Venezuela Is Almost Alone in Slashing Its Deficit Amid Covid-19

(Bloomberg) -- As governments across the world take on record amounts of debt and ramp up fiscal stimulus, the normally profligate government of Venezuela is one of the only countries set to narrow its budget shortfall this year.

The nation’s budget deficit will shrink to 7.9% of gross domestic product in 2020, from 11% last year, according to a study published this month by Andres Bello University in Caracas. That would make Venezuela, roiled by hyperinflation and mass hunger, the only major country in the Americas to tighten its fiscal stance during the pandemic.

Other forecasters such as Caracas-based economic analysis firm Econometrica also predict a smaller budget shortfall this year. Notre Dame University visiting professor Francisco Rodriguez estimates that Venezuela’s budget gap could narrow to as little as 4.8% of GDP, which would be lower than Germany’s.

“These numbers may seem low, but to have a high deficit you must have a way to finance it, and no one is lending money to Venezuela,” Rodriguez said.

Venezuela is currently enduring its seventh-straight year of contraction amid the deepest depression in recent history. The economy is forecast to shrink another 20% this year as the coronavirus pandemic aggravates the downturn caused by collapsing oil revenues, economic mismanagement and U.S. sanctions.

As the nation’s economic crisis deepened, the government largely abandoned the publication of timely economic statistics, and hasn’t published complete fiscal data for two years. The Finance Ministry didn’t reply to written requests for comment.

Only a handful of countries including Dominica, East Timor, the Democratic Republic of Congo, Guinea-Bissau, Guyana, Kenya, Lesotho and Zambia are set to cut their deficits this year, according to forecasts published by the International Monetary Fund in April. The IMF doesn’t have a 2020 forecast for Venezuela.

After defaulting on its dollar bonds in 2017, and with U.S. sanctions limiting the nation’s access to financial markets, Venezuela has few sources of credit left. The government has also tried to keep a lid on spending as part of its drive to limit money printing and get inflation back under control.

Help from allies such as Russia and China has recently been limited to debt rollovers that don’t involve fresh capital.

Cafe con Leche

Hyperinflation, now estimated at 2,400% annually according to Bloomberg’s Cafe con Leche Index, has diluted the government’s ability to finance itself owing to the so-called Olivera–Tanzi effect, whereby the time lag between the generation of tax revenue and its collection slashes its value.

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Government expenditure fell 29% in real terms in the second quarter from a year earlier, according to Econometrica, just as other governments in the region were spending more to offset the impact of the pandemic.

However, the upcoming legislative elections in December will make the government reluctant to further cut spending if it can avoid it. Economist Tamara Herrera, head of consulting firm Sintesis Financiera, says the government will inevitably try to finance itself by more money printing, since it’s running low on other options.

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