Maduro’s economic plan fails to lift Venezuela’s gloom
- Wed, 13 Sep 2017 20:37
People search for food in garbage bags next to a supermarket in Caracas in July © Reuters
Nicolás Maduro’s proposals to revive the devastated Venezuelan economy fail to address the key issues of exchange-rate arbitrage and inflation and will probably do more harm than good, analysts warn.
The president unveiled his plans in a speech late last week to the recently formed constituent assembly, announcing eight new laws including a new foreign investment law. He gave few details of the new legislation but if past experience is anything to go by it is unlikely to send foreign investors rushing to Venezuela.
This is the second foreign investment law Mr Maduro has passed in less than three years — hardly a recipe for long-term stability — and the first one, in late 2014, was counter-productive.
“It authorised expropriations, it froze investments by obliging investors to keep their capital in the country for at least five years, it said any litigation had to go through local courts and it eliminated the Office of the Superintendent of Foreign Investments,” said Leonardo Vera, professor of economics at the Central University of Venezuela in Caracas. “It was a real disaster.”
Years of economic mismanagement and expropriation mean many foreign companies have walked away from Venezuela, despite the potential riches in the oil, mining and agricultural sectors.
Although some oil companies such as Chevron, Shell, Eni, Repsol, Schlumberger and Halliburton continue to operate in the country, new foreign direct investment (FDI) has slowed to a trickle, with the Russians — and particularly oil company Rosneft — among the few still willing to invest.
By 2014, the last year for which figures are available, Venezuela’s stock of FDI was worth just 6 per cent of gross domestic product (GDP) — by far the lowest figure in Latin America. In 2001, shortly after the country embarked on its populist leftwing revolution, that figure was 32 per cent.
“No law will help attract and protect foreign investment in a country where the government regularly violates private property, where prices are controlled by the state and where the exchange rate system is used as a political tool to intimidate the private sector,” said Raul Gallegos, Venezuela analyst at the consultancy Control Risks.
Another of Mr Maduro’s new laws seeks to encourage mining, which could potentially be a lucrative source of income. Venezuela has gold, diamonds, iron, copper, coltan and other minerals.
The government has designated an area around the Orinoco River as a “mining development zone” and says it wants to develop small-scale exploration there to help ween the country off its dependence on oil.
The zone is more than 110,000 km2 in size — bigger than Portugal — and occupies 12 per cent of Venezuela’s territory, but has so far produced only a few tonnes of gold.
The law announced last week seeks to give companies operating in the area tax breaks, preferential access to import and export facilities and other measures.
Mr Vera pointed out that the president proposed the new mining law without the permission of the democratically elected parliament, as is required under the constitution, while Mr Gallegos said he was highly sceptical the law would lead to notable growth in mining.
“The government for years has promised to develop agriculture and the mining sector but has never adopted any real steps to do so,” he said. “These laws have served and will continue to serve as propaganda but they will fail to provide a real framework for developing either sector.”
The other laws proposed by Mr Maduro are likely to be of more interest to Venezuelans than foreign investors.
They include a pledge to regulate foreign exchange houses, increase taxes on the rich and fix maximum prices for the sale of 50 consumer items including milk, flour, chicken, tuna, butter, cheese, ham and soap.
“If the new reforms improve the distribution of food, that would be a big help,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research, a Washington think-tank.
“But it is difficult to imagine an economic recovery under the current exchange rate system, since that is the main cause of the inflation-depreciation spiral that has plagued the economy since 2012.”
In his speech to the assembly, Mr Maduro acknowledged he was presiding over the country’s toughest economic crisis in a century, complicated further by Washington’s recent decision to impose economic sanctions.
The economy has shrunk by about a third over the past four years, one of the deepest contractions in postwar Latin American history, and inflation is rife.
The government has long-since stopped publishing inflation data and in the absence of official figures the opposition-controlled parliament produces its own. They showed that monthly inflation hit 34 per cent in August — the biggest monthly jump on record. Inflation since the start of the year was 366 per cent.
Torino Capital, a New York investment bank that specialises in Latin America, says year-on-year price rises hit 649 per cent at the end of July and that, if sustained, annual inflation in 2017 will be 1,355 per cent, with a risk of full-fledged hyperinflation next year.