Changes in Venezuela's economic cabinet punished by international markets
<a href=www.vheadline.com>Venezuela's Electronic News Posted: Friday, April 25, 2003 By: VenAmCham
VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: Economic analysts do not like the changes in the economic cabinet, and that was immediately reflected in the international markets, which have shown concern. In the first place, the prices of Venezuela's sovereign bonds fell in the latest trading session, with the DBCs losing 1.5 percentage points, the Flirbs retreating 1.0 percentage point, and the Global 27s dropping 1.25 percentage points.
In the second place, JP Morgan, one of the leading investment banks in the United States, downgraded its recommendation on Venezuelan sovereign bonds from "overweight" to "neutral," mainly because of the possibility of an oil price decline but also due to the appointment of Minister Giordani. Venezuela's country-risk remains among Latin America's highest at 1,184 basis, exceeded only by the bonds of Argentina, Uruguay, and Peru.
Analysts never imagined that Giordani's appointment could have so strong an impact. This possible effect chiefly reflects fears that the new minister may be incompatible with Finance Minister Tobias Nobrega, who said a few days ago that Venezuela is interested in a foreign debt swap. That incompatibility could imply Nobrega's departure from the Finance portfolio and a delay in the implementation of the foreign debt swap he advocates.
Another factor that may contribute to explaining this market behavior is that the cabinet shift undermines the continuity of the Chavez administration's economic policy. The president himself has said that Minister Giordani will just go back to the 2001-2007 development plan, which could imply a return to the past. But that is just what worries some analysts, who believe that economic policy was what put Venezuela in such extreme difficulty last year.
- Giordani's return will probably bring greater cohesion among the economic ministers, but it will come at the expense of greater changes in the rest of the cabinet, adding even more justification for the market's high risk perception of Venezuela.
There is no question that the current state of economic policy is very fragile, and major changes in policy making will not contribute to improving economic expectations. In the end, what the government needs to change is not just ministers, but its basic economic strategy. It needs to formulate an economic policy that will elicit trust and put Venezuela on a path of sustained growth based on a strong and vigorous private sector, because private investment is a key tool for achieving higher economic growth, increasing our national wealth, and reducing the level of poverty from its currently high peak.