Chavez and Silva a study in contrasts; As news for Brazil keeps...

Por Venezuela Real - 22 de Mayo, 2007, 15:42, Categoría: Economía

Arcaya & Asociados
Jacqueline Thorpe - National Post
22 May 2007

... improving, Venezuela slides

In honour of exam season, how about some compare and contrast ? One country in Latin America is growing at a "modest" rate of 4% but has just had its credit ratings raised by Standard & Poor's, its stock market shatters records daily and its currency has blasted to a six-year high.

Inflation is under 4% despite soaring metal and agricultural prices, which would have in the past sparked a government spending binge and upward
 price spiral.

Another country is growing at a blockbuster 8%, unemployment is falling and income levels are rising, but government spending has stoked inflation to a Latin American-high of 20% while simultaneously causing its foreign reserves to drop 20%. Imports soared 47% in the first quarter as price controls gave domestic producers little reason to come to work.

Its stock market is down 22% year-to-date in U.S. dollar terms, and oh yeah, it has threatened to pull out of the IMF, a move that may trigger a debt default.

Which model looks most sustainable?

As the news gets better and better for Brazil, Venezuela's model of "21st century Socialism" is looking more and more like a runaway train about to careen off the rails.


That classic sign of socialist inefficiency -- bare supermarket shelves and food lines --has now become a staple of Hugo Chavez's Venezuela, as shoppers snap up food before the next price hike, Reuters reported last week.

In Brazil, President Luiz Inacio Lula da Silva, seems to have finally put his economy on the right track after a record US$30-billion bail-out from the IMF staved off a debt default in 2002.

To be sure, the global commodities boom couldn't have come at a better time for Brazil, a massive exporter of everything from base metals to coffee to orange juice to steel and pulp and paper. But this time, it is not frittering its windfall away.

"It's the notion of taking advantage of the global position," Lisa Schineller, an analyst at S&P, said in an interview from Sao Paulo.

"The balance of payments has been incredibly favourable but both the government and the private sector have used that to run down their external debt." S&P raised Brazil's long-term sovereign debt ratings last week to one notch below the coveted investment grade rating, citing a decline in external indebtedness to 28% of current account receipts, less than one-fifth of 2000- 2002 levels.

Brazil has also become a lot smarter in the kind of debt it is issuing, eschewing cheaper but more volatile foreign-denominated debt in favour of more stable --and loyal--domestic debt.

Ms. Schineller said government debt is still much too high at 43% of GDP but there is now a recognizable commitment to fiscal probity. "There is a policy commitment now across a spectrum of parties," Ms. Schineller said.

"It's pragmatic, there's an overall bias towards bringing down Brazil's fiscal vulnerabilities and external vulnerabilities."

The private sector has responded heartily. Local equity markets are providing a key new foundation for capital investment with more than 20 IPOs so far in 2007 after about 26 last year and foreign money is pouring in.


This has prompted privately held companies to also reorganize and strengthen governance. The combination has boosted investment, growth and tax receipts -- the beginnings of a classic virtuous circle.

What a different story it is for Brazil's neighbour to the north, which has also benefitted from the commodities boom, this time for oil.

"Venezuela is definitely an investment- grade country with a junk-bond policy mix," said Alberto Ramos, an economist at Goldman Sachs in New York. "They are very, very far away from capitalizing on the unique opportunities they have benefitted from in the last two or three years."

Mr. Chavez's spending program --government spending rose 48% last year -- may have increased income for the poor and boosted employment but at the same time price and exchange controls to try to control inflation has sapped domestic production and investment or forced it underground.

"We have the counter argument he is really redistributing a lot of income to the poor," Mr. Ramos said. "But the economy is on steroids and there are many other imbalances that will not help the poor, not on a permanent basis.

He's not giving them opportunities, he's giving them handouts."

Mr. Ramos, who was recently in Venezuela, said the mood on the street is still supportive of Mr. Chavez but he does not believe its policymakers have come up with the magic formula to make socialist economics work.

Whether those food lines will turn into riots in the months to come remains to be seen. High oil prices could indeed keep the goodies flowing.

"There are many different paths it could go down," Mr. Ramos said.

"The classic case is this will end up with a major blowup with an inflation spiral and the government will change. But given that the administration now has control over the key institutions in the country we can envisage a path like Cuba with 30, 40 years of no regime change. He controls the army, he controls the supreme court, he controls Congress so there is no constitutional legal way to replace the government."


In that case he foresees middleclass flight and a slow, grinding impoverishment of the economy.

The two models would be excellent case studies for economics students if real human beings weren't involved.

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