Likely devaluation and spending cuts are to curb consumption in Venezuela

In the third quarter, Venezuelan households' consumption hit its highest level ever since 1998, as well as a 7.8% leap over the same period in 2011, according to the numbers disclosed by the Central Bank of Venezuela (BCV).

Amidst increased government spending in subsidies and welfare programs, wage raises, as well as lower unemployment and cheap imports, consumption has skyrocketed in 2012. However, a bleak outlook is forecast for 2013.

Analysts believe that the Government will be forced to cut expenses and devaluate the Venezuelan bolivar. Both moves may have a negative impact on people's purchasing power.

A likely reduction of spending would translate into less subsidies, more modest wage raises and economic slowdown. In turn, devaluation would result in imports that are more expensive and boost inflation.

Research firm Ecoanalítica forecast that spending cuts and devaluation would lead to stagflation next year.

According to Ecoanalítica, Venezuelan economy will tumble by 0.5%, with inflation at some 26% and private consumption shrinking by 3.7%.

Basically, Hugo Chávez's administration will have to shorten expenses, as it cannot keep issuing debt at the same pace as in the last two years.

Debt to GDP ratio currently amounts to 50%, more than double in 2008. While still a manageable burden, debt is growing fast amidst high oil prices.

The gap between spending and revenue bridged with debt so far- stands at 11-15% of GDP.

Consequently, it appears that the Government will face economic imbalances with a combination of spending cuts and devaluation, which would increase the amount of bolivars for petrodollars.

Overvaluation

Besides the need for more dollars, Venezuela is headed for devaluation due to the overvaluation of the Venezuelan bolivar.

The official exchange rate has remained unchanged at USD 4.30 per US dollar since January 2011, while inflation has exceeded by far that in Venezuela's major trade partners. Consequently, in Venezuela, imported products are cheaper and foreign currency supply has skyrocketed to levels hard to meet.