CARACAS, Monday February 11, 2013 | Update

Devaluation raises Venezuela's debt burden to 70% of GDP

The size of the economy has shrunk following the adjustment of the exchange rate

José Guerra, an economist and professor at the Central University of Venezuela (File photo)
Monday February 11, 2013  12:24 PM

Pressed by the need to fill the gap between expenditures and revenues, the Venezuelan Government devalued the currency -a move that increases the amount of bolivars per petrodollars, but also creates negative effects on public finances as it raises the debt burden.

The increased debt burden means that the market perception of risk worsens and the country has to pay higher interest rates to obtain new financing. At the same time, the government has to pay higher amounts for the principal and interests payable on the debt. This absorbs a larger portion of the budget and cuts down the funds available for sectors such as health, education and infrastructure.

Economist and professor at the Central University of Venezuela (UCV) José Guerra, who conducted a research together with his colleague Luis Oliveros to assess the trend of Venezuelan debt, asserted that devaluation dilutes the amount of debt in bolivars because the government will need fewer petrodollars to repay the debt. However, the move also cuts the size of the economy, that is, the gross domestic product, while the foreign currency debt remains unchanged.

If one takes all the debt in bolivars and converts it into dollars based on the new exchange rate of VEB 6.30 per US dollar, and if the foreign debt is included, the total debt of the Venezuelan republic is USD 180 billion.

When the GDP is converted into US dollars, the total debt, after the devaluation, represents 70% of GDP, up 20 points compared to the level recorded with the exchange rate at VEB 4.30 per US dollar.

While this not an unmanageable debt-to-GDP ratio, it is no longer a comfortable level and triples the amount recorded in 2008.

Just like in the 1970s, the country has increased the debt amid a cycle of high oil prices, while skyrocketing public spending has failed to diversify the economy.

Translated by Maryflor Suárez R.
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