October 2, 2002

not sure how happy my boss will be if he sees I've posted VenEconomy's subscription-only editorial on this free website, but christ, Caracas Chronicles has like 15 readers at this point...

It’s the deficit, stupid...

How irresponsible is the government’s financial management? Look at it this way: in the first eight months of this year, the public sector’s current income averaged about Bs.1.66 trillion per month. That works out to just under Bs.20 trillion per year. Yet for 2003, the president has just announced that spending will total Bs.40 trillion. That’s twice this year’s current income, at a time when inflation is expected to run no higher than 40%.

Of course, Venezuelan budgets have always been exercises in creative accounting, legal formalities largely removed from reality. But traditionally they’ve erred on the side of understating spending. This time, it’s the opposite. Based on a hopeful 3-3.5% GDP growth projection, even the Onapre (national budget office) admits that current income won’t exceed Bs.28 trillion. That leaves the terrifying sum of Bs.12 trillion to be financed somehow (and that’s if the government’s growth estimate holds up; otherwise, it will be more.) And how is this gap to be bridged? By once again squeezing every last penny out of PDVSA, conjuring up some money out of thin air (they call it “exchange profits”) and then borrowing the rest – per Onapre estimates, a full Bs.10 trillion.

The simple conclusion is that the government just doesn’t learn. Already, the unreasonable chavista demands on PDVSA have caused a 25.5% drop in the corporation’s production capacity – with no money to spend on keeping up production, the country’s capacity has dropped from 3.5 million b/d four years ago to just 2.6 million b/d today (not including Orinoco Belt extra-heavy crudes), according to IEA estimates. This means that for the first time in history, Venezuela finds itself unable to cash in on the upside oil-shock caused by the looming US war in Iraq: there’s just no spare capacity to speak of.

The broader strategy is just as bad. By now, one might expect the chavista ruling clique to have caught on to how badly the public sector’s oversized thirst for borrowed cash has distorted the economy’s performance. By making massive deficit spending the norm irrespective of whether times are good or bad or whether oil prices are high or low, the government has already shut out the private sector from the credit market. The public sector’s snowballing demand for borrowed money keeps interest rates high, private investment rates low, and markets jittery.

As the pressure to raise more and more money increases, the government has opted for more and more unorthodox means of financing itself. First, it instituted the Bank Debit Tax, which might be described as relatively benign even though it undoubtedly generates destructive market distortions. Then, as the pressure for new cash intensified, it adopted more serious self-destructive practices, from the accelerating merry-go-round of increasingly bigger and more expensive short-term bond issues to the frankly perverse tactic of declaring purely fictitious “exchange market” profits to bankroll the government. The results are all around, and plain to see: a virtual investment freeze, rising unemployment, galloping inflation, and an unremittingly bleak outlook for the future.

Of course, much of the excess spending next year is due to higher debt service payments: the chickens of the wrong-headed financing strategies of the past coming home to roost. But rather than trying to tackle this vicious circle, rather than trying to implement a plan to return the nation’s finances to relative health, the government looks set to exacerbate the problem. Its financing plans for 2003 are a paragon of amateurish irresponsibility: on top of massive new borrowing, the government has already announced it will issue Bs.1.5 trillion in printing-press monies. Sadly, there’s just no medium-to-long-term strategy to ever break out of the deficit-spending trap. In fact, there’s no indication that the government even understands it’s in a trap at all. Under such circumstances, the only reasonable forecast is steady, ongoing deterioration.

Four years into its mandate, the Chávez administration hasn’t learned even the bare-bones basics from the mistakes it has made to date. The broad outlines of the budget plans announced so far make it clear that the wild goose chase that is the government’s quest for fresh cash will only intensify next year. The outcome is sadly predictable, and as usual, those who will suffer most will be those the president claims to champion.