Venezuela Finance Profile 2012

Market-based competition The fundamentals of market-based competition are under heavy stress. The government controls a vast scope of retail and service prices. It has tightened its control over exchange and pushed part of imports to the parallel exchange rate, which contributes to fuel inflation. This adds to the mounting difficulties for starting a business. Others include the country’s crumbling infrastructure, the hegemony of so-called collective or state-owned businesses over private enterprises, and the mounting state takeovers and expropriations. The informal or shadow economy still employs just a little less than one-half of the labor force who are excluded from social security coverage. The following comparative rankings of Venezuela’s economic order underscore this picture: Growth Competitiveness Index, World Economic Forum, 105 of 134; Business Environment Index, World Economic Forum: 117 of 118; Ease of Doing Business Report, World Bank, 174 of 181; Enabling Trade Index, World Economic Forum, 115 of 118.
 

Anti-monopoly policy A new anti-monopoly law was introduced in the National Assembly in 2006 but has not been approved. The 1999 constitution prohibits monopolies without specifying whether they are private or public. The government’s business-unfriendly policy in itself contributes to the concentration on the supply side as the number of existing businesses was halved since President Chavez came to power, and starting a business is ever more complicated. There are near-monopoly situations in some sectors such as cement (public) and beer production (private).

Liberalization of foreign trade Foreign trade liberalization is not an issue on the government’s agenda, even though Venezuela’s producers face problems with the country’s entry into Mercosur and the ensuing adoption of its trade integration agreements, which require liberalization until 2016. Venezuela’s counter project against the U.S.-inspired and now defunct Free Trade Area of the Americas, the Bolivarian Alternative for America, has so far convinced Cuba, Bolivia, Nicaragua and Honduras. Its basic inspiration is solidarity exchange, not free trade. The plan is fundamentally driven by generous Venezuelan oil shipments at preferential prices, an unsustainable – and also less attractive – scheme when prices plummet. The state controls exports and imports through a bundle of non-tariff barriers.

Banking system Venezuela’s banking system is differentiated with a handful of local and a few branches of global players dominating the sector. Public institutions mainly serve special interests, such as micro-credits to particular sectors and activities. The socialist production units are the primary recipients of this money. Intermediation capacity is poor. Banks thrive mainly thanks to public sector deposits. Public institutions tend to lose money because their credit default rates typically are ten times those of the private sector. Regulations earmark nearly half of the banks’ credit portfolio (minimum proportions for agriculture, housing, construction, etc.). The supervising agency is understaffed and turns a blind eye on underperforming public institutions.

Commercial Banking Report Q1 2011