Venezuela loses billions despite Chavez's controls

Venezuela loses billions despite Chavez's controls

http://news.yahoo.com/s/ap/20090618/ap_on_re_la_am_ca/lt_venezuela_currency_crunch

By RACHEL JONES, Associated Press Writer Rachel Jones, Associated Press Writer
VALENCIA, Venezuela – General Motors Corp. is halting production in Venezuela for three months starting Friday. Ford Motor Co.'s subsidiary announced 10 percent cutbacks last week. Other automakers also are shrinking their business — but not because Venezuelans don't want to buy cars.

They're closing down because the government won't give them enough dollars to import parts.

It's a crisis entirely brought on by the currency controls imposed by President Hugo Chavez, Gabriel Lopez, president of Ford Motors for Venezuela and the Andean region, told The Associated Press. "Year after year we're shrinking by about 10 percent compared to the year before," he complained.

Chavez began regulating access to dollars and making it harder for businesses and people to transfer money in 2003, after confidence in his government was shaken by a failed coup and a subsequent strike. Venezuelans must now apply to the currency agency Cadivi for dollars at the official rate of 2.15 bolivars to import goods or take vacations.

These controls have backfired with a vengeance — businessmen, companies and private citizens transferred some $72.7 billion out of Venezuela over the last six years — nearly double the outflow of the previous six years, according to the Central Bank — distorting the economy, fueling inflation and discouraging private investment.

But the controls themselves haven't led to a political backlash, perhaps because Venezuelans with means tend to be opposed to Chavez's socialist policies already. Poorer Venezuelans haven't been as affected, partly because the government subsidizes food and free health care.

That could change now that oil income has plunged from last year's record highs. Oil represents 93 percent of Venezuela's exports, and with crude prices at 52 percent below their July peak, the inflow of dollars is expected to drop by half this year to about $42 billion, said Alejandro Grisanti, an economist at Barclays Capital in New York.

The oil price drop has roughly cut in half the amount of goods Venezuela can afford to import, so the government has had to tighten currency controls even more and ration the dollars it supplies to travelers and importers in response, Finance Minister Ali Rodriguez said.

Just $4.9 billion was allotted for imports in the first quarter of the year — 39 percent less than the same period last year, according to the Caracas consulting firm Ecoanalitica — and the government is prioritizing dollars for food and medicines, while limiting those it provides for luxuries like liquor, cosmetics and designer clothing.

Nearly all private businesses are feeling the pinch — from automakers to hairdressers. Textile manufacturers are waiting for currency to import cloth. Dairies complain they can't buy imported powdered milk.

The closure of GM's two plants in central Carabobo state could be a tough blow to the local economy. GM is Venezuela's largest automaker, employing 4,000 people and generating 70,000 indirect jobs.

Many will be affected — including 40-year-old transport worker Franklin Gonzalez. He said his employer, Tegma Venezuela — a subsidiary of Brazilian firm Tegma Gestao Logistica SA — will have to find business elsewhere or its roughly 20 drivers will see their salaries slashed by 60 percent or more.

"How is one supposed to work?" asked Gonzalez, who stopped supporting Chavez years ago because he believes the president's policies have strangled private business.

Chavez has assured that "Venezuela won't go under," but said spending must be regulated carefully until oil revenues rebound.

Even hair salons — a weekly staple for many Venezuelan women — have been affected.

"You try to get one hair dye and you get another. Or you ask for 10 shades and you get six," said 42-year-old hairdresser Judy Morales, whose salon is now using more local products than those from France, Brazil or other countries.

"We're not used to this in Venezuela," she said.

When they can't get government dollars, many companies turn to dollar-denominated government bonds or to the thriving black market, where the dollar sells for about three times the official exchange rate. This contributes to Latin America's highest inflation, which hit 26.8 percent in May.

Inflation is reducing Venezuelans' purchasing power and putting brakes on economic growth, which officially dropped to 0.3 percent in the first quarter of the year from 5 percent a year earlier.

Araceli Reyes, a 54-year-old housewife browsing a Caracas department store, said she was only comparison shopping because prices for some goods — especially household electronics — have skyrocketed.

"I bought them before, but not anymore," said Reyes, who is saving for an increasingly expensive plane ticket to visit her three grandchildren in Phoenix, Arizona.

The Chavez government cut in half the amount of dollars residents can get to send to relatives abroad — from $1800 to $900 a month. It also cut in half the amount of dollars travelers can spend on their credit cards abroad, to $2,500 a year. Manuel Barroso, who heads Cadivi, estimates the credit card restriction will keep an extra $2.3 billion in Venezuela.

Venezuelans are taking fewer and shorter trips abroad as a result, said Francisco Melean, who said the past few months have been the most difficult for his Caracas travel agency in years. "What we don't know is, how long it's going to last," he said.

Chavez has said Venezuela can always draw on the billions it has stashed in government reserves and joint development funds formed with allies including China.

But much of that money is committed to other projects, and cash flow problems are growing.

Carmakers GM, Ford, Toyota Motor Corp., Chrysler LLC, Iveco Venezuela, Mack de Venezuela and Mitsubishi Motors Corp. produced 54,113 cars in Venezuela during the first five months of 2009 — 9.7 percent less than a year earlier, according to the nation's automotive chamber.

State oil company Petroleos de Venezuela SA, or PDVSA, has fallen behind on billions of dollars in payments to foreign and domestic oil contractors — prompting some, such as Dallas, Texas-based oil driller Ensco International Corp., to halt their Venezuela operations. Such moves could decrease oil production just when Venezuela needs those revenues most.

Venezuela ran a trade deficit of $1.4 billion in the first quarter of this year, and $3.7 billion in last year's fourth quarter — its first in more than a decade.

Small importers are particularly struggling. Nagibe Chaya, who helps run her family's electronics store, said her family is as much as a year behind on payments to distributors in Panama, and is still waiting for the government to exchange an approved $400,000 through her bank. Sales are falling and interest on those payments is 10 percent a month.

"How can a company function?" she asked.