Hugo Chavez's economy is starting to unravel in the currency market.
While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16 percent, the highest in Latin America, as President Chavez tripled government spending in four years. Exxon Mobil Corp. and ConocoPhillips are pulling out after Chavez demanded they cede control of joint venture projects.
The currency, the bolivar, has tumbled 28 percent this year to 4,750 per dollar on the black market, the only place it trades freely because of government controls on foreign exchange. That's less than half the official rate of 2,150 set in 2005. Chavez may have to devalue the bolivar to reduce the gap and increase oil proceeds that make up half the state's revenue.
``This has been the worst managed oil boom in Venezuela's history,'' said Ricardo Hausmann, a former government planning minister who now teaches economics at Harvard University in Cambridge, Massachusetts. ``A devaluation is a foregone conclusion. The only question is when.'' ...
Chavez, an ally of Cuban President Fidel Castro who calls capitalism ``evil,'' weakened the currency 11 percent in 2005. He imposed restrictions on foreign exchange in 2003 to halt capital flight that has driven down the bolivar more than 70 percent since he took office in 1999.
A devaluation would give the government more bolivars from its oil export tax receipts, helping fund Chavez's policies to provide free healthcare, housing and discounted food to millions of Venezuelans. The government says social programs helped cut the poverty rate to 34 percent in the first half of 2006 from 49 percent eight years earlier. ...
Chavez, who is seeking to end presidential term limits, has taken $17 billion of foreign reserves from the central bank and expropriated dozens of farms that he deemed underutilized.
He nationalized Venezuela's biggest private electric and telephone utilities and took majority stakes in oil projects owned by Exxon, the world's largest producer, and ConocoPhillips, the third-biggest in the U.S. Foreign direct investment was a negative $881 million in the first half as foreign companies pulled out money.
Chavez terminated the broadcast license of the country's most-watched television network in May, sparking weeks of student protests. He has threatened to take over cement makers, hospitals, banks, supermarkets and butcher shops, saying they weren't obeying price controls. ...
Contreras called the government-set prices on many products ``fantasy prices'' that are below production costs. Items including milk, chicken, coffee and flour have disappeared from store shelves in Caracas at times this year because companies refused to sell at a loss. ...
Harvard's Hausmann said the growth in public spending has been so rapid that the government needs oil prices to keep rising to hold its deficit in check. He estimates the public sector deficit will equal about 5 percent of gross domestic product this year. The Finance Ministry forecasts the public sector will post a balanced budget this year, Public Credit Director Luis Davila said last month.
``For the macroeconomic house of cards not to come crashing down, the price of oil has to go up at double digit growth rates,'' Hausmann said. ``If oil stays at $70, they're going to hit the wall.''
