Inflation: Venezuela Worst, Peru Best

Source: Latin Business Chronicle - Monday, April 16, 2007
18 de Abril de 2007

Venezuela and Argentina are reversing Latin America's trend towards lower inflation.


Latin America's inflation is expected to reach 5.7 percent next year. That represents the first increase since 2003 that inflation is growing rather than falling. The main culprits are Argentina and Venezuela, which both are expected to boost their inflation rates in 2008 compared with this year.

Venezuela's inflation rate will likely reach 25.7 percent, the highest level in Latin America and the country's worst result since 2003, the International Monetary Fund forecasts. It also means Venezuela will have the third-highest inflation in the world. Only Zimbabwe and Myanmar are expected to post higher inflation next tear, according to a Latin Business Chronicle analysis of IMF data.

"In Venezuela, efforts will be needed to rein in government spending that has grown exceptionally rapidly in recent years in response to the surge in revenues from the oil sector," the IMF warns in its latest World Economic Outlook, which was released last week.

Venezuela has boosted public spending dramatically the past few years to finance growing social spending. The government plans to spend more this year as a result of the acquisitions of telecom company CANTV and electricity company EDC, which are being nationalized. The government of President Hugo Chavez is paying U.S.-based telecom operator Verizon $572 million to acquire its 28.5 percent controlling share in CANTV and plans to acquire the remaining 70 percent through a public offering that ends on May 8. Meanwhile, it has agreed to acquire 82.1 percent of EDC from U.S.-based energy company AES for $739 million. It also plans to acquire the remaining shares.

Also Argentina has boosted public spending and has seen inflation grow as a result. The country will post Latin America's second-highest inflation next year: 12.7 percent, also its highest level since 2003. "In Argentina, inflation declined during 2006, but the authorities continue to rely on administrative measures to keep a lid on price pressures," the IMF says.

Both Venezuela and Argentina have implemented price controls to try to reduce inflation, but without success.

Meanwhile, investors are increasingly critical of the official Argentine inflation data. In January, the government fired the head of the official statistics agency INDEC, allegedly over a methodology dispute, and then subsequently released January inflation figures deemed too low by most economists. Last month, the government again released inflation figures deemed to low by leading analysts.

Revisions to the cost of the “basic food basket” in March have further increased concerns about the legitimacy of Argentina’s inflation figures, Credit Suisse analyst Carola Sandy says.

INDEC announced last week that the March figures were revised, showing a 0.2 drop instead of a 3.6 percent increase. It claimed the original figure was caused by a calculation error.

"While it is plausible that the revision to the cost of the “basic food basket” was indeed prompted by calculation errors, the controversy surrounding this amendment has further fueled the market’s concerns about the legitimacy of inflation data in Argentina," Sandy said in a commentary Thursday.

A higher cost for the basic food basket would strengthen the workers’ position in ongoing wage negotiations, almost as much as high inflation figures would, she points out.

The problems in Venezuela and Argentina come as most of Latin America is seeing progress in reducing inflation.

"The inflation targeting frameworks introduced in a number of countries are proving useful monetary policy anchors and, outside of Venezuela, inflation outcomes have been generally favorable," the IMF says.

All in all, nine countries are expected to see falling inflation rates next year. Except for Argentina and Venezuela, the remaining eight are expected to see small increases. Paraguay is expected to see the strongest decline - from an estimated 10.2 percent this year to only 3.4 percent next year, the IMF predicts.

Peru will again have the lowest inflation rate in Latin America - only 2.0 percent. Panama and Chile follow, with 2.4 percent and 3.0 percent, respectively.

Measured by trade groups, Mercosur will have the worst performance next year. Its average inflation rate will be 10.2 percent. By comparison CAFTA will only have an average of 5.9 percent and the Andean Community 3.7 percent, according to the Latin Business Chronicle analysis.





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