Chavez's spending could boost Venezuela inflation

[January 04, 2012]  WINCHE, Venezuela (AP) -- President Hugo Chavez's government is likely to spend heavily this year to rev up the economy during his re-election bid, and that could worsen one of Venezuela's biggest problems: 27-percent annual inflation that is already close to the highest in the world.

Chavez has started ramping up spending ahead of the October vote, and economists warn that more money injected into the economy will jolt prices. The government predicts 22 percent inflation in 2012, but the investment bank Barclays Capital projects that it could top 36 percent.

The incomes of the poor are being squeezed in places such as Winche, a hillside community on the outskirts of Caracas where children play on dirt roads lined with shacks made of wood and corrugated zinc. Some residents say they're being forced to spend more of their paychecks on groceries because of soaring food prices.

"I buy what's most necessary, which is food, and I don't buy other things, you know, like clothes," said Nebis Berrios, a 55-year-old woman who says her husband's modest pay does not go as far as before. "As far as the money goes, we buy food. And if not, that's as far as we get."

The oil-exporting country has had the highest inflation in the Americas for six years running. No other country is even close, according to the U.N. Economic Commission for Latin America. Suriname is officially No. 2 at 15.8 percent as of October, though economists says Argentina's real rate may be at least double the latest government figure of 8.6 percent.

Venezuela had the second-highest official inflation rate in the world as of November, surpassed only by Ethiopia's 31.5 percent.

The Venezuelan government's increasing economic controls, heavy reliance on imports and inadequate domestic production of food and other items have contributed to the problem.

Chavez's attempts to control inflation through price controls have added to other complications, such as sporadic shortages of sugar, cooking oil and milk.

Higher oil prices during the past year have allowed Chavez to pour more petrodollars into populist programs, such as a newly created cash benefit for poor families of $100 a month for each child.

Chavez is also investing billions of dollars in public housing projects, railways, subway expansions, and a new cable car system in Caracas' hillside slums.

Government spending in November was already 73 percent higher than in the same month a year earlier in nominal terms, according to Central Bank figures.

Venezuelan economist Asdrubal Oliveros, who heads the Caracas-based consulting firm Ecoanalitica, recently predicted that government spending could increase 20 percent in real terms this year as compared to 2011.

That torrent of money would add to an already rapidly expanding money supply. The amount of Venezuelan bolivars circulating in the economy shot up about 40 percent last year, including both newly printed money and currency recorded electronically in banks.

"We expect the increase in spending and the increase of the money supply to create significant inflationary pressures," said Alejandro Arreaza, an economist at Barclays Capital in New York who tracks Latin American economies.

The New York-based Eurasia Group, a political risk research and consulting firm, ranked Venezuela 10th on its list of top risks in the world this week, saying the election may further complicate the economic situation.

"The government will embark on a massive spending spree to stoke economic growth in the run-up to the vote," the group said in a report. "Venezuela will continue to issue large amounts of debt to finance spending ... in order to sustain this growth and ensure Chavez's re-election. This profligacy will aggravate current financial distortions."

The price of a kilogram (2.2 pounds) of beef already has risen from the equivalent of $6.51 to $9.77 in the past year, while a kilogram of sugar has gone from 87 cents to $2.56, and is still hard to find in stores. The government-set price for a liter (quart) bottle of corn oil stands at $1.40, but it's usually absent in stores and sold illegally by street vendors at $4.50 or more.

"We sure do a lot of walking to find food," said Carmen Montalvo, a 40-year-old housekeeper. "Cooking oil was scarce, but we've found it."

She said her family used to get by spending a bit more than $200 a week on groceries, but it's no longer enough.

"We used to go out with half as much, and we could eat. Now the most expensive thing is food," said Montalvo, who lives in a two-room house with her four children, two sons-in-law and three grandchildren.

Polls consistently show that Venezuelans see inflation as one of the country's biggest problems after violent crime. Poor Venezuelans, who traditionally have been key supporters of Chavez, are particularly hard-hit by rising food prices, which according to the Central Bank, increased by more than 35 percent last year.

Still, the political damage to Chavez thus far seems limited. Recent polls show his support above 50 percent.

Pollster Luis Vicente Leon said most Venezuelans don't blame the government directly for inflation, which has long been a problem in the country. In the 1990s, for instance, Venezuela's inflation rates topped 80 percent, though that was in the midst of a major financial crisis.

Today's financial situation is different, however, and still the government hasn't been able to lower inflation below 20 percent in the past five years.

Even as the economy rebounded and grew about 4 percent in 2011, salaries didn't keep up with inflation for many Venezuelans.

Economist Angel Garcia Banchs, a professor at Central University of Venezuela, said he calculates the real value of average private sector salaries has fallen 21 percent between 1998 and 2010.

Trying to counteract that trend, Chavez has repeatedly raised the minimum wage to keep up with inflation, increasing it by 25 percent last year to the equivalent of $360 a month. He also approved 50 percent salary raises for the military, 30 percent pay hikes for state-employed doctors and 40 percent more for teachers.

The government runs a network of state-run markets that sell food at discount prices and is a central part of its anti-inflation strategy.

Chavez's government is also attempting to battle rising prices through a new law that expands price controls to a wider range of goods in addition to food and gives the government more enforcement authority.

Some of the new items under price controls will include personal hygiene products such as diapers, shampoo, razors and toothpaste. A newly created government agency has been charged with the job of setting permissible ranges of prices and is expected to release a list of maximum prices for 19 such products on Jan. 15.

Central Bank president Nelson Merentes recently estimated that the new Law of Costs and Fair Prices could reduce inflation by 3 percentage points.

But business groups and analysts warn that more price controls will probably discourage private sector investment and lead to more shortages on store shelves.

[Associated Press; By FABIOLA SANCHEZ]

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