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Friday, August 24, 2007

Boom signals take-off for Venezuela's jet-set

Venezuela's in fashion this week on the FT

Ta' barato dame dos logo Financial Times

Boom signals take-off for Venezuela's jet-set

By Benedict Mander in Caracas

Published: August 23 2007 22:36 | Last updated: August 23 2007 22:36

From a wealth of picture-postcard Caribbean beaches to the magnificent
table-top mountains that inspired Sir Arthur Conan Doyle's The Lost World,
Venezuelans have no shortage of domestic holiday destinations to choose

However, surging oil wealth and the restrictions of a dollar-pegged,
overvalued currency are driving unprecedented numbers of Venezuelans to
travel overseas on holiday, with the number of international flights jumping
45 per cent last month over the previous year.

"It's never been like this, it's extraordinary," says Maria Falvay, a sales
executive for Pegasus Travel in Caracas. "If you want to fly out of
Venezuela over the next few weeks you might as well forget it, we're fully
booked. At the moment we're taking bookings for December."

Flight sales so far this year have risen by 28 per cent to $428m (€317m,
£215m) compared with the same period in 2006, while the number of tickets
issued is 40 per cent greater.

That far exceeds the number of overseas travellers when previous records
were set during Venezuela's last oil boom in the late 1970s, when Concorde
used to fly to Caracas.

According to Alejandro Grisanti, an economist at Ecoanalitica, the increase
reflects the growing affluence in Venezuela pushing up overall consumption.
This in turn is feeding the highest inflation rate in the region – 17.2 per
cent in July.

Venezuela's consumption is being fuelled by inflation that is outstripping
interest rates so fast that consumers prefer to spend rather than see their
money eroded in bank accounts. Banks are providing a further stimulus to
spending through cheap credit.

Mr Grisanti argues that rising overseas travel is also a consequence of
Venezuela's overvalued currency, which has been fixed at 2,150 bolivars to
the dollar since March 2005. On the parallel "black" market the dollar is
now worth more than twice as much.

"The government is subsidising people to travel, effectively giving away the
difference between the official and the parallel exchange rate," he says.

Although currency restrictions have caused the parallel market value of the
dollar to shoot up over the last year, tickets with international airlines
are paid for at the official rate, so have dropped in cost compared with
other consumer goods. Despite the scarcity of dollars at the official rate
locally, Venezuelans travelling abroad can take advantage of an allowance
provided by the government of up to $5,600 at the official exchange rate.

Travel agents point out that travel to Venezuela's high-priced top
destinations is now more expensive than a trip to the US, a favoured
destination for Venezuelans. Nevertheless, internal flights so far this year
have still increased by 37 per cent from 2006.

The problem is compounded by insufficient supply to keep up with demand for
flights. Although international carriers such as American
Airlines have asked to increase the frequency of their flights to keep up
with demand, permission has not been granted by the government, which is
seeking to protect local airlines.

Fewer international airlines now operate in Venezuela, with leading carriers
such as British
Airways and KLM
having ceased to fly the route in recent years.

Umberto Figuera of the Venezuelan Airline Association admits that local
carriers are unable to fill the gap in demand.

"The fundamental problem is that there aren't any big local airlines that
can cover the routes run by international airlines.

"Not a single one flies to Europe, for example. They just can't compete," he
says. He believes that Venezuela's airline sector needs a proper government
policy to resolve its problems.

Copyright <> The Financial
Times Limited 2007

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Another article on PDVSA's 32mm USD for London's transport system

Caracas <>
hopes UK can get it out of a jam

Chávez <>
oil dollars buy bus tickets for London

Chávez's iron grip on economy 'unsustainable'

By Benedict Mander in Caracas

Published: August 23 2007 22:36 | Last updated: August 23 2007 22:36

President Hugo Chávez's tightening grip over Venezuela's economy is
generating distortions that economists fear could, paradoxically, eventually
lead to a loss of control.

Price controls, currency controls and negative real interest rates are just
some of the elements that have contributed to one of the highest rates of
inflation in the world and a substantially overvalued exchange rate.

"This regime is not sustainable. It is only propped up by the high price of
oil," says Jose Guerra, a former director of research at the central bank.

"Venezuela has already experimented with these policies in the past and it
ended up going broke."

The controls introduced by Mr Chávez are, in part, an attempt to offset the
inflationary effects of large-scale government spending, afforded by record
oil prices, to boost economic growth.

In this, the government has succeeded: growth has averaged 12 per cent in
the past three years, leading to a drop in the rate of poverty from 43.9 per
cent when, Mr Chávez was first elected in 1998, to 30.4 per cent in 2006.

This has won Mr Chávez increasing levels of support from the electorate, who
are expected to vote in favour of his proposed reforms to the constitution
in a referendum that would allow him to be re-elected indefinitely.

But his economic policies have triggered high levels of consumer demand that
now far outstrip the economy's productive capacity, with negative real
interest rates providing consumers no incentive to save their cash.

Unbridled spending combined with price controls that are intended to check
the inflationary effects of such policies has lead to scarcity of basic
goods such as milk, eggs, beans and beef.

To counter this, imports have tripled in the past three years in an effort
to make up for the economy's inability to support demand. But rising
inflation and an increasingly overvalued exchange rate will continue only to
make imported goods even more attractive, just as non-oil exports become too
expensive on world markets. This would make Venezuela ever more dependent on
oil, which accounts for almost 90 per cent of exports.

Ironically, one of Mr Chávez's key policies is to stimulate "endogenous
de­velopment" to steer Venezuela away from its dependence on oil.

"If the price of oil suffers a significant world decline, the retail sector
will not be able to support the current level of imports without the country
sliding into immediate trade deficit," says Mark Turner, an analyst at
Hallgarten, who adds that central bank reserves would not last long under
such pressure. "Recession would be a real threat to the economy as well as
the administration running it."

But Mark Weisbrot, an economist at the Centre for Economic and Policy
Research, argues that the Venezuelan economy "does not fit the mould of an
'oil boom headed for a bust'."

He says that a large current account surplus, rising foreign exchange
reserves, and low levels of external debt are enough to insulate the economy
from any imminent danger, although he concedes that the currency is at least
30 per cent overvalued in relation to the dollar.

"This is something that will have to be remedied if Venezuela is going to
pursue a long-term development strategy that diversifies the economy away
from oil," he says. However, he concedes that the government is reluctant to
devalue due to the effect this would have on inflation.

Copyright <> The Financial
Times Limited 2007

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