Venezuela's credit recovery will depend on economic activity

<a href=www.vheadline.com>Venezuela's Electronic news Posted: Monday, June 16, 2003 By: Jose Gabriel Angarita

VenAmCham economist Jose Gabriel Angarita writes: In March and April of 2003, following the shut-down of the foreign exchange market, prevailing expectations focused on the possibility of the government's bringing interest rates in the Venezuelan financial system under control as well, in view of the banks' wide interest rate spreads and high profitability -- as then-Planning Minister Felipe Perez put it.

Opinions by highly qualified experts including the Central Bank Board were then expressed, insisting that the natural market mechanisms would effectively lower the cost of money and there was no need for controls, despite fears of a cessation of payments and inflation's expected impact on interest rates.

As expected, interest rates have come down. The average bank lending rate has fallen from 39.64% in December 2002 to 24.60% in May 2003, according to statistics published in this morning's edition of the El Nacional newspaper. This interest rate variation reflects the economic agents' inability to change bolivares to dollars as an investment alternative, which has flooded the system with liquidity.

But the pressure on interest rates has not induced a recovery of bank lending; indeed, it contracted by approximately 1.4 trillion bolivares between December 2002 and May 2003. The reason is quite simple: there has been no recovery of demand for credit among the economic agents. The economic contraction of 2002 and the 29% plunge in the supply of goods and services in the first quarter of 2003 have prevented companies and individuals from demanding financing for consumption, investment, and production.

A structural adjustment in the economic system is an indispensable necessity. Until the national economy recovers, until the market mechanisms for allocation of resources are set free, until a political environment free of conflict is restored, and until a climate of confidence among national and foreign investors is generated, the national financial system's credit portfolio will continue to be decisively influenced by the country's enormous macroeconomic instability -- not to mention the impact of the high proportion of total bank assets represented by government securities.