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Message: venezuelan economy

venezuelan economy

posted on May 29, 2008 03:13AM
5/28/2008 7:01:00 PM

Venezuela's Increasingly Statist Economy Starts To Sputter CARACAS (Dow Jones)--A sharp slowing in Venezuela's economy in the first quarter suggests that output could become sluggish throughout the year and even worsen in 2009. Despite sky-high oil prices, economists blame the government's highly interventionist policies for the petroleum-rich country's flagging growth. Venezuela's gross domestic product, the broadest measure of overall economic activity, increased an annualized 4.8% in January through March. It was the lowest figure after four years of double-digit growth. Forecasts from four private sector economists now have the economy growing anywhere from 4% to 5.5% this year, less than the government's 6% target. And all of them see it cooling off even more next year. "We're in for a sharp slowdown," said Orlando Ochoa, an economist with Andres Bello University in Caracas. Stifling bureaucracy and fast-expanding regulatory regimes, including a gamut of price, interest rate and foreign exchange controls constrain private enterprise, which has been badly shaken by nationalizations in the energy, telecommunications, power and mining sectors. President Hugo Chavez's harsh anti-market rhetoric also hasn't helped. The restrictions on the local currency, which is pegged to the U.S. dollar at 2.15 bolivars, make it difficult for companies to obtain the greenbacks for their operations. Price controls on several food items mean that some farmers aren't covering their production costs, leading to shortages. Chavez's socialist rhetoric has scared off foreign investment. Foreign direct investment receded by $475 million, "despite the vast opportunities in the oil and gas sector," wrote Goldman Sachs' economist Alberto Ramos. "In the meantime, FDI flows into Brazil, Chile, Colombia and Peru are booming," he noted. Some key sectors like manufacturing and construction almost came to a standstill in the first quarter after posting double-digit growth last year. More alarming than that, said Pedro Palma, an economist with local research firm Metroeconomia, was the 12.6% contraction in the car-making industry, despite government imposed quotas on car imports that seek to boost domestic production. The Venezuelan mining industry has also failed to take advantage of the worldwide commodities boom, retreating an eye-popping 20.5% in the quarter. Economists have long warned that extremely loose monetary and fiscal policies would likely be less effective this year than in previous years, given that they have fueled a boom in consumption, but not investment - due to the administration's statist bent. The government has been streaming record oil windfalls into social programs, said Andreas Faust, an economist with Caracas-based Banco Mercantil. "We're seeing higher consumption with very little investment," he added. The result has been the highest official inflation in the region: April's level stood at 29.3% on year. "This is the Achilles' heel of the Venezuelan economy," said Andres Bello University's Ochoa. Inflation could accelerate even more in coming months as the Chavez administration is likely to ramp up government spending ahead of regional elections in November. The GDP figures released Tuesday by the bank are also somewhat of an embarrassment for the government's economic team. Planning Minister Haiman El-Troudi, an electric engineer who has inked a handful of socialist treatises, on several occasions publicly boasted that growth for the first quarter would surpass 6%. El-Troudi is the head of Chavez's economic team and also sits on the central bank's board of directors. "The government was clearly surprised by this," said Mercantil's Faust, who added that he was baffled by El-Troudi's public predictions considering that he had access to detailed and updated economic growth data. Source: Darcy Crowe, Dow Jones Newswires; (58) 212 905 6304; darcy.crowe@dowjones.com
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