Venezuelan government takes steps to revive the economy

Venezuela's government approved early on October 16 a package of measures to promote industrialization and foster domestic production in the country

Economy
October 14

Ministry of Finance ponders limiting purchases of bonds by banks
Venezuela's financial authorities, who are intent to curb the economic downturn, are ready to implement a plan to force banks to inject funds into strategic sectors such as food production, electricity and housing.

Last week, Minister of Planning Jorge Giordani announced that the tool used by the government would be "moral persuasion." However, the Ministry of Finance is considering issuing a resolution that will limit the amount of bonds to be purchased by banks and maintained in their portfolio in order to force them to lend more money.

In the first eight months of the year, total bank loans -in an environment where companies have slowed investment plans and have been affected by a sales decline- have only grown 5 percent, while investments in bonds increased by 45 percent.

Although Hugo Chávez's administration has relied on the massive sale of bonds and Treasury bills to limit the impact of declining oil revenues, experts with the Ministry of Finance think that companies have sufficient liquidity and may buy the bonds that would not be purchased by the banks.

Official data show that at the end of August, on average, financial institutions devoted VEB 54.4 out of VEB 100 in deposits to credits. The goal, as explained by Nelson Merentes, the president of the Central Bank of Venezuela, is that this ratio to climb to 61 at the end of the year, and between 63 and 65 in 2010.

October 15

Venezuelan state-run banks to cut consumer credits
Edgar Hernández Behrens, the Superintendent of Banks and other Financial Institutions, said that the state financial institutions will cut consumer credit and loans provided to the trade sector to focus on loans to the industrial sector, agriculture and tourism.

Hernández Behrens said that consumer and trade-related loans represent 70 percent of the state banks' loans. "We must reverse this trend so that the present 30 percent of loans granted to the agricultural, industrial and tourist production sectors increases to 70 percent," Hernández Behrens said in a press release.

The most important piece in this puzzle is the recently nationalized Banco de Venezuela, which must lead the new role of the financial institutions in Venezuela. For such purposes, the Venezuelan government has established the so-called Economy and Finance Sector Unit, Corporation of State Banks, whose mission is to restructure this government tool which, among other functions, will grant loans to boost economic growth.

Although private and state banks remain the major source of funds for businesses, a study conducted by consulting firm Softline Consultores shows that the capital market is gaining ground.

José Grasso Vecchio, the president of Softline, says that through the sale of bonds companies get longer periods to pay their debts than those afforded by banks, as well as lower interest rates.

October 16

Govn't to fine banks failing to meet compulsory credit portfolio
Venezuelan President Hugo Chávez announced on October 16 that his Cabinet has agreed to urge domestic banks to comply with a specific share of credits for the manufacturing sector.

State-run TV network Venezolana de Televisión broadcasted a message from Chávez, who was in the Palace of Miraflores preparing to travel to Bolivia. The ruler said that Venezuelan banks must meet 100 percent of the share of credits to the industrial sector by the end of the first quarter of 2010. Otherwise, they will be fined. The government is pondering incremental fines.

Chávez stressed that the presidential council of ministers agreed to "strictly regulate the issue of the manufacturing industry loan portfolio of the domestic private and state banks. This figure should be equal to 10 percent of the compulsory loan portfolio, at an interest rate of up to 19 percent," he said.

Venezuela rules out new taxes to revive the economy
Jesse Chacón, the minister of Science, Technology and Intermediate Industries, presented on October 16 twenty seven economic measures, which are part of the Executive Office's plans to curb inflation, spur economic growth and boost employment.

Among the announcements, Chacón said that the government is preparing a regulation about a compulsory loan portfolio to benefit the manufacturing sector and tourism, as well as the establishment of an investment fund to promote several strategic areas of the country, among them the food industry.

Chacón denied that the government is weighing new taxes. He explained that financial officials are pondering benefits to very specific strategic sectors to achieve the economic development expected by the government.

Chávez approves measures to boost industrial development
Venezuela's government approved early on October 16 a package of measures to promote industrialization and foster domestic production in the country. President Hugo Chávez announced these decisions in the state-run TV network after a cabinet meeting that lasted into the early hours of October 16.

"Rest assured that we will turn Venezuela into a power," the President said. Among the measures, the President mentioned the establishment of a fund aimed at financing strategic economic sectors such as agribusiness, petrochemicals, production of auto parts and manufacturing industry.

He also announced the strengthening of the National Institute of the Small and Mid-Sized Enterprises (Inapymi) as the core of the policy of industrial financing.

Moreover, the government will create an industrial pre-investment fund to facilitate research, development and innovation.



http://english.eluniversal.com/2009/10/16/en_ing_esp_venezuelan-governmen_16A2908531.shtml

I read the transcript of the different ministers' declarations. It seems to me they're groping around for a solution to a very serious problem - they have very high inflation rate and the economy seems to be winding down at the same time. This is what killed Jimmy Carter's presidency - stagflation.

They can't patch this performance gap selling bonds forever, so I bet they'll devalue the currency by the end of the year.

By Lester Pimentel and Daniel Cancel

Oct. 19 (Bloomberg) -- Venezuela won’t devalue its bolivar exchange rate, which has been fixed since 2005, this year or in 2010, as oil prices rise, Morgan Stanley said in a report today.

The South American country will keep the official rate at 2.15 per dollar, according to Morgan Stanley, which previously forecast a rate of 2.85 per dollar in 2009 and 4 per dollar in 2010. A devaluation would cause imported food prices to surge and erode the value of savings in the local currency, analysts Giuliana Pardelli and Daniel Volberg wrote in the report.

“At the turn of the year there were risks that the global downturn would squeeze Venezuela,” the analysts said. “But with the markets - particularly crude prices - and the global economy healing, the authorities are likely to have enough maneuvering room to maintain their commitment to a fixed exchange rate.”

Venezuela, the largest oil producer in South America, has kept the bolivar pegged for more than four years as part of currency controls imposed by President Hugo Chavez in 2003. Venezuelans must seek authorization from the government to buy dollars at the official rate, or turn to the parallel currency market where the bolivar trades at about 5.30 per dollar.

Pardelli and Volberg noted that avoiding a jump in the exchange rate will help the government rein in inflation. Consumer prices surged 28.9 percent in September from the same month a year earlier, the highest rate among 78 economies tracked by Bloomberg.

New Forecast

Morgan Stanley revised its forecast for the Venezuelan economy’s contraction this year to 1.9 percent from an earlier prediction of a 5 percent decline. South America’s third-biggest economy will expand 1.3 percent in 2010, according to Morgan Stanley, compared with a previous forecast for no growth.

Venezuela’s gross domestic product shrank 2.4 percent in the second quarter, the first contraction in five years, after the government reduced dollar sales to importers to save reserves.

Venezuela’s fiscal deficit will widen to 6.5 percent of GDP this year, up from a previous forecast for a 2.9 percent deficit, the analysts said.

“The extra revenues derived from higher crude are likely to allow the authorities to keep spending and allow the government to boost dollar sales, in order to diminish the gap between the official and parallel market exchange rate,” Pardelli and Volberg said.

http://www.bloomberg.com/apps/news?pid=20601086&sid=aarBTRb_NPCU