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Venezuelan Trends: inflation in 2015?
20/Feb/2015

WRITTEN November 2014

 

General Overview:

Vice President for Economic Area and Finance Minister, presented to the National Assembly the budget for 2015 that includes substantial improvements over 2014 budget. Finance Minister considers that the economy will grow 3%, so will the inflation, which in the last twelve months has recorded a jump of 63.4%, to then lose strength, and settle in the range of 25-30%.

This optimistic view differs completely from most specialized firms and financial institutions, which do not believe possible that the Venezuelan economy will be able to leave behind stagflation. 

Financial institution projections from Deutsche Bank, Jp Morgan, Goldman Sachs and local firms as Ecoanalítica, estimate that in 2015 the economy would have a minimum 0.7% growth and would be accompanied by a 60% inflation rate.

"TO COME DOWN TO 25-30% inflation in 2015, as projects the Finance Minister, there should be strong spending cuts, not feasible in an election year", said Asdrubal Oliveros (Ecoanalíitica).
 

Oil Prices:

Oil provides 96 for every $100 entering Venezuela. In its latests report, dated October 20th, a Bank of America analyst, estimates that if the oil price stays at $80 a barrel the government would have financing needs in the order of 13 billion dollars. These numbers indicate that in a scenario where the oil price does not recover after dropping in the last four months, the government would still need to print more bolivares to keep spending, something that inevitably would result in accelerating inflation. 

As per the report provided by the Government to the Securities and Exchange Commission (SEC) the average price of the Venezuelan oil basket in 2013 was of $98 a barrel. The government spending including all public enterprises overpassed in 16.96% of GDP the income of the whole year. Ecoanalítica, estimates that the gap this year will be of 22% of GDP.
 

Devaluation:

The budget presented by the Ministry of Finance, maintains the exchange rate of 6.30 bolivares per dollar for priority goods. However, in an environment in which this type of artificially cheap exhange rate triggers currency requests to unsustainable levels, the Government will need more bolivares per petrodollar to bridge the gap between revenues and expenditures. 

The main scenario for Ecoanalítica is that the government will eliminate the exchange rate of 6.30 bolivares per dollar in 2015 and will transfer all that is imported at this rate to Sicad 1 rate, which would slide from 12 to 15 VEF per dollar; this devaluation will inevitably boost inflation, raising the price of imports made at 6.30 VEF. 
 

Conclusions:

After an overview of the economic situation in Venezuela and its estimates for 2015, it is clear that many serious problems have been ignored. We face the aggravating circumstance that 2015 has a very imporant political component, which are the parliamentary elections of the National Assembly (AN). Traditionally in Venezuela, during an electoral year, there are no devaluations or adjustments. Nobody wants a negative effect in the population that would result in a high political cost. 

In this scenario, postponing the necessary adjustments in 2015 will worsen consequences which will result in greater imbalances. 


Source: De cuánto será la inflación en 2015?; por Víctor Salmerón. PRODAVINCI.; Pedro Palma. Globovisión; 

 

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