Jesús Bermúdez, Venezuela’s deputy finance minister, says
the government has assembled a coherent plan to attack one of the
country’s most serious economic weaknesses, its deteriorating
public finances. Spending has gotten ahead of revenues and last
year, the fiscal deficit hit 5.1% of GDP. Bermúdez says the
government intends to strengthen its finances while it continues to
move ahead with its structural reform agenda, which includes
privatizations and concessions to develop the country’s huge
natural gas reserves.
The government is also in talks with the National Assembly
to establish a plan to improve management of the country’s oil
revenues. State governors and mayors have already signed a deal
with the government to share out funds accumulated in the Economic
Stabilization Fund (FIEM).
Private sector economists say they expect the country’s
current account surplus to rise to 6.1% of GDP in 2002 from 3.5% of
GDP last year. Imports are falling, which should offset the effects
of lower oil export revenues. The good news is that economists
expect a 10% increase in non-oil exports, which should help a
forecasted $10.4 billion trade surplus in 2002. However, the
principal challenge facing President Hugo Chávez’s new economic
team is to return the country to growth. A resumption of growth
would also make it easier to stabilize the public finances, achieve
price stability and generate new jobs.
Q: What is your analysis of the economy, and what are
the policies that the government has adopted to deal with the
situation?
A: “We are taking basically three fiscal policy measures. First,
we are modifying the tax laws to increase the Value Added Tax rate
and we are sending a proposal to the National Assembly to raise the
rate from 14.5% to 15.5% and to simultaneously eliminate the 20% of
exemptions from that tax. Increasing the rate by one percentage
point will allow us to raise additional revenues equivalent to 0.5
percentage point of GDP. Second, we are increasing the financial
transactions tax from 0.75% to 1%. This is a temporary tax that the
National Assembly authorized this tax for one year so we are
increasing the tax rate only through March of next year when the
tax expires. Raising the rate to 1% until next March will allow us
to get a further 0.2 percentage points of GDP. The third measure is
that we are starting to modernize the customs service by using
independent international agencies to examine cargos before they
leave foreign ports for Venezuela. This is a system that Peru and
Ecuador both use already.
On the spending side [in June] we made budget cuts equivalent to
approximately $1 billion and this is going to reduce the fiscal
deficit to 2.5% of GDP from 4.5% of GDP.
These measures will all make the public finances far more
manageable than we believed at the beginning of the year. These are
the fiscal adjustments we are doing. The financing side is divided
between the domestic and international markets. On the domestic
side, we are expecting to raise about $2.2 billion and another $3.1
billion in external debt, of which half has already been raised.
This corresponds to contracts signed with export credit agencies,
commercial banks and the multilateral agencies. As a result, we
only need to find another $1.5 billion from the markets and this is
perfectly possible, it does not involve going through the public
markets but can be done with private placements.
Q: All the same, opinion in the markets is hostile
toward Latin America now and may remain so until after the
Brazilian elections in October.
A: We are going on a non-deal roadshow to explain the situation.
The external situation is strong because we have a good current
account surplus and the question of capital flight was caused by a
speculative attack at the beginning of the year that can’t be
repeated now because the central bank is selling a limited quantity
of dollars and because there is a floating rate now. The central
bank uses a minimum amount of dollars from its reserves, $60
million a day, to intervene in the market and in fact its reserves
are increasing.
Q: But the real economy is certainly going though a
difficult period now.
A: The real economy is undergoing a contraction. We do not know
how large it will be, but we do expect a 3% contraction this year.
But we hope to control this with a privatization and concessions
plan that has already begun. PDVSA has started by offering gas
concessions to investors. PDVSA will have to take a 51% share in
the fist concession, but in the following ones the private
investors can take 100% shares and this includes foreign companies,
which are likely to be the main investors. We are also going to
privatize hotels and even privatize jails like the United Kingdom
has done. There is going to be privatization of infrastructure like
highways. A part of all these asset sales will bring in $300
million this year and these measures and with the foreign
investment they will bring should begin to have a small effect on
the economy by the fourth quarter of the year.
Q: Inflation remains a serious problem. How does the
government plan to deal with the rise in prices that affects the
poor much more than the wealthy?
A: With the economic contraction that we are expecting this
year, we expect that inflation will be about 25%. But we are
thinking of including in the new spending package an increase in
social assistance plans to reinforce two feeding programs that
exist already. The first one feeds 300,000 children from low-income
families and the plan is to increase the number to 600,000
children. The other program is for people over 60, which we plan to
increase. We are going to extend social security schemes to 33,000
people. Venezuela has a big problem of underemployment and
unemployment. About 40% of the workforce is employed in the formal
economy and 60% are occupied in the informal economy. We don’t
expect much of an increase, although there will be greater freedom
in the labor market.
Q: There is concern that the banking system is under
threat because it is holding stock of government bonds and because
liquidity and solvency ratios are deteriorating.
A: It is not true that the banks’ holdings of government
bonds are increasing. We have repaid a net $800 million in debt to
the banks. They are not increasing their holdings and it is not
true that there is an increase in liquidity or that there is excess
liquidity in the financial system. The IMF was here and made no
remarks about this. As far as the banks are concerned, it is
possible to observe some asymmetry in the market. Some banks are
more liquid than others. But since there is plenty of liquidity
available, there should be no problem for the banks. [Excess]
liquidity is sterilized by the central bank’s open market
operations via repos with the banks and there are $800 million in
voluntary placements, in repos with the central bank.
Q: The external picture looks complicated and the credit
rating agencies may downgrade the country’s credit. How is the
economic team dealing with this problem?
A: We are in permanent contact with the agencies and we will see
what happens. We hope that nothing happens. One can say that
earlier there was a justification for a downgrade in April, but not
now. We have paid down so much debt and so we do not have to worry
about refinancing [maturing debt] because there was a heavy
repayment schedule in June, which we dealt with easily. It is a
problem of perception caused by negative propaganda from the media.
The rating agencies look at the proposals that are being worked on,
but the media is very negative.
Q: The business community is not helping the government
and the political outlook is not good either. What is the
government doing to improve this?
A: We have been talking to the Fedecámaras [business
association] and the government has signed a pact of governability
with all of the state governors and mayors. Yet none of this
received any coverage in the media. But it is extremely important
to have this, an agreed pact that has to be followed by the
politicians. And remember that even the governors from opposition
parties agreed to sign too. This pact states principally how to use
the resources in the FIEM [stabilization fund] and there will be
various committees set up to manage the recourses.
Q: What are your forecasts for the price of Venezuelan
oil for the rest of the year and what will the government do about
the stabilization fund?
A: Our forecast is for a price for Venezuelan blend of $19 per
barrel, and currently it is at $20 and it has been above our
forecast price all year. There will be no further deposits into the
FIEM while a new law to govern these resources starting in 2003 is
being discussed by the National Assembly. We do not have any
concrete proposals of our own in the government but there is a
proposal to have a savings fund and a macroeconomic stabilization
fund, but that’s all at the moment. There are meetings at the
moment to decide how this will be done. w