Wednesday, February 01, 2006

Going further into debt? 

As anyone who has followed Venezuela for the past couple of years knows their economy has been on a roll. It is one of the fastest growing in the world at 9% last year and 17.4% the year before. It is further expected that the economy will grow between 5 and 10% this year.

Be that as it may, not everything is peaches and cream with the Venezuelan economy. Today there was an article in El Universal pointing out that Venezuela's indebtedness increased during 2005.

According to the article Venezuela's foriegn debt increased by $3.58 billion dolars in 2005 to a total of $31.6 billion. Further, its domestic debt (ie, what it owes to Venezuelans as opposed to foreigners) increased by $1.8 billion to reach $15.5 billion. So Venezuelas total national debt is now $47.1 billion.

That debt is equal to 37.8% of Venezuela's GDP. By way of comparison the U.S. federal debt is 63.5% of GDP. So Venezuela's debt is still reasonable. But it is up from 29% of GDP when Chavez first took office. The article also points out that servicing this debt will cost Venezuela $6.7 billion this year which is about the same as is spent on health care and education combined.

Now, the article does leave out a couple pieces of relevant information. For example, the state oil company, PDVSA, has paid down bilions of dollars of its debts which is really a reduction of Venezuelas overall debt. Further, the foreign reserves are at an all time high and have increased by more than $10 billion during Chavez's tenure. So the net new indebtedness hasn't really increased that much under Chavez. Not to mention there have been some mitigating circumstances such as a rather nasty oil strike that certainly didn't help things.

Nevertheless, news of the debt still going up in 2005 at a time when government revenues from both oil and taxes were very high is neither good nor acceptable. There just really isn't excuse that can be put forth to justify this. While Venezuela certainly needs all the money it can get and borrowing is one way to get money it is just not smart. All money that is borrowed ultimately has to be repaid. Worse still, it has to be repaid with interest. So borrowing money is something a country like Venezuela really wants to avoid if at all possible. And if you can't get off a credit addiction when you have a banner year like 2005 then I really have no idea when you will ever do it.

Side note: If you read the actual article in El Universal it is quite amazing. It is well written, informative, based on facts, and avoids the usual hyperbole. Whats up with that? Could it be they finaly want to do something to restore their tattered credibility? We'll have to see if this is a trend.


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