Saturday, February 9, 2013

Prof. Chávez’ macroeconomics

Chávez’ inadequate macroeconomic and exchange rate policies have worsened the ongoing recession. He needs to get back to the drawing board if he wants to prevent Venezuela from a disaster. by Manish k Pandey

Almost two years ago, when a financial tornado was wreaking havoc across the globe, Hugo Chávez, Venezuela’s Leftist President, was standing tall and smiling wide (thanks to Venezuela’s annual GDP growth rate of 7.8% in Q2 2008) claiming that the crisis couldn’t even touch his country’s borders, leave aside the possibility of a chaos within the economy. Apparently, all this changed when the oil price plunged in the international market (from around $147 per barrel in July 2008 to around $33 per barrel in December 2008) and shattered the so-called well-shielded walls of the economy that primarily bets on oil exports (oil accounts for over 90% of Venezuela’s export revenue) for its growth. The tango of dreams and realities after all could not afford to last long.

Although oil prices have risen strongly since then (around $77 per barrel at present; even touched $80 a week back), the Venezuelan economy hasn’t. The country, which possesses the biggest oil reserves outside the Middle East (100 billion barrels as per British Petroleum estimates) and supplies more than 10% of US oil imports, continues to grapple with a severe recession. While the Venezuelan economy shrank 3.3% last year, it contracted by 5.8% in the first quarter of 2010. Inflation too is at 32% (a seven-year high) and is likely to rise further. Bolívar, the Venezuelan currency, has already been devalued (by 50%; bolívar had been officially fixed at 2.15 to the US dollar) in January 2010 and is still sinking in Caracas’s parallel money market. Private consumption, which accounts for about 70% of total GDP, too has gone down by over 6% in the last quarter. Even exports have fallen by 6.6% in Q1 2010 (and are expected to contract by about 15% in the Q3 2010), further intensifying the problem.

Considering all this, foreign investors are now staying away from Venezuela. While total foreign investment in Latin America in 2009 was about $126 billion, only $600 million were invested in Venezuela. In fact, on the contrary, the Venezuelan economy saw a direct investment outflow of $3 billion in 2009 as several companies pulled out of the country following nationalisations in the steel, cement, oil and food industries. In all, the current state of Venezuelan economy looks frightening and the future bleak. “The Venezuelan economy will struggle in 2010. GDP will contract 3.6% over the year, by far the worst performance of any major economy in Latin America,” Juan Pablo Fuentes, Economist, Moody’s tells B&E. IMF too predicts that Venezuela’s GDP will shrink by 2.6% in 2010, making it the only Latin American economy, and the world’s only oil exporter, to see a contraction in 2010. In fact, Morgan Stanley goes a step forward and boldly announces that it expects the Venezuelan economy to shrink by 6.2% this year and by 1.2% in 2011. And interestingly, this is when the overall growth rate of the Latin American region is expected stay above 4% in 2010.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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