García sees the official exchange rate expectation (at Bs1,960 to the dollar) as indicating that the end-2004 exchange rate will be 50% below the current Bs1,600 rate. A lower exchange rate will help to balance the budget since oil revenues are in dollars, but spending is in bolívares. García reckons that the economy will grow by between 3% and 3.5% next year, rather than the government's 6.5% forecast. He estimates the actual level of government borrowing to cover the fiscal deficit next year will be about Bs10tn (US$5.1bn). Add in the money needed to refinance maturing debts, and the economy is getting close to its debt servicing capacity.
Oil
The government seems aware that it is likely to be in a cash bind next year. It has been tapping the international capital markets, and profiting from the strength of oil prices, which has helped the country's sovereign risk premium to fall: this has fallen from 1,127 basis points over comparable US Treasuries to 760. Venezuela is the world's fifth-largest oil exporter. The government has also signalled that it will increase the tax burden on oil companies: those operating in the country will now have to pay a 30% royalty instead of the 1% they were previously charged.
The change may well put oil companies off making new investments in the country. The government has been counting on foreign oil companies to provide the bulk of the investment to develop the huge (270bn-barrel) heavy crude reserves. Currently, the heavy crude projects produce a total of 400,000b
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