Inflation, uncertainty high in Venezuela

Inflation, uncertainty high in Venezuela

	Published : Mon, 22 Jan 2007 19:54 By : Agencies Print this Story

CARACAS, Venezuela (AFX) - Holding on to the family nest egg has suddenly become much harder in Venezuela, where inflation and uncertainty reign as President Hugo Chavez says 'nothing and no one' can stop him from transforming the country into a socialist state.

The economy is booming, flush with oil money and government spending, but the usual options for protecting personal wealth don't apply.

Trading bolivars -- worthless outside Venezuela -- for another currency is costly and mostly illegal.

Put it in the bank? With inflation running at 17 percent and bolivars plunging on the black market, savings lose value by the day.

Buy a property? It might get expropriated. Chavez, who will soon begin changing laws by presidential decree, announced Sunday that a new 'luxury tax' will redistribute wealth to communal councils in poor neighborhoods. He didn't spell out the details, but said second homes, art collections and expensive cars would be targeted.

'Oh, you have a yacht? Perfect, give it to me, buddy,' Chavez said. 'You go around Caracas in a tremendous car. You have a house where you live and another one by sea... You have some marvelous art collections -- come here, buddy.'

High oil prices made Venezuela's economy the fastest-growing in South America last year, but near-record public spending by a government awash in petrodollars also led to the region's highest inflation rate. And with so much uncertainty about where the country is heading, there are few solid investment options.

Since Chavez imposed strict currency controls four years ago to slow down capital flight, there have been only two ways to legally and regularly obtain dollars in large amounts -- using bolivars to buy Venezuelan government bonds, or shares in CA Nacional Telefonos de Venezuela, the only Venezuelan listing on the New York Stock Exchange. Both could be re-sold for dollars after paying a substantial premium.

But the CANTV route is closing down now that Chavez is intent on nationalizing the phone company. CANTV shares plummeted 14 percent on the NYSE to $11.57 a share mid-day Monday, after Chavez said shareholders including New York-based Verizon Communications Inc. will get less than a market price for their stakes, arguing that CANTV was practically given away in a 1991 privatization.

Chavez's supporters believe the economy remains healthy and credit investor optimism for the vibrant consumption and surging demand for government bonds. And they generally dismiss fears about increasing state control, saying revolutionary changes are needed to direct more resources to the poor.

Armando Monsalve, a 60-year-old Chavez supporter who sells industrial-grade refrigerators, says those who are upset about the economy now are the wealthy elite who have lost their dominance.

'We are on good footing economically,' he said, describing how his merchandise completely sold out in a buying frenzy during November and December. 'The country is moving forward.'

But Josue Bermudez, who has a small construction business, has been stockpiling basic materials, sorely aware that the market value of his savings in bolivars takes a tumble each time Chavez announces another effort to control the Venezuelan economy.

'I'm worried about the future of this country,' he says as he weaves between cement, tools and other supplies stacked next to the table and sofas of his apartment in a middle-class Caracas neighborhood.

Inflation makes his business riskier, and supplies can be scarce because the government lags in approving dollar transfers to importers. Bermudez says the private construction jobs he depends on aren't picking up because clients lack the confidence to invest in costly long-term projects.

Bermudez is pondering leaving the country, and taking out a loan against his home to finance a new start elsewhere.

If he does, he will run up against the exchange controls that make standard procedures like wire transfers or withdrawing money at a foreign ATM all but impossible, and force many Venezuelans to the black market. While prosecutions are rare, violators face the risk of fines and jail if caught trading large amounts.

Since Chavez took office in 1999, his government has seized company assets, farmlands and private buildings for cooperative ventures and imposed state control through joint ventures in the oil sector, raising the taxes and royalties foreign partners pay. His wealth redistribution efforts have made him widely popular among Venezuela's poor and working classes.

But critics say Chavez, who now effectively controls all branches of government in Venezuela, is worsening persistent economic problems by ill-considered fiscal and monetary policies, and by creating too much uncertainty about the future.

With government spending at near-record highs, the economy isn't generating enough goods and services to soak up the excess liquidity. Currency controls trap this cash in the economy, fueling inflation that officially is still below the 30 percent level in 1998 when Chavez was first elected, but above maximum interest rates regulated by the central bank.

When inflation outpaces interest rates, it fuels an 'almost irrational consumption' of automobiles, appliances and other durable goods as Venezuelans desperately seek havens for their money, said Enrique Gonzalez Porras, a Venezuelan expert in economic regulation.

Similar distortions explain the strong demand for government bonds and for CANTV shares, which have been used to calculate the black market rate for dollars, now trading at a record high of more than 4,000 bolivars, far above the official rate of 2,150 bolivars. That rising dollar creates a surge in prices -- first for imported products, but with most Venezuelan goods and services linked in some way to imports, the effect eventually ripples across the board.

Meanwhile, capital flight is likely to continue, no matter how tightly Chavez controls the economy.

One study by Emilio Medina-Smith, an expert on the issue at Venezuela's University of Carabobo, has shown that Venezuelans have been funneling money out faster than in the previous four decades before Chavez came to power: roughly US$66 billion fled abroad between 1999-2005 compared to US$112 billion -- adjusted for inflation -- between 1950-1999.

'Before 1999, Venezuela's national sport wasn't baseball, it was taking money overseas,' he explains. 'Now there's an additional ingredient -- political insecurity.'