approximately USD 10) to ease the monetary
transition. Simultaneously, Maduro ambitiously promised to eliminate the
fiscal deficit and halt its monetization.
These measures reveal major inconsistencies, however. Foremost, the publicsector
wage bill will soar due to the hefty increases in the minimum wage
and pensions, allotment of bonuses and transitional costs for businesses.
Although a series of tax reforms and other revenue measures are in the works,
including a 4 percentage point VAT hike to 16%, higher taxes on upper-income
households and partial elimination of costly fuel subsidies, analysts contend
the government will not be able to raise sufficient revenue, particularly given
the economy is in a state of depression, to cover the surge in expenditures.
Therefore, contrary to the stated goals, the fiscal gap will likely continue to
widen and would force the government to resort to monetary financing once
again—only to stoke inflationary pressures further.
All in all, although some measures may appear sensible at first glance—
namely the devaluation of the official exchange rate to its effective rate set
by the black market and the minimum wage hike to recoup some of the lost
purchasing power of households—the reform package as a whole is unlikely
to resolve the country’s economic woes. Furthermore, as international
financial sanctions continue to constrain the government’s room for maneuver,
particularly its ability to access external sources of financing, it is expected
that the economy will remain in dire straits.
Panelists participating in the LatinFocus Consensus Forecast project that
GDP will contract 12.1% in 2018, which is down 0.8 percentage points from
last month’s forecast. For 2019, panelists expect GDP to drop 4.2%
Por Focus Economics: https://www.focus-economics.com/ Desde Barcelona -España
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