Girish Gupta

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Minor economic reforms are unveiled
Jan. 22, 2015 — Caracas, Venezuela

Published by Economist Intelligence Unit

Event

In response to deepening economic problems, Venezuela's complex foreign-exchange system is set to undergo minor reform. The country is also being prepared for a rise in petrol prices, currently the world's lowest.

Analysis

The policy changes and data were announced by the president, Nicolás Maduro, in an annual speech to the National Assembly on Wednesday. In the address, the president admitted that Venezuela's economy was in trouble, although he attributed much of the blame to an "economic war" against his government, adding that the US was using oil as a geopolitical weapon. Falling oil prices have severely impacted Venezuela, which relies on oil earnings for virtually all of its export revenue.

Venezuela's strongest exchange rate of BsF6.3:US$1 will remain in place for essential food and medicine. The country faces severe shortages of basic goods, and many importers say they are unable to obtain hard currency at this rate. The two further exchange rates, BsF12:US$1 and BsF52:US$1, known as Sicad I and Sicad II respectively, are to be merged; it is not known yet at what rate. A third exchange rate mechanism will also be added, in which hard currency will be provided by private brokers. This is likely to be closer to the black-market exchange rate of BsF177:US$1. The changes essentially represent a devaluation of the currency, allowing the government more local currency for its oil sales.

Mr Maduro, in a speech that was in part antagonistic towards the opposition and the US, and in part apologetic for the state of the economy, also admitted that petrol prices needed to rise. Venezuelans currently pay around two cents per litre. The opportunity cost to the government is some US$12bn per year. No concrete timeline was offered, although it appears that Mr Maduro is looking to increase prices this year.

This and other more pragmatic changes are politically very difficult for a president whose approval ratings are around 22% and falling. When the government last tried to raise petrol prices, in 1989, thousands took to the streets. There are pockets of unrest similar to those seen last February, and they are likely to grow as supermarket lines and other manifestations of the poor economy worsen.

Impact on the forecast

While the changes are significant, they are nowhere near enough to allay a deepening of the recession. Given the recent downgrade to our oil price forecast, we will be revising our GDP predictions for Venezuela downwards.

Filed from
Caracas, Venezuela






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© Girish Gupta