Venezuela: Hard Landing

With the oil bonanza behind it, Venezuela is now facing the music. The decision by U.S.-based auto giant General Motors to halt car production in Venezuela last week is only the latest example of how government policies are hurting the economy. Coming up are billions of dollars in fees for foreign companies that have been confiscated. All this while the oil-dependent country is seeing a dramatic decline in revenues thanks to lower oil prices than last year.

Pedro Palma, president of MetroEconomica, expects Venezuela’s economy, Latin America’s fourth-largest, to fall by 2.0 percent this year.  “The economy will obviously suffer because of the global crisis, mainly due to the fall in oil prices,” he says. “The dependence on oil is very high.”

The economic decline is affecting all sectors of the economy. Sales at the working-class Mercado Popular Quinta Crespo, for example, have fallen 60 percent from last year. Wealthy Venezuelans who own private aircraft are now forced to sell them at bargain-basement prices. And credit is growing scarce as local banks are forced to buy government bonds.

Meanwhile, inflation will likely worsen this year thanks to a combination of factors, including the dollar restrictions. It will likely reach 35 to 37 percent, he predicts. Venezuela is the only country in Latin America expected to boost inflation this year compared with 2008 and will likely end up with one of the four highest rates worldwide, according to a Latin Business Chronicle analysis of IMF projections.

Venezuela pegs its currency, the Bolivar, to the U.S. dollar at an official rate of 2.15 Bolivars per dollar. Companies that import products and need to pay those in dollars at the official rate, have to apply for permission from a government agency, Cadivi, first.

Alternatively they can buy dollars on the parallel market at a much higher rate – typically three times higher.

With lower oil prices, Venezuela has now started to...

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Keywords: Aircraft, Harper Meyer, INAC, PDVSA