Can Caldera Pull Venezuela Out Of Its Stall?

For weeks, there have been long lines at exchange houses on Avenida Urdaneta in downtown Caracas, as Venezuelans rushed to convert their fast-shrinking bolivars into dollars. In nearby office towers, executives of multinational subsidiaries scraped for dollars to pay for imports, while Venezuelan food importers warned of shortages for lack of dollars.

Then, on May 24, Venezuela's Central Bank acted. It eased the currency crunch by setting up a "Dutch auction"--a system that makes dollars freely available to the banks that offer the best prices in bids they submit each morning. That move toward a free currency market ended a disruptive three-week attempt by the Central Bank to ration dollars to protect the country's hard-currency reserves.

FLIP-FLOPS. The rationing crimped multinationals' operations amid fears that Venezuela was headed toward rigid exchange controls. General Motors Corp. considered scrapping a planned $30 million expansion. Now, with dollars available, "we hope to continue with the investment and with normal operations," says Walter Wieland, president of General Motors Venezuela.

The crash of the bolivar is just one sign of the deepening crisis of confidence in the economic policies of 78- year-old President Rafael Caldera. He won December's presidential election with the help of populist rhetoric. But since taking office on Feb. 2, he has shaken business confidence most by his wavering between free-market and statist policies.

Caldera inherited part of his troubles: the collapse of Banco Latino, Venezuela's second-biggest, shortly before his inauguration. But his indecisive response triggered a run on eight other banks. Bailouts totaling $5.5 billion fueled inflation and increased pressure on the bolivar. His economic-policy flip-flops also brought on the latest crisis. On Apr. 26, Central Bank President Ruth de Krivoy quit in protest against government pressures to ease the bank's anti-inflationary money tightening. Fears of an inflationary binge sent Venezuelans scrambling for dollars and poked a big hole in Venezuela's currency reserves, which have dropped to an estimated $9.5 billion from $12.6 billion at yearend.

De Krivoy's successor worsened the crisis by selling only limited amounts of dollars to banks. The result was to spawn a parallel currency market and push the bolivar even lower (chart).

Now, while the new currency-auction system eases that crisis, Caldera must do much more if he hopes to restart private investment and pull Venezuela out of recession. A key test may be his handling of plans to sell chunks of state-owned companies. On May 24, Finance Minister Julio Sosa Rodrguez said the government plans to sell part of its 49% share in telephone company CANTV, a stake valued at more than $2 billion. It is currently run by a consortium headed by GTE Corp. that bought a 40% stake in 1991 (BW--Mar. 28). Also earmarked for sale are 60% stakes in aluminum, iron, and steel plants. Kaiser Aluminum & Chemical Corp., for one, is interested.

What's not clear is whether Caldera is ready to push government agencies to offer attractive sales terms. A recent attempt to sell domestic airline Lnea Aeropostal Venezolana fizzled for lack of firm offers. American Airlines Inc. and other potential bidders said they were worried over the lack of guarantees of profitable fare structures, among other concerns.

Surprisingly, Venezuela's oil industry, a state monopoly long hemmed in by nationalist taboos, now is spearheading the opening to investors. Luis Giusti, president of Petrleos de Venezuela, expects Congress to approve pacts with foreign companies this year to explore for oil under production-sharing arrangements. By itself, oil can't solve Venezuela's problems. But it may still be a springboard for recovery.

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