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Venezuela Cuts Spending as Oil Prices Plummet

Venezuela Cuts Spending as Oil Prices Plummet

Posted by Shanelle Weir on December 03, 2014

President Nicolás Maduro, struggling with an economic crisis compounded by falling oil prices, said Tuesday he authorized a 20% cut in government spending and plans to modify the country’s complicated foreign-exchange system, opening the door to a possible devaluation.

The moves could shore up the country’s fragile finances but are also likely to deepen an economic downturn and pose a major political risk to Mr. Maduro, whose predecessor Hugo Chávez built a successful political machine based on government spending for the poor.

The price of Venezuela’s oil, which accounts for 96% of the country’s dollar income, plunged in recent days, falling nearly 7% from Friday to $63.40 as of Tuesday.

In a country that was already spending beyond its means for the past several years, the falling oil price stands to worsen the country’s finances. Venezuela’s fiscal deficit—the difference between what it spends and earns—stands at about 17% of annual economic output, a level economists say is unsustainable.

“We have a very complicated challenge here,” Mr. Maduro told government ministers in a televised address on Tuesday. He said the government only planned to cut “unproductive” expenses and wouldn’t affect social spending.

Underscoring the challenge facing Mr. Maduro, his popularity sank to a new low of 24.5% in November, down 5.7 percentage points from September, according to a poll by respected local pollster Datanalisis on Tuesday. Nearly 86% of the 1,293 homes surveyed said the country was headed in the wrong direction.

Venezuela’s economy is expected to contract by 3% this year, with an inflation rate topping 60% and a dollar crunch that has created frequent shortages of imported food and consumer goods. The falling price of oil sets the stage for worse to come.

“The government is so desperate that they are going to have to make reforms,” said Russ Dallen, partner at brokerage Caracas Capital Markets. “They really have no choice.”

Analysts say Mr. Maduro is walking a tightrope in trying to maintain the populist policies of Mr. Chávez while trying to confront the reality of Venezuela’s economic problems. This past summer, Mr. Maduro publicly discussed measures to raise income like raising the country’s virtually free price of gasoline but later backtracked.

Foreign Minister Rafael Ramírez said last month that Venezuela would continue its generous PetroCaribe program in which more than a dozen allies in the region receive Venezuelan crude at preferential terms and can pay for it over 20 years.

But behind the scenes, Venezuelan officials have held talks with some members like the Dominican Republic and its investment bank, Goldman Sachs Group Inc., on a deal that would give Venezuela cash in exchange for retiring debt, people familiar with the matter said.

Under the proposed structure the governments discussed, Goldman would acquire the Dominican debt from Venezuela at a steep discount, one of the people said. The Dominican Republic would in turn sell bonds, using the proceeds to retire the debt now held by Goldman, the person said.

The person said an agreement hadn’t been reached, and a deal wasn’t imminent.

Jamaica, another Venezuela borrower advised by Goldman, has also considered a similar arrangement, the person said.

In the face of the economic turmoil, Mr. Maduro said his government is evaluating changes to the foreign exchange system, but didn’t offer details.

Venezuela has had rigid currency controls for more than a decade. The government has at least three official exchange rates, including one pegged at 6.3 bolivares to the dollar. But on the black market, one dollar fetched 157 bolívares in street transactions as of Tuesday, according to, a website that tracks the parallel market.

Mr. Maduro pledged to make changes that would create more access to dollars through official means.

“We’re going to be delivering a blow to the parallel dollar, which does so much damage,” Mr. Maduro said.

Venezuela Finance Minister Rodolfo Marco is in China this week seeking loans from the Asian country, which has already extended the South American nation nearly $50 billion in credit since 2007. Mr. Marco will next head to allied Iran and Russia also in search of financing, Mr. Maduro added.

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