Arcaya & Asociados
Economist Intelligence Unit
October 10, 2007
With constitutional reforms still pending, Venezuelan authorities have focused in recent weeks on macroeconomic policymaking, and in particular on the continuing battle to control inflation. A plethora of heterodox measures have been undertaken this year in response to the upward drift of inflation above 20% at the beginning of 2007. For the most part, these have failed to tackle the fundamental causes of recent price pressures—a combination of extremely expansionary fiscal policy, exchange controls and domestic capacity constraints—but they are evidently having some beneficial impact in the short term.
An important component of the anti-inflation drive has been a combination of stricter price controls and stricter penalties for "hoarding and speculation". This has been generally intended as a means of combating now frequent shortages and black-market sales of basic foods such as milk, meat and sugar, which have come about as a result of a lack of price adjustments for controlled items. Producers now claim that their costs are higher than the fixed consumer price, which, combined with more general uncertainty over property rights, has proved a serious disincentive to investment in new domestic production.
Private healthcare services have in recent weeks become the government's latest target in its drive against "speculators". A sharp rise in incomes per head and the imposition of exchange controls has served to boost demand for private healthcare in the past two years. At the same time, President Hugo Chávez’s focus on the health policy "misiones" has, it is claimed, resulted in vastly improved health services in the poorest areas of the country, but at the expense of public hospitals serving a large chunk of the population. The latter facilities have deteriorated, while there has been little investment in new private facilities as a result of weak property rights protection.
The result has been a sharp rise in the price of healthcare services, which account for just over 4% of the consumer price index. In August, for example, the price of healthcare (including equipment and services) rose by 26% year on year, considerably above the 12% average increase registered in2006.
This has attracted the attention of government members, including President Chávez, who has threatened private facilities with expropriation if they do not heed the planned introduction of price controls. In mid-September representatives of the industry attempted to pre-empt a unilateral move by the government, presenting proposals for a 15% price reduction for a variety of the most common medical procedures to the National Assembly. The initial reaction of the Assembly has been discouraging; the chair of a congressional committee examining the issue has stated that the government is looking instead at cuts of 25-30%. This is a figure that private hospitals suggest will impact on the quality of care.
A new bond issue
Other efforts at controlling inflation also continue. The Ministry of Finance relaunched the Bono del Sur III in late September, the latest in a series of joint bond issues with Argentina. The issue had to be postponed in August as a result of severe instability in global financial markets. As with previous issuance, the bonds are purchasable in local currency at the fixed exchange rate, making the bono an attractive tool for draining excess liquidity from the domestic financial system.
In early September the government also announced the arrival of new supplies of imported subsidised sugar and black beans, although local producers complain that such measures further weaken their competitiveness, exacerbating shortages in the long term.
Finally, the authorities are preparing for currency reform, another plank in the anti-inflation plan announced in January, which will entail removing three zeroes off the value of the currency and renaming it the bolívar fuerte (the strong bolívar). However, it is extremely unlikely that this in itself will have any beneficial impact on inflation.
Indeed, despite this combination of measures, the Economist Intelligence Unit forecasts year-end inflation of 18% this year, and 17% in 2008. We project double-digit inflation into the medium term as well.