Venezuela raises fuel price amid economic crisis

Venezuela President Maduro hikes fuel price first time in nearly 20 years and devalues currency to tackle economic crisis

Photo by: Reuters
Photo by: Reuters

Venezuela's President Nicolas Maduro speaks during a meeting at Miraflores Palace, in front of a painting of South American revolutionary hero Simon Bolivar, in Caracas, in this handout picture provided by Miraflores Palace on February 17, 2016.

Venezuelan President Nicolas Maduro on Wednesday devalued the currency and raised heavily subsidised fuel prices in an effort to stem a widening economic crisis, though critics of the socialist leader quickly dismissed the moves as insufficient.

The measures are meant to help shore up the OPEC nation's finances as plummeting oil prices and a collapsing state-led economic model have left the country with a severe recession, triple-digit inflation and chronic product shortages.

"This is a necessary measure, a necessary action to balance things, I take responsibility for it," Maduro said, in reference to the fuel hike during a combative speech in which he insulted opposition leaders and occasionally used foul language.

The reforms risk fueling triple-digit inflation at a time when millions are struggling to make ends meet, and comes two months after the ruling Socialist Party suffered a blistering defeat in parliamentary elections due to anger over the crisis.

The package will likely be seen by Wall Street investors, who are increasingly concerned about a potential default, as mildly positive but still vastly insufficient to help Venezuela make some $10 billion in debt payments amid a major cash crunch.

"Bottom line is no change to cashflow for this year and hefty year end debt payments," said Siobhan Morden director of Latin America fixed income strategy at investment bank Nomura Securities in an email.

Venezuelan bonds have recovered this week thanks to the bounce in oil prices, but they are heavily discounted on concerns the country will be unable to meet payments. The benchmark Global 2027 bond sells for a mere 38 percent of its face value, reflecting investors' default concerns.

Maduro devalued the strongest official exchange rate by 37 percent to 10 bolivars per dollar from 6.3, and streamlined the previous three-tiered system into a dual exchange rate mechanism. Greenbacks on the black market currently fetch 1,046 bolivars, according to website DolarToday.

The weaker of the two rates will be a free float based on an existing system that currently sells dollars at around 200 bolivars, Maduro said, while the stronger rate will over time be shifted based on criteria he did not specify.

Implementation Cruicial

Critics immediately noted that the government has repeatedly announced "free-floating" systems that withered away precisely because authorities never allowed them to be determined by demand.

A truly free float would raise prices of staple goods such as rice and corn flour that are currently subject to price controls. That would cut into the subsidized food programs created during the oil boom years by late socialist leader Hugo Chavez, Maduro's predecessor and mentor.

"It's a positive step but the key will be implementation," said Temir Porras, a former economic advisor to Maduro and his predecessor Hugo Chavez. "A dual forex system generates incentives for speculation and arbitrage."

Maduro also runs risks if he does not significantly overhaul the system. Currency and price controls have spurred snarling food lines reminiscent of Soviet bloc countries, spawned a lucrative smuggling trade and left furious shoppers scrapping for prized items such as chicken or laundry soap.

Opposition leaders insist the only solution to economic chaos is to dismantle the 13-year-old controls and roll back Chavez's wave of nationalisations that turned hundreds of private enterprises into unproductive state-run firms.

The first fuel price hike in nearly 20 years will boost the cost of gasoline by at least 1,329 percent. But fuel is still so heavily subsidised that filling a small car will still not cost more than half the price of a soft drink, or around 20 cents based on the black market exchange rate.

However, the money it brings in over a year could be close to 5 percent of this year's budget or 0.5 percent of GDP, according to Reuters' calculations.

A fuel price hike in 1989 contributed to three days of looting and subsequent military repression known as the "Caracazo" in which at least several hundred people were killed. The memory of that has made the gasoline subsidy a third rail that politicians are wary of touching.

With the combination of fixed fuel prices and raging inflation, buying cheap fuel has become one of the only uses for low-denomination bills. During Maduro's speech, mock news website Bipolar Capybara ran the headline, "Two-bolivar note commits suicide following gasoline price increase.''

TRTWorld, Reuters