Adjustments required amidst economic imbalances in Venezuela

President Nicolás Maduro's administration ended 2013 with a balance of rampant inflation, low economic growth, high scarcity of goods, currency drought and a gap between income and expenses. Therefore, year 2014 has started with severe imbalances that require some adjustments.

Devaluation and increases in prices, public service fees, and gasoline prices are some of the moves included on the government agenda. According to investment banks, such measures will be implemented during 2014.

Macroeconomic adjustments will come hand in hand with more regulations. Maduro has special powers to legislate and the laws he has enacted under his enabling law suggest the State will have further control over imports and in setting prices and profit margins.

Taxes and foreign exchange

In the last quarter of 2012, economic distortions emerged and, therefore, year 2013 began with a devaluation of the official exchange rate and the elimination of the Transaction System for Foreign Currency Denominated Securities (Sitme).

A few months into 2013, authorities established an alternative mechanism for selling foreign currency -the Ancillary Foreign Currency Administration System (Sicad) in order to raise the supply of foreign exchange. Further, the prices of some controlled items were revised up and talks were held with the private sector. However, such actions failed to correct the imbalances and, in the last quarter of 2013, authorities announced that they were tuning up foreign exchange and fiscal measures.

Although the oil price has remained at around USD 100 and tax contributions have climbed, revenues have failed to meet spending, while the gap between revenues and expenses exceeds 15% of Gross Domestic Product. Such deficit leads to a revision of the foreign exchange regime.

In recent days, Economy Vice-President and Petroleum and Mining Minister Rafael Ramírez announced the redesign of the forex system to allow state-run oil giant Pdvsa and its foreign partners to sell foreign currency through Sicad, as well as tourists and gold miners. He noted that the parity of VEB 6.30 would remain in place for food, healthcare, medicine, and capital goods. Therefore, other sectors yet to be defined would buy dollars at the Sicad rate.

However, investment banks estimate that the devaluation of the official rate and the Sicad rate will take place sooner rather than later given the funding requirements.

The Bank of America believes that if the rate of VEB 6.30 bolivars continues in force, the deficit in the fiscal accounts would worsen and hit 18% of GDP. Thus, the firm suggested that devaluation could be implemented in two stages. The first stage would take the official rate to VEB 11 and the second would raise the Sicad rate to VEB 18. Meanwhile, Barclays Capital estimates that the official exchange rate of VEB 6.30 would be increased to VEB 12.5.

Analysts view revenue from devaluation as insufficient. Therefore, they believe more funding sources are required and that a raise in gasoline prices may help bridge the gap.

Ramírez acknowledged a few weeks ago that the fuel subsidy results in annual losses around USD 12.5 billion. He said the costs of production need to be recovered. This week, President Maduro said that the government has no rush to increase the fuel price adjustment. "This is a medium-term plan."

Research firm Econalítica estimated that an increase in the price of gasoline so that it meets production costs would help cover 48% of the public sector deficit.

However, beyond income, other actions are required, but no spending cuts are forecast. Barclays does not expect fiscal restraint and projected deficit at 10.9% in 2014.

More controls

Besides the measures already described, more controls are expected.

The government has created a new exchange structure. Via the Foreign Trade Center and the Foreign Trade Corporation, the State is responsible for imports and supply of goods to public and private companies.

Ecoanalítica noted that "non-priority private imports will continue the downward trend" in 2014 and remarked that "as long as there is not a more aggressive correction of the exchange rate and structural measures, problems will not disappear."

The centralization of imports will be accompanied by more regulations. "We will control everything, everything," Maduro said recently.

Variables

Investment firms forecast little growth and high inflation, because the adjustments will be implemented in parts.

Ecoanalítica estimated that inflation would end at 75% with an economic contraction of 1%. Barclays expects that prices will rise 51.5% and the economy will pick up just 0.3%.