Pedaling towards disaster: Import-dependent Venezuelan businesses try to imagine a future without dollars

Latin Trade, April, 2003 by Mike Ceaser

Bicycle shop owner Juan Jose Segura had a great Christmas. He nearly doubled his normal income, and that left him with a problem. His store, Ciclos Segura, is nearly empty of new bicycles, and the government's currency exchange controls mean he has little chance of obtaining more of the expensive, imported cycles he sells.

Segura predicts dollar-starved Venezuelan bicycle importers will eventually give up--and so will his customers. "If [more bicycles] do come," he says, "they'll be too expensive."

Eager to punish the anti-government business community that took part in a two-month strike--and to bolster support for his self-styled "Bolivarian revolution," named after Venezuelan patriot Simon Bolivar--Venezuelan President Hugo Chavez has vowed "not one single dollar for coup-mongers." Importers are petrified, Venezuela imports 60% of its retail goods, and dollars are the lifeblood of business, "We importers expect to be hit, because we aren't 'Bolivarians" says Pablo Herrera, owner of bicycle importer PHD Repuestos.

Exchange controls are only one of many challenges confronting Venezuelan businesses, which also face a plummeting currency, panicking foreign investors and an economic contraction widely predicted to double last year's 8% decline.

Part of the problem is that the proposed new currency system provides no legal parallel market, a common feature in foreign exchange regimes, forcing business owners to get dollars from the government or go to the black market. "Among the various exchange control systems, they probably chose the worst," says Francisco Rodriguez, who heads the National Assembly's appointed economic consulting office.

At press time, the official exchange rate was 1,600 bolivars to the dollar, at least 500 bolivars lower than the exchange rate on the already-flourishing black market. The government's limit for the entire country's imports is US$450 million a month, or $5.4 billion per year. The Venezuelan economy, however, is used to importing between $12 billion and $17 billion in goods annually. "Thousands of companies will close," predicts economist Maxim Ross, frequently mentioned as a likely member of a successor regime should Chavez step down or be forced out.

As the economy heads toward a deep recession, the government will have to avoid the temptation of paying its bills by running the printing presses. If that happens, hyperinflation is a real threat, says Rodriguez. He already predicts an economic contraction of between 11% and 15% of gross domestic product (GDP) and a fiscal deficit of 4% of GDP--but only if the government devalues the bolivar to average 2,500 bolivars to the dollar in 2003, a 56% decline from the current official level. "The government has such a difficult fiscal situation that it could find itself needing to print large amounts of money," Rodriguez says.

Government price controls, intended to protect consumers of basic goods from speculators, are worrisome, too. Many fear low prices will prompt producers to quit and retailers to stop selling. The government set the maximum price of white cheese at 400 bolivars per kilo. But Mercedes Socas, administrator of dairy distributor Viveres y Lacteos El Campo, says her cost is already up to 380 bolivars and is being pushed higher by a drought. Producers, she says, will balk. "If the price isn't there, they won't bring food to Caracas," she says.

Mixed results. Venezuela has had two other recent experiences with exchange controls, from 1983 to 1989 and again from 1994 to 1996, both of which offered legal, non-government parallel markets for buying dollars. Macroeconomic results under those currency regimes, however, were mixed, and both left fundamental economic troubles festering. Poverty-driven rioting in 1989 killed hundreds in Caracas; in 1996, the banking system collapsed.

Both previous control periods also bred rampant corruption, as government bureaucrats found that their routine decisions meant big gains or losses for importers. Foreign investors are even less likely to join the pain. "Who's going to bring any money here to invest?" says Aurelio Concheso, president of Centro de Divulgacion de Conocimiento Economico, a Caracas business think-tank.

Perhaps the only beneficiaries from a controlled economy will be domestic manufacturers, who expect controls to tamp down smugglers since they cannot request government dollars for their illegal transactions. During the past decade, textile company Hilanderias Venezolanas has closed plants, reducing its workforce from 1,800 employees to 180. a decline Hilanderfas Vice-President Steven Mishkin blames on a flood of cheap clothing from Asia.

Since exchange controls were announced, Mishkin says old customers have been contacting him and asking for updated prices. "The textile industry's problem has always been contraband," Mishkin says. "And we believe that the exchange controls will control that." But Mishkin does worry about getting imported machine parts. Mishkin's side business, as the Venezuelan franchiser of TCBY yogurt, is 100% import-dependent. With the bolivar falling and supplies uncertain, he might be forced to drop the brand name.