Weak currency, inflation afflict Venezuela
CARACAS, Venezuela – During his re-election campaign, President Hugo Chavez promised to deepen the “21st-century socialism” that has meant an ever-greater state role in the economy. That message won him a surprising 11 percentage point win in what many had thought would be a tight race.
Still, he’s set to start a fourth presidential term under challenging economic circumstances. The government’s free-spending ways, bankrolling the generous social programs that aided his re-election, may be seriously crimped.
Chavez faces immediate economic time bombs beginning with a rapidly expanding public debt, one of Latin America’s highest inflation rates and a weakening currency.
Many economists believe Chavez will have no choice but to devalue the currency, the bolivar, by about half early next year at the latest. That will make the money in people’s pockets suddenly worth a lot less and likely drive inflation while putting imported consumer goods out of reach for poorer Venezuelans.
“He’s going to have to deal with some very basic, mundane capitalist things, like reducing inflation,” which stands at 18 percent, said Eduardo Gamarra, a Latin American studies professor at Florida International University in Miami.
Price controls and government subsidies for basic foodstuffs have eased inflationary pressures, but a major devaluation would drive prices higher and could worsen scarcities, economists say.
At the heart of Chavez’s economic challenges is declining productivity in the oil industry, which accounts for 95 percent of exports and funds Chavez’s social programs. Governing the country with the world’s largest proven oil reserves has so far insulated Chavez from the fallout of his confrontational polices, including a drop in foreign investment.
But economist David Rees of London-based Capital Economics said the government has relatively few dollars left, “having utilized them to fund an import binge ahead of the ballot.”
Even as he celebrated victory before thousands of jubilant supporters early Monday, Chavez appeared to acknowledge he has let down some Venezuelans. People are upset by a soaring homicide rate, power outages and crumbling infrastructure.
“I pledge to you, I repeat, to every day be a better president than I’ve been,” he said.
Venezuelans will choose state governors in December, and Chavez is likely to save any devaluation until after that election.
sponsored Jargon is confusing, by definition. And the financial world has its own set of cryptic words.