Venezuela hit by fears of hyperinflation and recession
Hyperinflation is looming in Venezuela, with prices suffering their highest monthly rise on record in May, while the economy slides into recession and the popularity of Nicolas Maduro, the new president, wanes. Prices rose 6.1 per cent in May, compared with 1.6 per cent in the same period last year, bringing accumulated inflation for the first five months of 2013 to 19.4 per cent, almost as high as the annual figure for 2012 of 20.1 per cent. The sudden jump in prices, with the 4.3 per cent rise in April already sounding alarms, has triggered fears at Goldman Sachs that Venezuela could be on the brink of hyperinflation, which the US bank defines as seasonally adjusted annualised rates of more than 40 per cent. There is no fixed definition of hyperinflation. The International Accounting Standards Board puts it at a cumulative rate of 100 per cent over three years. At present, the annualised rate of inflation in Venezuela is 35.2 per cent. At the same time, the economy is losing steam, with 0.7 per cent growth registered in the first quarter of 2013, compared with 5.9 per cent growth in the same period last year. Analysts at London-based consultancy Capital Economics suspect that the Venezuelan economy may already be in recession, and forecast that gross domestic product will contract by 1 per cent this year. At the root of the Opec country’s economic woes is a tangled web of price and currency controls which, together with problems in the oil industry that supplies 96 per cent of export revenues, have generated a shortage of foreign currency, on which the import-dependent economy relies. That has caused shortages of basic goods including food, in turn aggravating inflation further. Zulia, Venezuela’s most populous state, had considered rationing of 20 basic food products but Mr Maduro dismissed this plan as “insane”. As Mr Maduro struggles to right a deteriorating economy, with stagflation now entrenched, political instability has also racked the country since his victory by less than 2 percentage points in the mid-April election, a result which an emboldened opposition refuses to recognise. In addition, infighting within the ruling socialist party is damaging Mr Maduro’s popularity. A recent poll by Caracas-based IVAD showed that Henrique Capriles, the opposition leader, would win if the election was held again today. “The Maduro administration seems to be incapable of acting and is locked in internecine policy and power conflicts that are causing paralysis,” said Russ Dallen, managing partner at Caracas Capital Markets. He doubts whether Venezuela is in hyperinflation territory “yet”. He says the problem is that the value of the dollar on the currency black market, the result of a decade of strict controls, has more than tripled in the past three years, making imports more expensive. “If Maduro can find dollars and speed them into the markets, he could turn that situation around. Sadly, the Cubans seem to be running things in the meantime and you end up with Cuban-type solutions like the rationing model in Zulia,” he said. The government’s problems at home are reflected in an increasingly erratic foreign policy. Mr Capriles, who says Mr Maduro’s election win was fraudulent, has been canvassing support for his cause across Latin America. His recent trip to Colombia provoked Mr Maduro to lash out at President Juan Manuel Santos and accuse Colombian institutions “at the highest level” of plotting to poison him. Mr Santos dismissed Mr Maduro’s accusations as “crazy”. Tensions with Peru, which chairs the Union of South American Nations (Unasur), led to the resignation of its foreign minister, who had backed a meeting to discuss an audit of Venezuela’s disputed election result. In contrast, Caracas has made overtures to the US government, which Venezuela’s late president, Hugo Chavez, regularly accused of trying to overthrow him. On Wednesday, John Kerry, US secretary of state, met with Elas Jaua, Venezuela’s foreign minister, at the sidelines of a meeting of the Organisation of American States in Guatemala. “We agreed today, both of us, Venezuela and the United States, that we would like to see our countries find a new way forward, establish a more constructive and positive relationship,” said Mr Kerry. He expressed hope that full diplomatic relations could “quickly” be restored. Mr Chavez expelled the US ambassador in 2008, accusing Washington of backing a coup against him.
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