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http://www.businessweek.com/stories/1998-09-06/venezuela-a-costly-credibility-gap

Businessweek Archives

Venezuela: A Costly Credibility Gap


Business Outlook: VENEZUELA

VENEZUELA: A COSTLY CREDIBILITY GAP

Venezuela's tardy, halfhearted embrace of market economic reforms is costing it dearly. As Asian and Russian woes have made markets jittery worldwide, no Latin American country has been hit harder than Venezuela, the region's fifth-largest economy.

First, the Caracas stock exchange has plunged 19% since Aug. 19 (chart) and is down 60% since its peak in March. Second, most analysts believe Venezuela has little choice but to devalue. The government insists that it will keep the troubled bolivar within a trading band, as it has for the past 28 months. But foreign reserves already have shrunk by one-third since November, to about $14 billion.

President Rafael Caldera is trying to avoid a devaluation, at least until after the Dec. 8 Presidential elections. To prevent a meltdown that could drag down neighboring Brazil, Caldera has asked Congress for fast-track authority to implement measures to finance the fiscal deficit, which totals about 4.5% of gross domestic product. Caldera plans to issue $1.4 billion in domestic bonds, raise some taxes, and create a macro-stabilization fund to offset plunging oil prices.

That, however, may not be enough to save the bolivar. Although Venezuela runs a current-account surplus and has a reasonable debt burden, inflation is surging 38% annually and real GDP growth is expected to slow to 1.8% this year, from 5% in 1997. And investors simply don't trust the government to implement significant reforms. While Brazil's fiscal situation is also weak, its authorities have a more credible history of responding to external shocks than Venezuela does. The last time Venezuela faced a big credit crunch, in mid-1994, it imposed exchange controls.

Another concern is the December election. Front-runner Hugo Chavez, who led an abortive coup d'etat in 1992, has troubled investors by hinting of a debt moratorium and a reversal of some market-opening reforms. He is also viewed as a populist who might not impose the market discipline that Venezuela sorely needs now.By Geri Smith in Mexico CityReturn to top

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