Business

Tue May 27 22:57:37 PDT 2008

* GDP growth quarterly lowest since 2003

* Government on fiscal ‘diet’ in midst of oil boom

* Spending expected to rise closer to November elections

By Frank Jack Daniel

CARACAS, May 27 (Reuters) – Although its coffers are swelling with treasure from record world oil prices, Venezuela’s economy is cooling as anti-inflationary measures slow growth by biting into consumer demand.

Growth in the first three months of the year was below expectations at 4.8 percent, the central bank reported on Tuesday, compared to 8.8 percent in the first quarter of 2007 and the lowest since 2003 when a political crisis shut the oil industry.

The government and analysts predicted a few weeks ago the economy had expanded between 6 and 7 percent in the first quarter.

OPEC-member Venezuela has for several years enjoyed strong growth on the back of the oil bonanza, but suffered the 22.5 percent inflation in 2007, accompanied by sporadic shortages of some foods and a rapidly devaluing black-market rate for the bolivar currency.

Since January, the government of President Hugo Chavez has used dollar-denominated local debt issues to soak up liquidity in an economy awash with bolivars because of strict foreign exchange controls designed to prevent capital flight from the socialist country.

The reduced availability of dollars, along with a more stable political situation, has helped strengthen the non-official rate for bolivars, from almost 7 to the dollar in December to about 3.1 per dollar in May. The bolivar officially trades at 2.1 to the dollar.

Venezuela has so far denied reports of a planned dual rate that might mean essential imports like food and medicine are bought at the current price, while luxury goods are bought with a devalued bolivar.

Other anti-inflationary policies include slower growth in government spending and an increase in imports to ease food supply bottlenecks that were driving up prices and damaging the president’s popularity.

The government has also hiked interest rates twice this year to encourage saving and reduce credit card spending. The second rate hike was partly aimed at offsetting the inflationary impact of a 30 percent minimum wage increase.

Meanwhile, the current account is bulging, with the bank reporting a $10 billion surplus in the first quarter — the result of soaring oil income.

Inflation is still high, at 8.9 percent for the first four months of 2008, and with elections looming it remains to be seen how long the government can hold off from spending more of the oil bonanza.

Some observers predict a fiscal spree as the campaign for November’s elections for mayors and governors begins in earnest. That could lead to a renewed weakening of the bolivar and a resharpening of inflation.

(Editing by Carol Bishopric)

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