Caracas,
Thursday
December 18, 2008

Venezuelan oil basket at $34.49 is now less than the rate of inflation at 35%

By Jeremy Morgan
Latin American Herald Tribune

CARACAS -- Consumer prices continued their inexorable rise in the run-up to a festive season marred by yet more bad tidings from the economic front as world oil prices slipped below $40 a barrel on the London market.

The Venezuelan Central Bank (BCV) said Friday that shop prices increased by 2.3% in November, slightly down from 2.4% a month before. Last month's increase put the cumulative rise in prices during the first 11 months of this year to 27.6%.

As is its customary, albeit questionable, practice, the central bank didn't issue an annual rate. Economists reckon the yearly rate will end 2008 at well over 30 percent, against last year's official figure of 22.5%.

Food again led the charge, with price rises accelerating to 3.6% from 3.1% in October, followed by health (2.2%, up from 1.6%), transport (1.9%, from 1.6%), and clothing and footwear (1.8%, from 1.3%).

The BCV said that seven of its 13 main categories of goods and services saw a slowdown in price rises. These included alcohol and tobacco, up 1.5% after a thumping 8.8% rise in October, restaurants and hotels (2.4%, from 3%), schooling (0.2% after 2% in October), communications (0.4% after 1.8%) and housing rentals (0.4% after 0.7%).

The small drop in annual inflation was mostly the result of a high base of comparison from a year earlier, when the government implemented a tax on financial transactions that was repealed a few months ago as rising prices began to bite.

The figures only temporarily distracted attention from what is now perceived to be a difficult year looming on the horizon. Even as the news came in from London, José Toro Hardy, a respected economist and former director at the state oil corporation, Petróleos de Venezuela (PDVSA), said the price of Venezuela's mix of medium-grade and heavy crude was now down to $32 dollars.

Forecasting a sharp contraction in the economy, severe shortages and high inflation in 2009, Toro Hardy warned that Venezuela faced a "very serious economic crisis as a consequence of the brutal fall in petroleum prices."

Toro Hardy argued that President Hugo Chávez was pushing for a quick referendum on changing the constitutional limit of two successive terms in office in order to get that issue out of the way before the crisis hits people were it hurts.

On the basis of the likely level of revenues from oil exports, Toro Hardy said Venezuela would have no more than $20 billion to $25 billion for imports in 2009, half the amount it has spent this year. Venezuela imports as much as 60% of its food needs, according to unofficial estimates.

Venezuela, said another economist who works in the state sector and asked not to be named, was "about to pay the price of having a mono-economy deeply reliant on the outside world."

Estimates are that at least 90% of the country's hard currency export earnings come from oil, which accounts for about half of gross domestic product (GDP). "This country doesn't have a real non-oil economy to fall back upon," the same source said.

Even worse, much of the non-oil economy is based on imports, particularly in the manufacturing sector. "The oil money simply won't be there to pay for the imports. Factories are going to close down. We might have to become a nation of domestic servants, but even that assumes the rich will still be around to pay for it." No wonder this source wished to remain nameless.

PDVSA President Rafael Ramírez Rafael, who doubles up at Energy and Oil Minister, and Finance Minister Alí Rodríguez Araque continue to insist that Venezuelan oil production is running at 3.2 million barrels a day (b/d), taking into account the 200,000 quota cut decided by the Organization of Petroleum Exporting Countries (OPEC).

The figure flies in the face of other estimates such as those from OPEC itself, and the International Energy Agency (IEA). They put output at between 2.3 million b/d and 2.4 million b/d.

Be all that as it may, the higher production is the harder will be the fall, the state sector source commented. If the government's right about output, the cutbacks in spending will have to be all the greater.

As if all that were not enough, the drop in oil income is now expected to undermine the government's foreign exchange controls. Currency traders report that PDVSA has been discreetly selling dollars on the black market in a bid to avert a sudden surge in the illegal "parallel" exchange rate, which is currently around 5 bolivar fuertes to the dollar. This is up 50% from last year, making imports paid for in the unofficial market that much more expensive and slowing demand.

Critics claim this is a quick fix that can't last and shouldn't because it directs cash away from the official reserves. Static or falling reserves would be seen as a sign of economic weakness, adding to the pressure to get into dollars. Venezuela would be in a classic vicious circle that fuelled yet more inflationary pressures, they say.