Venezuela: Economic Overview

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ECONOMIC OVERVIEW

Venezuelan President Rafael Caldera in April 1996 announced a series of fiscal and monetary reforms calculated to restore economic growth. Major measures implemented include increasing the price of gasoline fivefold; eliminating foreign exchange controls; establishing currency convertibility under a managed float system; freeing interest rates; eliminating most price controls; increasing the wholesale tax from 12.5% to 16.5%; and stepping up the timetable for the government's privatization program. The adoption of these reforms led to approval by the International Monetary Fund for a standby agreement to provide the country with financial assistance for an estimated $1.4 billion.

While the economy is too narrowly dependent on the oil industry, the country does well when oil prices are firm. Indeed, the fourth-quarter 1996 surge in oil prices was estimated to translate into an extra $3 billion in foreign income.The government has reiterated its plans to use excess oil profits to pay off debt, a strategy for managing the additional oil income and avoiding inflation and additional pressure on the bolivar's exchange rate.The oil profits permitted the government to avoid drawing down a $500 million tranche from its IMF standby program. One indication that the international markets support Venezuela's fiscal adjustment program was the Deutschemark bond issue, worth about $420 million, placed in Germany in September.

FOREIGN INVESTMENT CLIMATE

The country's accelerated privatization program offers opportunities to investors in the scheduled sale of aluminum companies, electric utilities, a steel company, banks, and hotels. In a US initial public offering in November, some $100 million worth of the government's 49% share of CANTV, the national telephone company, was purchased by GTE, a long-standing investor in Venezuela. Overall, the government raised about $1 billion through the CANTV sale, the country's largest privatization in several years.

Positive expectations for the government privatization program have encouraged investors to buy stocks in anticipation of rising investment in the Caracas stock market.Average stock prices have increased more than threefold since September 1995.

Several sectors continue to attract foreign investment, including oil and mining. Texaco and Phillips Petroleum, for example, are in talks with the Atlantic Richfield joint venture with state company Corpoven to invest in a $3.5 billion crude oil exploration and development project. And in mining, the Andean Development Corporation approved a $50 million loan for Placer Dome's Las Cristinas gold mine project in Bolivar state. …