Monday, 26 January 2009

Venezuela's León Let The Cat Out of the Bag: Public Finances Are in a Bind

Central Bank Director Armando León (photo) is probably the most respected economist working for the Hugo Chávez administration. I met him 2 1/2 years ago in Singapore, during an IMF/World Bank meetings; we had coffee a few times, chatted at the airport, took the same flight from Singapore to Paris. León is criticised by some of his peers for his allegiance to the regime: to me, he simply refused to flee the boat while it started sinking. At the time of our meetings, oil was flying high and he sounded confident that the president's economic policies wouldn't go beyond rhetoric. He, like most of us, was wrong.

León, sources told me at the time, was a key advisor to Chávez during his decision to nationalise telecom and oil and electricity companies in Jan. 2007. He basically prevented things from getting worse.
In an interview with Últimas Noticias, the newspaper owned by the Capriles group, León voiced some discontent over the current course of the Chavista economic policies: ''State policies should be revisited. We can't afford buying companies that, in a three-month period, soak up their own resources and trigger losses, or are simply unable to honour their payrolls,´´ León told the newspaper. The translation is mine. The link takes you, dear reader, to El Nacional news summary on the UN story.

Even as Venezuela has a cash cushion that we estimate at around $70 billion, its public finances have suffered structural damages -- as León seems to suggest -- due to the president's obsession with nationalising anything he deems
strategic from dairy producers to oil joint ventures. The expected purchase of Banco Santander SA's Venezuela unit is one example of the many pending nationalisations that will take their toll on the national budget. Let me add something else -- the budget was elaborated assuming oil above $60 a barrel. Yet, last week, the price for the Venezuelan oil basket dropped to $37 a barrel.

León dropped a bombshell, days before the referendum that Chávez is desperately seeking to win so he can run again in 2013. Not that none of us didn't smell a rat, we all know that the fiscal situation in Venezuela is a mess.
But by ringing the alarm bells, León is signaling that the government is considering devaluing the currency or raising taxes, instead of cutting spending, which would be the proper thing to do. If Chávez wins the referendum, the probability of a currency devaluation will rise. The economy needs a valve of scape, and it might need it sooner than we imagine.

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