Huge wealth inequality is a major feature of Venezuelan society. This continues to undermine sustainable development and contributes to political instability. It already looks unlikely that Venezuela will meet all of its Millennium Development goals (1990 - 2015) on poverty reduction despite the reforming zeal and promises of the current administration.
This explains the popularity of reforms designed to bring about a less unequal society in opposition to powerful vested interests in maintaining the status quo. The current administration has labelled the reform and poverty reduction agenda as the “Bolivarian Revolution” and is using oil industry profits to finance social programmes aimed at reducing poverty.
The Venezuelan economy is dependent on its oil industry and approximately one third of its Gross Domestic Product (GDP) and more than 50% of government revenues are generated from oil and its derivatives. The government has made efforts to diversify into the exploitation of other mineral reserves including iron, aluminium, coal, and cement; and is trying to close the infrastructure gap in transportation and energy supply.
The government is also privatising loss making state owned enterprises and seeking foreign investment in petrochemical, mining, forestry and tourism - albeit with a strict emphasis on state control of assets. Tax collection is being improved and now accounts for the other 50% of governmental revenue.
GDP has risen by more than 600% since 1996 reaching 206,125 billion Bolivar’s in 2004. The figures for 2001 and 2002 would have been higher had it not been for the nine week national strike and general shut down which affected industrial production. During this period economic activity and oil output fell dramatically but have recovered since. For 2005 the official GDP exchange rate figure is expected to be around $116.2 billion which represents an annual growth rate of over 9%.
Other Latin American countries have been experiencing similar gains and the economic outlook for the whole region is positive for the short to medium term. If the current social and anti poverty policies prove effective, barriers to economic participation should lower and this in turn will increase GDP and tax revenues. However unemployment has hovered stubbornly high for the last decade and around 12% of the 12 million strong workforce were unemployed in 2005.
Consumer prices in Venezuela were high in the 1990s but have fallen since 1998. Figures for 2006 are expected to fall a further 5% according to the International Monetary Fund (IMF). High inflation levels have historically been a big problem for Latin American economies and other developing countries. During the 1970s, 1980s and 1990s high inflation was largely the result of commodity price shocks and loose fiscal and monetary policies. The former of these was particularly problematic for Venezuela because its economy is based primarily on producing, and exporting, primary goods.
The main unit of currency in Venezuela is the Bolivar. In February 2002 the Venezuelan government abolished the exchange rate controls and the Bolivar fell 25% against the US dollar. The Bolivar has continued to depreciate against the dollar and the average annual exchange rate in 2005 was 2,090 Bolivar’s per US$, five times in 1996 when it stood at 417 Bolivar’s per US$.
Surprisingly, given the dominance of the oil industry, Venezuela sources two thirds of its electricity from hydroelectric plants. However it is still a major emitted of carbon dioxide due to its oil industry. Mining operations especially illegal mining is causing environmental damage in rainforests and river courses. Indigenous communities face the destruction of their way of life and violence from the mining industry, and require greater protection from the state. Bari, Yukpa and Wayuu indigenous people from the state of Zulia, many of whom voted for the Fifth Republic, held a demonstration in Caracas against coal mining in Sierra de Perija in 2005.
Gold mining is causing mercury contamination, excessive sedimentation and deforestation. In July 2005 the Minister of Environment and Resources, Jacqueline Faria indicated that the government was intending to ban mining in the state of Amazonas and revise mining operations in the state of Bolivar. Mining operations are banned along the Caroni river due to high levels of mercury and cyanide. Illegal miners are generally vulnerable people who are extremely poor and work in dangerous conditions. Any long term solution to stop illegal mining must provide alternative employment for miners.
Whilst devastating floods hit northern Venezuela in 1999, water shortages have affected the country in more recent years. The government is therefore encouraging domestic consumers to be more careful. At present the cost of water in Venezuela is 700 Bolivar’s per 1,000 litres but the government is indicating that this price will increase. Currently only 21% of sewage is properly treated but the government claims that it will increase this to 40% by 2010.
Lake Maracaibo faces many environmental threats including pollution from oil tankers, excessive growth of duckweed which thrives on nutrients carried downstream and subsidence as a result of hydrocarbon extraction in the Maracaibo basin. Pollution from industry has also compromised Lake Valencia and the government is trying to improve water quality in the lake.
The threat to Venezuela’s environment, and indigenous communities, will continue to grow as the government pursues a development strategy based on exploiting minerals such as gold and oil revenue. Grand infrastructure projects will also be difficult to manage and construct. However, reducing social inequalities by investing in people through education and health will improve the economy through an expanded skills base and a more cohesive society.
Copyright: Rowena Slope 2006 (Redkite Research)
Redkite Research is an internet based company providing research and information services including speech writing, reports and presentations. For more information please go to: http://www.redkite-research.com
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Tags: economy, environment, exchange rate, GDP, gold mining, indigenous community, Inflation, Maracaibo, Venezuelaeconomy, environment, exchange rate, GDP, gold mining, indigenous community, Inflation, Maracaibo, VenezuelaShare This
The base unit for the renminbi is the yuan, which is how the Chinese currency is most commonly referred to. The official ISO abbreviation for the yuan is CNY, but it is also commonly abbreviated in the forex industry as RMB.
The yuan had been pegged at 8.28 to the dollar since 1994. While China has been openly discussing scrapping the dollar peg for several years, many traders weren’t expecting a move until later in the year.
The PBC declared that the new regime would be a managed floating exchange rate based on supply and demand in relation to a basket of currencies comprised of the U.S. dollar, euro, yen and the Korean won. The yuan s central rate against the dollar was then adjusted by just over 2% to 8.11. Keep in mind that the RMB exchange rate is quoted in dollar terms, in other words, the dollar is the base rate of this currency pair. A 2% positive revaluing of the RMB results in a 2% decline in the dollar rate versus the Chinese currency.
According to the PBC, the RMB will now be allowed to fluctuate up to 0.3% on any given trading day with the daily closing price then serving as the midpoint of the next day’s trading range. That could mean as much as a 6% move in either direction in a month. However, the PBC is very unlikely to allow for that kind of movement and has in fact already intervened in the forex market to prevent the yuan from straying too far from 8.11. With over US$700 billion in currency reserves they certainly have the power to enforce their wishes and it’s doubtful that forex speculators will be willing to test the resolve of the PBC in any meaningful way any time soon.
While the floating of the yuan, albeit tightly controlled, is a significant policy shift, the initial revaluing of the RMB is seen as largely symbolic. Chinese president Hu Jintao visits Washington in September and the modest revaluation may have succeeded in heading off a face to face showdown on China’s exchange rate policy. Critics contend that the yuan is undervalued by more than 20%, affording China an unfair trade advantage. U.S. manufacturers have demanded as much as a 40% revaluation. A more significant move than 2%
is needed to truly affect the massive trade imbalance between China and the U.S., so there will undoubtedly be calls for further RMB appreciation.
So where might the renminbi be headed longer term? One year non-deliverable forward contracts in Singapore rose to RMB 7.64 before edging higher again, suggesting scope for an additional 6% of RMB gains over the next twelve months. More aggressive projections suggest potential for 7% appreciation by year end and up to 15% gains by the end of 2006. However, traders can be assured that any such projections will only be achieved if the PBC will allow it.
Given the tight constraints of the new renminbi regime it is unlikely that CFS clients will see any RMB trades in their accounts any time soon. First of all it will take several months of operation to allow traders to get a handle on how the new managed float will operate. There’s just very little transparency at this point.
While there may not be any trading opportunities in the RMB any time soon, China’s move has created opportunities elsewhere. Other Asian currencies such as the Japanese yen rebounded on the news, but quickly retraced when it became apparent that the RMB wasn’t really going anywhere. The yen is likely to remain under pressure as the dust settles, although near term losses may be a little more tentative while focus remains on China.
The biggest reaction to the policy shift by China, and likely the most sustainable, was seen in the U.S. treasury market where yields shot higher. The new exchange regime suggests that China is likely to be a less reliable buyer of U.S. treasuries as well as the dollar. Higher treasury yields will net higher mortgage rates which may prick the U.S. housing bubble,
dampening home sales and the consumer spending commonly associated with the purchase of a home.
Higher corporate lending rates are likely to negatively impact stock prices and the broader U.S. economy. Ultimately we could see a resumption of the long term downtrend in the
dollar. While this assessment may seem bleak in a broad sense, this is exactly why alternative investments, such as the Managed FX products of CFS, are an integral part of a diversified portfolio.
The burning question now becomes: are we better off having forced China’s hand on their currency policy? I don’t think there’s any question that the ideal is a free floating and open
exchange rate, where market forces set the price and government intervention is limited. However, the pains associated with the aforementioned scenarios may be greater in the
near term than any competitive advantage the U.S. might gain as a result of higher yuan.
Peter Grant has spent the majority of his career involved in the global foreign exchange (FX) market. He is the Vice President of Operations for CFS Capital Management http://www.cfscap.com and may be reached at pgrant@cfscap.com or by calling 303-940-7777.
Read the entire CFS Capital Newsletter ‘The Alternative’, at: http://www.cfscap.com/news.htm
Tags: exchange rate, forex market, PBC, RMB, yuanexchange rate, forex market, PBC, RMB, yuanShare This