Economy
Tied as they are to the fate of oil prices, Venezuelans are feeling relieved as crude prices have rebounded in the past few weeks. They are confident that purchasing power and consumption will soar. However, some signals suggest that a relatively modest increase of petrodollars will not be enough to avert economic slowdown.

The Venezuelan oil basket is averaging USD 62.63 so far in June, and should it remain at this level, the average price of oil in 2009 would be around USD 56. This is similar to the price recorded in 2006, when the economy grew 10.3 percent and unemployment showed a downward trend.

Nevertheless, Orlando Ochoa, an economist and professor at the Andrés Bello Catholic University, says that the economy will remain stagnant with growth rates similar to the first quarter of the year (0.3 percent), due to the loss of effectiveness of public spending.

Ochoa added that between June 2006 and May 2009, the inflation rate jumped 97 percent, while the exchange rate is pegged at 2.15 Venezuelan bolivars per US dollar. As a result, when the government cashes petrodollars in bolivars, it gets money with a lower purchasing power. Therefore, the fuel to feed the economy has declined.

"The situation can be corrected through currency devaluation, but this solution would have a recessionary impact for 12 or 18 months," warns Ochoa.

The administration of Hugo Chávez, which until now has remained faithful to the theory of the exchange-rate pegging, is beginning to soften its position. On June 27, Alí Rodríguez, the Minister of Finance, said in New York that currency is a commodity and as such the government can not rule out any price adjustment. "However, we must take into account the impact that it would have on the economy."

A failed model
Another factor to be considered is that even if oil prices climb higher, there are some indicators that show a loss of effectiveness in a model based on a scheme where the government injects high doses of funds to boost consumption and improve growth.

For instance, in the first nine months of 2008, the price of the Venezuelan oil reached unprecedented levels and moved within a range between USD 80 and USD 129. However, the economy began to slow down quickly.

In fact, during the first semester of 2008, the industrial sector grew 3 percent versus 7.3 percent in the same period of 2007; the construction sector climbed 7.4 percent versus 18.9 percent; trade grew 7 percent compared to 19 percent. Finally, the financial sector shrunk 3.4 percent.

Analysts think that the bottlenecks generated by price controls, exchange controls and uncertainties about ownership rights have a negative impact on the production rate of domestic companies. This leads to higher inflation and lower growth.
vsalmeron@eluniversal.com

Translated by Gerardo Cárdenas

Víctor Salmerón
EL UNIVERSAL