Venezuela: Election spending fuels inflation

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By:
Jason Mitchell
Published on:

Analysts estimate $12 billion of bond issues; But Chávez’s health puts candidature in doubt

Venezuela’s president Hugo Chávez has built up a financial war chest to fight the presidential election on October 7. However, his bid for re-election has been thrown into serious doubt after he revealed that he needed more surgery to remove a cancerous lesion.

Barclays Capital estimates that the country’s fiscal deficit could reach 14.2% of GDP this year. Chávez faces the most challenging election since he came to power 12 years ago and his government has embarked on a big spending spree to shore up his support among the poor.

Henrique Capriles Radonski, the right-of-centre governor of the state of Miranda, won the first-ever opposition presidential primary in Venezuela
Henrique Capriles Radonski celebrates winning the first-ever opposition presidential primary in Venezuela
On February 12, Henrique Capriles Radonski, the right-of-centre governor of the state of Miranda, won the first-ever opposition presidential primary in Venezuela, obtaining 64% of the votes, more than double those of the runner-up, Pablo Pérez. He is likely to stand against Chávez in the presidential elections. However, on February 21 Chávez admitted that he would have to return to Cuba for more cancer surgery. Barclays Capital says there is now a "high probability" that he will not be the official candidate at election time.

Recently, PDVSA, Venezuela’s state oil company, whose finances are difficult to separate from the government’s, reported a 35% increase in profits last year. Analysts estimate that the sovereign and PDVSA will issue bonds valued at up to $12 billion this year to finance further public spending (in total, the sovereign and PDVSA issued bonds valued at $15 billion last year).

Barclays Capital estimates that the regular government budget this year will be the equivalent of $136 billion – 32.6% of GDP. However, it says the off-budget expenditure – which includes the amount PDVSA spends on social programmes – will add up to another $35 billion. Last year, the regular budget is estimated to have been $95 billion and the off-budget expenditure a further $38 billion. Last year, the fiscal deficit was estimated at around 9.8% of GDP, including off-budget expenditures. The deficit is expected to reach 14.2% this year including off-budget spending.

"The government started to spend more through off-budget expenditure at the start of last year," says Alejandro Arreaza, a Venezuela analyst at Barclays Capital. "This became more evident in the fourth quarter when many social programmes were set up in the run-up to the elections.

Barclays Capital says PDVSA continues to use its account at the central bank as a credit line from which it can disburse the bolivars it needs for its domestic obligations and social spending. As of December 23 2011, PDVSA’s net debt at the central bank totalled Bs97.6 billion ($22.7 billion), nearly doubling in the last quarter of 2011.

The central bank has become a direct creditor of PDVSA and, indirectly, of the treasury, at the cost of higher inflation. Barclays Capital expects an acceleration of inflation to 36.5% this year. Any intensification of this policy could create even further pressure on prices, considering that in the last quarter alone the money base increased by 34.5%.