Venezuela’s War Footing Stumbles
Venezuela’s socialist party-dominated assembly granted special “economic war” decree powers to President Maduro prior to December local elections, as business profit margins were capped and executives jailed for “gouging” and a new currency control body was established. Despite 50 percent inflation, price cuts were ordered for consumer appliances and staples ahead of the Christmas shopping season, and the state oil company offered a $4.5 billion dollar bond to divert demand from the black market bolivar at ten times the official 6.3 rate. The opposition political leader decried the move from a “Cuban puppet regime” as the military was deployed to stores to enforce reductions and order. With the per barrel oil export value down from $100 reported reserves have fallen one-third to $20 billion, and are mainly in illiquid gold as the Chavez legacy against hard currency “imperialism.” The sum may be double with Chinese loan for natural resource facilities and off-budget accounts which enable import and debt service coverage, but capital flight continues through loopholes such as overseas air ticket purchase as fuel and food subsidies harden the 10 percent of GDP fiscal deficit. Foreign director investors hanging in like Toyota have suspended operations on funding and equipment shortages while bond houses have cut previous overweight positions on new administration risk despite the double-digit yield.
Andean MSCI stock markets have likewise underperformed on slower GDP and personal credit growth despite support from domestic private pension funds and the three-way Chile, Colombia and Peru exchange alliance. Colombian President Santos announced his re-election bid for next year as a peace deal with the rebel FARC remains elusive despite anti-poverty and party formation agreements. An eventual accord could be put to a referendum around the same time as the polls, but critics such as presidential predecessor Uribe highlight the lingering security threat posed by a recent assassination plot and the drop in rural incomes from commodity and free trade pressures coinciding with the conflict which drew angry farmer protests. Economic growth fell to 2 percent in Q3 on weak manufacturing and retail data with unemployment over 9 percent. The central bank kept the benchmark rate at 3.25 percent on a better 2.5 percent inflation reading as Moody’s assigned a stable banking sector outlook on credit moderation despite reservations about corporate conglomerate ties and Central America expansion. Peru went ahead with a rate cut as both growth and the current account deficit as a share of GDP come in around 5 percent this year with the Finance Minister conceding an “end to the commodities supercycle.” Additional copper projects are set for launch as President Humala tries to balance environmental and community demands and increases infrastructure spending. Capital market, labor and bureaucratic reforms are on the agenda as the government tries to bolster business confidence to offset household loan retrenchment. The currency is off slightly against the dollar on intervention but the foreign 50 percent ownership of local debt remains on solid footing.
