Archive for March 21st, 2009

Hugo Chavez announces very timid economic measures to confront drop in oil revenues

March 21, 2009

cluelessVenezuela may be the only country in the world where the President addresses the Nation to say that two days later he will announce a set of economic measures which he calls “tactical adjustments”, because he is afraid that the people will think of this as the same type of “package” of economic measures that were common in the IVth. Republic. But in the end, its is exactly the same, but badly done, poorly conceived and will likely be badly implemented.

Badly done, because the reason they were not announced on Thursday is that the Government had not yet decided what measures it would implement. Thus, after months of low oil prices, improvisation and ignorance continue to rule the management of the Venezuelan economy, since Chief economist Chavez has veto power over all suggestions from professionals and thus, the real adjustment needed is once again postponed until later and measures are half baked ones.  If baked at all.

But even as Chavez spoke on nationwide TV today at noon to announce that he is now formally a Dictator, as he has illegally taken over ports and airports from the regional Governors, Chavez said that some details about his economic plan needed “rounding up”, in another proof of the level of improvisation surrounding the way Venezuela is being run. (BTW it was grotesque to see Diosdado Cabello, an incompetent Governor ousted by the voters three months ago, leading the takeover of the Puerto Cabello port facilities and boasting that this was a matter of “justice”)

And in the end, the measures announced tonight left a lot to be desired. There will be no devaluation and no increase in the price of gas. I was not expecting a devaluation given the revived presence of Minister Giordani in the Cabinet, but I did think Chavez was preparing the way for the gas increase last Sunday, which would help PDVSA alleviate its cash flow problems. But even such a simple move is too unpopular for charismatic Chavez to implement.

Thus, the only concrete measure announced is the increase of the Value Added Tax (VAT) from 9% to 12%. All of the rest sounds like a typical Chavez project, lots of fluff that will need to be executed if it is going to have any effect: A reduction of the budget by 6.7%, elimination of superfluous expenditures, a cap on salaries at high levels, more efficient expenditures and an increase of debt issued. Since it would be very difficult for Venezuela to issue debt today abroad, this debt will all be local, Chavez talked about increasing debt in Bolivars from Bs. 12 billion to Bs. 32 billion.

And in the indispensable populist note of the night, Chavez also announced that the minimum salary would be increased by 20% starting on May 1st., it was not clear if the cut in the budget would be before or after this salary increase which was not included in the original budget for 2009. I bet that with this announcement, the original budget remains essentially the same as the one proposed last November.

Chavez again talked about the nationalization of Banco de Venezuela, but at a “fair” price. I am sure the owners have a “fair” price which is much higher than wthat Chavez is thinking about. At the same time, given the need to protect the country’s foreign currency, this would seem to fall under the category of ‘superfluous” expenditures, but we all know this is a Chavez whim and we all know when he throws a temper tantrum, he always gets his way.

Thus, as expected, not much substance in Chavez’ program, a couple of measures that are real (VAT and salaries), but the rest a lot of wishful thinking that will face the resistance of the bureaucrats to implement them, since it affects their power and their perks. Since nobody will do follow up to all these measures of savings, efficiency and rationalization of expenditures, they will in the end not have much of an impact.

One of the highlights of Chavez’ presentation was his use of the best precepts of How to Lie with Statistics, when he presented a graph showing how he has increased the minimum salary in US dollars by almost a factor of three since he became President. Of course, he failed to note that the calculation since early 2003 was at the official rate of exchange. If he uses either the swap rate (Bs. 6 per US$) or the rate of inflation (Prices have tripled since Jan. 2003), then the minimum salary has actually lost ground or remained the same in the best case. But either he does not understand this, or he is lying, both a common occurrence for him.

In the end, if oil prices do not rebound significantly, we will see a repeat of this week’s show in June-July, with another set of measures, this time, much tougher ones, as the country begins drawing down foreign reserves and PDVSA’s cash flow becomes critical. Shortages will become quite common by then, much like what happened in late 2007 and speculators and oligarchs will be blamed.

But the poor economic management of the country by Chavez and his Minsiters will not be blamed or even mentioned.

This was as irresponsible as these guys get!!! They are clueless, but that’s not an excuse!!!

(Chavez was careful all day to reassure people that he would announce everything before the Venezuela vs. S. Korea World Baseball Classic game tonight and he did. However, he shoudl have kept talking and spare us, Venezuela is getting whipped 10 to 1 in the seventh inning…sigh…)