Venezuela's heavy indebtedness can lead to unsustainable fiscal situation
<a href=www.vheadline.com>Venezuela's Electronic News Posted: Friday, June 13, 2003 By: Jose Gregorio Pineda & Jose Gabriel Angarita
VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: On Thursday June 12 the National Assembly's Finance Committee authorized the 4.8 trillion bolivar public borrowing for which Finance Minister Tobias Nobrega asked for authorization on May 26. But before the Assembly took action the government made use of Article 80 of the Organic Financial Administration Act, according to which borrowing authorization requests are automatically approved due to "administrative silence" if no decision has been made within 10 days of submission.
The public borrowing policy pursued in the last several months comes as no surprise; it had been expected since the beginning of the year that the National Treasury would need to make major fiscal adjustments to meet its obligations in 2003, especially in view of the economic contraction's effects on non-oil revenue collections.
The rapid growth of Venezuelan public debt in recent years, the high cost at which money has been borrowed, and the debt's high concentration, can all undermine the maintenance of long-term financial solvency. The most important fiscal problem at this time is an issue of liquidity or flow of funds, but the way this liquidity problem has been addressed may lead to a solvency problem in the future, given the large and rapid growth of government debt's share of GDP. Consequently, the main risk facing public finance is that the only viable way to resolve a future solvency problem is to liquidate those liabilities through high inflation.
The Central Bank of Venezuela (BCV) board has expressed its deep concern that the rapid growth of national debt could have an impact on fiscal sustainability and the absorption capacity of the domestic market ... and especially that of the banks ... because the recession forecast in the months to come will result in an even smaller demand for credit, leaving the banks with no other profitable option than purchase of high-yielding public securities.
All this could generate a situation of high risk in which the financial system's health would be tied to the evolution of internal public debt.