L to r: Francisco Rodríguez, Aaron Freedman, Alejandro Arreaza, and Christopher Sabatini. (Image: Roey Yohai)

 

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Summary: Venezuela's 2014 Economic Outlook

By Virginia Guevara

Leading analysts spoke about a possible devaluation while discussing Venezuela's economic policies this year.

Speakers:

  • Alejandro Arreaza, Latin American Economist, Barclays
  • Aaron H. Freedman, Vice President/Senior Credit Officer, Moody's Investors Service
  • Francisco Rodríguez, Director and Senior Andean Economist, Bank of America Merrill Lynch
  • Christopher Sabatini, Senior Director of Policy, Americas Society/Council of the Americas; Editor-in-Chief, Americas Quarterly (Moderator)

Summary

On February 10, AS/COA hosted a public discussion on economic perspectives for Venezuela. Based on Venezuela’s current situation, the experts assessed the possible scenarios to resolve the country’s economic crisis. They discussed the possibility of a devaluation and what lies ahead in terms of economic policy.

Venezuela’s Economy: Current Risks

Barclay’s Alejandro Arreaza noted that there is incongruence between Venezuela’s fiscal policy and its exchange policy, while Bank of America Merrill Lynch’s Francisco Rodríguez added that the country’s exchange rate is “completely unrealistic.” Moody’s Aaron Freedman noted that the lack of transparency also affects the economy. The Venezuelan government does not give information on the “supposedly liquid external financial assets that the public sector holds,” he explained. He also commented on how long the government can keep up its current policies. “As long as the government continues to borrow more money, they can keep this thing moving along,” he said.

Rodríguez gave his perspective on the risk of a default, saying it is “clearly exaggerated.” He pointed out the large number of assets abroad, such as the ones held by multinational companies. The problem is on “a hugely misaligned exchange rate,” he explained, but at the same time, this issue is not leading to depletion in reserves. Arreaza added that the government should adjust the exchange rate to reduce the deficit.

The Impact on Companies

Speakers discussed what companies must do to deal with the current economic climate. “The airlines will probably reach a good deal with the government,” said Arreaza, but companies without access to dollars may have to leave. Freedman affirmed that “companies that are part of essential industries will continue to operate and probably get preferential access to foreign currency, but those with no high priority are probably going to have a harder time.” Also, Arreaza and Rodríguez noted that the oil industry has suffered, given less productivity and more internal consumption, leading to a decline in external assets.

The Devaluation Possibility

Panelists agreed that a devaluation is likely, and Rodríguez gave possible scenarios. The government could implement a set of exchange controls on industries such as food and pharmaceuticals, or it could also decide to take control of the whole private sector. A major devaluation would be “surprisingly effective,” he said, and if the government chooses not to do so, inflation will continue to rise. Freedman said that beyond the devaluation, the government needs to modify other policies. “Even if they do a full devaluation, unless they address these other imbalances and distortions, they will very soon going to find the exchange rate is overvalued again,” he said. “I do not think the devaluation itself is going to be enough to adjust the situation.”

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