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Ruth Krivoy: Love thy neighbor

Sep 1, 2013

Venezuela must not squander the opportunities to increase competitiveness as it integrates into Mercosur, the country’s former central bank president warns

By Katie Llanos-Small

Venezuela’s integration into South American free-trade area Mercosur presents a "big threat" to Venezuelan companies, without significant reforms to make the economy more competitive.

So says Ruth Krivoy, the country’s former central bank president, who insists in an interview with LatinFinance that having joined the trade bloc, Venezuela now has a window of opportunity to implement sound policies – and adapt.

"There is a drive now in Venezuela to really turn Mercosur into an opportunity for local business, instead of a threat," says Krivoy, who ran the central bank between 1992 and 1994. "If we don’t do anything it’s a big threat. If we learn that now that we’re there we need to change, it will be an opportunity."

Venezuela’s acceptance as the fifth member of the South America trade bloc – which includes Argentina, Brazil, Uruguay and Paraguay – was agreed in principle in 2006, although the country wasn’t formally admitted until six years later. Bolivia is slated to become the sixth member and the door also remains open to Ecuador.

Since the death in early 2013 of former president Hugo Chávez, the trajectory of policy in Venezuela’s heavily state-run economy has been unclear under his successor, Nicolás Maduro. But Krivoy says that reforms to place the economy on a sounder footing are unlikely, given a challenging political climate.

"President Maduro’s government has realized the need for more pragmatism in managing the [currency] controls and trying to correct some distortions especially with the exchange rate," says Krivoy in reference to a new mechanism to control foreign exchange flows, SICAD, which was introduced in early 2013.

"But it’s hard to envisage significant changes because I don’t think they’re ready to really deregulate or turn around the course of events. They’re constrained by the need to portray the image of the continuing Bolivarian revolution. They can’t afford to lose support of the people ahead of the December [municipal] elections."

Krivoy, now at Síntesis Financiera, a consultant firm for GlobalSource Partners, says inflation is likely to hit 45% by the end of this year, and to stay at a similar level next year. The firm calculated year on year inflation to be 39.6% in July 2013, the highest level since Chávez took office in 1999.

Investment needed

The country’s most profound challenge is the lack of private investment, says Krivoy. That stems from "overregulation, weak rule of law, challenges to property rights, a very intrusive price control system that tries to micromanage profits, margins between producers, wholesalers, retailers and so forth," says Krivoy. "That explains why the economy has really not made much progress."

As for other trade relationships, Krivoy expects agreements with China to continue. Venezuela sends around 500,000 barrels of oil daily to China, which has offered loans in an increasing number of sectors, including for industry and ports.

How much oil Venezuela will continue shipping to its neighbors though is less clear. Under Chávez’s PetroCaribe plan, the country has offered large quantities of oil at knock-down prices to Caribbean countries.

"We’re probably nearing the time at which this program will start pulling back slowly," says Krivoy. A need for cash at the state oil producer PDVSA will ultimately determine the extent of exports. But the political costs could be high.

"Maduro’s leadership in the Caribbean may suffer if he starts cutting back on the supplies of oil," she says. "So you have contradicting forces working there. It’ll probably be slow. It won’t be announced – it may take place by just cutting back volume here and there." LF

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