October 7, 2006 (Venezuelanalysis.com)—The Venezuelan Vice Minister of Finance Eudomar Tovar said last week that he sees no reason to devalue Venezuela’s currency, the Bolívar, in 2007 despite some economists’ recommendations and expectations due to inflationary pressures in the Venezuelan economy.
Many economists say the Bolívar (Bs) is currently overvalued by around 25% due to the exchange controls imposed by the government, fixing it at Bs. 2,150 to the dollar. The government last carried out a devaluation in March 2005 by 12%.
Venezuela is recording high levels of growth – 9.6% in the first half of this year. This is due to the high levels of public spending that record oil prices are permitting the government. The social programs, substantial state investment in industry, public worker salary increases, and military spending have pushed government spending up by 73% in 2005. Spending is expected to reach $57 billion this year, which is 40% of gross domestic product.
This high level spending inevitably affects the inflation rate, which is currently at 12.5% and which could be as high as 15% by December 31, the highest rate among Latin America’s larger economies, despite currency, price, and interest rate controls that have been in place since 2003.
Vice-Minister Tovar spoke of the strength of the Venezuelan economy in glowing terms, “ There are not conditions for a devaluation [next year], there has been a strengthening of foreign reserves, economic growth, inflation rates that we are going to fight.”
Unlike many other countries, a devaluation has an inflationary effect in Venezuela because Venezuela imports up to 70% of its consumer goods and these become more expensive with the devaluation of the currency.
Carmen Julia Nogurea, an economist for Banco Mercantil in Caracas, thinks the government us thus unlikely to devalues the currency. “We expect to see a continued expansive fiscal policy [next year],” she said. Mercantil expects Venezuelan government spending to rise to $62 billion with an $8.5 billion public deficit as a consequence.
Venezuela’s S&P Bond Rating Improves
In other economic news Standard & Poor, the international credit ratings agency, raised Venezuela’s debt rating from “stable” to “positive” on Wednesday, due to the increased hard currency reserves swelling Venezuela’s Central Bank coffers. Venezuela ’s credit rating is now only 3 grades from investment grade.
The revision “reflects continuing sharp improvements in Venezuela’s external and public debt indicators, with high oil prices generating large current account surpluses that, in turn, have boosted the external assets of the public sector”, S&P credit analyst Richard Francis said in a statement.