Chavez Enacts Cuts He Once Slammed to Delay DevaluingJoshua Goodman and Charlie Devereux
Hugo Chavez coasted to re-election last year warning Venezuelans that a victory for the opposition would lead to a “giant package” of spending cuts. Now his government is being forced to adopt the same strategy to stave off a budget crisis and devaluation.
Last week the government cut by $2.9 billion Petroleos de Venezuela SA’s share of oil revenue it contributes to an off-budget fund that’s the second-biggest source of public spending. Central government outlays, which surged 26 percent in real terms in the year prior to the Oct. 7 vote, have declined 7 percent since then, according to Bank of America Corp. At the same time, consumer prices jumped by the most in more than two years in December, pushing inflation to 20.1 percent.
The austerity drive taking place as Chavez recovers from cancer surgery in Cuba should help narrow a budget deficit larger than that of the U.S. as a share of gross domestic product and delay a devaluation that analysts say is overdue. With elections possibly looming because of Chavez’s health, the government wants to avoid further price increases fueled by a weaker bolivar that would erode its base of support among low-income voters, said Francisco Rodriguez, a Bank of America economist.
“The government wants to avoid anything that looks like a devaluation,” Rodriguez said in a phone interview from New York. “Instead, we’re seeing the same effects as with a straight devaluation, but the impact on incomes will be somewhat delayed.”
Chavez’s fragile health has triggered a 38 percent rally in Venezuelan bonds in the past year as investors bet that he’ll be forced to cede power, ushering in a new government that will retreat from policies that curtailed oil production in the country that holds the world’s largest reserves.
During last year’s campaign, Chavez railed against opposition candidate Henrique Capriles Radonski’s economic plans, saying they risked sparking the sort of deadly riots that followed an end to oil subsidies in 1989.
Capriles “doesn’t talk about suspending contributions from PDVSA to Fonden as is written here,” Chavez said Sept. 11, reading from what he said was a secret plan formulated by his rival’s economic team that included cuts to the development fund. “They’re hiding all of that, or trying to hide it.”
Now his own administration is doing the cutting.
On Jan. 28, the government raised the tax threshold charged to PDVSA on windfall profits, which will have the effect of reducing by 19 percent, to $12.6 billion, the state company’s annual contribution to Fonden. The central bank will also reduce its contribution to Fonden’s 121.5 billion bolivar ($28.3 billion) 2013 budget by 12.5 percent, according to a copy of the plan obtained by Bloomberg.
Off-budget funds, of which Fonden is the largest, comprise 39 percent of government spending, according to Bank of America. The money is used to finance infrastructure projects and social spending, including Chavez’s low-income housing program.
Oil fell in New York today after the biggest gain in a week, widening its discount to Brent crude to the most this year. U.S. crude and gasoline stockpiles rose last week, an industry report showed. The U.S. is the biggest importer of Venezuelan oil.
The tax changes in Venezuela also aim to attack another economic scourge: a shortage of staple goods, from toilet paper to sugar, exacerbated by a lack of dollars following Chavez’s pre-election splurge. A central bank index measuring the scarcity of goods jumped to a record in December.
Under the plan, PDVSA will sell the central bank an additional $2.5 billion in oil export earnings to fund purchases abroad, receiving bolivars in return. The government, which imposed currency controls in 2003, cut dollar supplies to importers 46 percent, to $34 million a day, in January from the same month a year ago, according to estimates by Ecoanalitica.
The lack of access to official exchange rates of 4.3 bolivars and 5.3 bolivars per dollar is driving more Venezuelans to the black market, where the currency has plunged 33 percent since the election to 18.41 bolivars per dollar. The central bank may expand the purchase of dollars at the 5.3 rate to persuade companies to bring more greenbacks into the country.
There are other signs of austerity. A previously free public bus system in Caracas will begin this week to charge 1.5 bolivars for a single fare. The National Assembly’s finance committee has also begun studying a bill to cut spending and increase tax collection.
Venezuela’s Information Ministry didn’t reply to an e-mail seeking comment about whether the government is applying an austerity package.
Venezuelans haven’t seen or heard from their president since state television broadcast images of him arriving in Havana Dec. 10 to undergo his fourth cancer-related surgery in 18 months. Before departing, the self-declared socialist urged his followers to vote for Vice President Nicolas Maduro should he have to cede power.
“The thinking is any measure other than a devaluation,” said Asdrubal Oliveros, director of Ecoanalitica. “In a country that imports so much, a devaluation implies significant price increases and a decline in purchasing power.”
Much deeper cuts or a devaluation are still needed to sustain the level of spending that’s been Chavez’s formula for economic growth and electoral success over the past decade, said Bret Rosen, a Latin America strategist at Standard Chartered Bank. A devaluation would increase the amount of local currency the government receives from its tax on oil dollars.
“The fiscal distortions are so great that you have to devalue at some point,” Rosen said in a phone interview from New York. “I suspect it would already have happened if it weren’t for the confusing situation in terms of the president.”
Morgan Stanley estimates that the country’s deficit has ballooned to at least 12 percent of GDP. That hasn’t stopped investors from snapping up bonds issued by South America’s biggest oil producer, which have returned an average annual 14.7 percent since Chavez took office in 1999.
The cost of protecting Venezuelan debt against non-payment for five years with credit-default swaps fell 10 basis points to 625, according to prices in London compiled by Bloomberg. Yields on Venezuela’s benchmark 9.25 percent dollar-denominated bonds due in 2027 fell 2 basis points to 8.9 percent at 8:21 a.m. in Caracas, according to data compiled by Bloomberg.
The budget imbalances could worsen if growth stalls amid the political uncertainty. While the central bank is forecasting growth this year of 5 percent, the median estimate among economists surveyed by Bloomberg is for 2 percent growth. Bank of America forecasts a contraction of 3.6 percent.
Analysts surveyed by Bloomberg this month predicted that Venezuela will weaken the bolivar rate 33 percent, to 6.4 per dollar, in the second quarter. In July, they forecast a similar-sized devaluation would take place in the first quarter.
Still, the spending cuts are only temporary since the government will need to renew public expenditure once the political panorama clears up and elections are scheduled, said Hernan Yellati, head of research at BancTrust & Co. in Miami.
“The fiscal adjustment will only truly come once a new government has consolidated power,” Yellati said.