Archive for January 3rd, 2008

As structural inflation hardens, Chavez shuffles Cabinet looking for loyalty rather than expertise

January 3, 2008

This is a very good graph by Santander Investments which shows the problem that structural inflation has become in Venezuela. The gray curve shows the 12 month or annualized inflation in prices at each point in time since 2005 for items in the CPI which are not controlled.  The red curve on the other hand shows the same CPI annualized, but for items under control. As you can see, the items under control have never been able to yield an annualized inflation level of less than 10%. Moreover, you have to remember that it is precisely these controlled items that are seldom available at stores, so the “true” level of inflation is much higher. Given this, in the absence of new and effective economic policies to fight inflation, the current reconversion of the currency will become a useless exercize.

Note that for the last year the prices of items not under control have diverged from those controlled and that recently the difference is close to 20%, a huge number and while there is a suggestion that it is tapering off, the difference has only increased in the last few months.

Clearly, President Hugo Chavez needs new and more capable faces in the Cabinet to tackle these problems. One of the difficulties is that he personally pays little attention to coordinating economic policy and had left this on the hands of the Vice-President for at least the last year and a half. Rumor had it that Chavez was ready to bring new faces into the Cabinet, maybe move Tax Superintendent Vielma Mora into the Vice Presidency (He has been an effective manager, even if fairly ignorant o economic matters). Instead, Chavez has named Minister Of Housing Carrizales as the new Vice President. Carrizales managed to build less than 40,000 new housing units in 2007, while this is an improvement, in the bad old days of the IVth. Republic, 60,000 units was the norm not the exception. Thus, Carrizales has not been that effective in his position and now gets promoted to VP!

Chavez also moved Jesse Chacon to the Ministry of the Secretary of the Presidency, while moving the President of CANTV, Socorro Hernandez, to the Ministry of Telecommunications. Hernandez was thought to be way above her level of competence in CANTV and six months later she gets a promotion to Minister.

Clearly, Chavez is still shuffling people around, rather than looking for experts. He wants loyalty more than effectiveness and management capability. This bodes badly for him (and us!) in the near future, as there are significant problems that need to be resolved and tackled with true expertise. The most important positions that needed to be filled were the Vice Presidency and the Ministry of Finance, we shall see what the latter brings.

Politically, Chavez needs a good economist as Minister of Finance, who may (tough job!) be able to remove the strains in the economy slowly and stop inflation. From the looks of it, he will go for another crony in this all important position.

It’s the economy silly, not the FARC

January 3, 2008

Yes, it is the economy silly, not the FARC that matters, but in the end it seems to be secondary to the Government’s plans, as those in charge appear not to have much of a clue as to what to do.

In the latest economic tidbits from the revolution:

1) Today was the first real day of the reconversion process and there was a lot of frustration everywhere. It is still hard to tell how well it went, as most people are still on vacation and many stores did not even open. I went by the supermarket where I shop and to my surprise it was closed as the systems were not ready yet. The ever optimistic Minister of Finance called it a success only to say right after it that 75% of ATM’s are working. Sounds low to me, but he has never been one to have ambitious goals (see below on inflation).

In terms of the banking system, most online statements seem to have the right balance, but charges seem to be in old Bolivars, so that people who had a few million old Bolivars, now have only ten thosuand or so, but were charged one thousand for Internet use or the like. They will eventually get it right.

The sad thing is that given current conditions, the whole process has been futile and it will do little to slow down inflation at a very high cost.

2) Inflation was bad in December. The CPI for the full year was 22.5% after December came in at the high end of expectations at 3.3%. Basically, between the new tax and too much money chasing too few goods, inflationary pressures are still around and growing. For the Minister of Finance Rodrigo Cabezas, the numbers are proof that he has been a total failure in the policies he implemented. Every time he announced a new policy he would say that it was not inflationary and he has said all along that high Government spending could coexist with low inflation. Now he calls the inflation for December “moderate” and says policies need to be changed. Jeez, I guess he never goes shopping and he certainly should read this blog for some pointers from a non-expert.

But if the 12 month number of 22.5%, twice the Government target of 12 % per year, as recently as July of this year, it was worse for Food and Beverages, which reached 4.7% for the month of December and 38.6% for the year. Items under control, many of which can’t be found in the shelves, were up 10.7%, while those without control went up 32.7% in 2007.

3) GDP numbers for 2007 are in and it is a case of good news and bad news. The good news is that thanks to high Government spending the economy grew by 8.3%, the bad news is that the oil GDP contracted by more than 5%, continuing a very worrisome trend. Moreover, imports for the year were close to US$ 45 billion, which is clearly unsustainable.