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Venezuela finance minister pick may signal more pragmatic economics

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(Globalpost/GlobalPost)

By Brian Ellsworth

CARACAS (Reuters) - Venezuela's designation of central bank President Nelson Merentes as finance minister signals the OPEC nation may be headed toward a more pragmatic approach to rising inflation and slowing growth.

Merentes, an ally of late socialist leader Hugo Chavez who served two previous stints as finance minister, is seen making rigid currency controls more flexible to ensure better distribution of dollars to the import-dependent economy.

His capacity for dialogue with investors, following the hermetic and doctrinaire tenure of his predecessor, could mean a more pragmatic approach to economic policy under President Nicolas Maduro, who won last week's vote to replace Chavez.

Merentes, who is also a mathematician, faces a struggle to prevent the economy from slowing as the government trims spending, and to contain consumer prices pressured by blow-out 2012 outlays that helped ensure Chavez's re-election.

"Merentes is hardly an orthodox economist, but he is seen as a pragmatic voice within 'Chavismo' who has been open to dialogue with the private sector and the international market," said JP Morgan's Ben Ramsey in a research note.

His most important tasks will be improving the currency system and bolstering local industry, which was cowed during the Chavez era of nationalizations and price controls.

Merentes has been central bank president since 2009, and he served as finance minister from 2001 to 2002 and 2004 to 2007.

Most private economists expect growth to slow from 5.6 percent last year to about 2 percent due to a slowdown in state spending, which in 2012 was heavily driven by an ambitious home construction program.

They also predict inflation will reach close to 30 percent this year on a burgeoning money supply after months of heavy spending and two devaluations since February that boosted the cost of imported goods.

The government's forecasts for this year show economic growth of 6 percent and inflation of 16 percent.

CURRENCY CONTROL OVERHAUL?

Merentes may revamp the recently created Sicad currency mechanism, which businesses initially called confusing and cumbersome, to ease dollar shortages that have left consumers scrambling to find goods ranging from wheat flour to auto parts.

That may require implicitly recognizing that the bolivar, at an official rate of 6.3 per dollar, is overvalued, given that greenbacks on the black market fetch nearly four times that.

"Merentes is a defender to the death of stabilizing the parallel market," said Asdrubal Oliveros of local firm Ecoanalitica via his Twitter account.

His appointment may mean a resumption of foreign bond issuance, which totalled only $3 billion last year following 2011 bond sales of $17.5 billion by Venezuela and state oil company PDVSA - potentially boosting supply and pushing down prices.

Merentes is known for fluid communication with investors, business leaders and private bankers as well as a jovial sense of humour. Like the late Chavez, his policy announcements are at times filled with colourful Venezuelan idioms.

Merentes completed a Ph.D. in mathematics in Budapest in 1991 before returning to Venezuela as a university professor.

As central bank chief he would take journalists to his native coastal village of Naiguata for the lively San Juan festival, in which throngs of revellers dance to pulsing Caribbean drum rhythms.

Villagers addressing him as "uncle" would from time to time stop him to ask for favours.

OUT WITH 'THE MONK'

Wall Street views him as an improvement over the previous Finance Minister Jorge Giordani, an often dour figure known by the moniker "The Monk" who led the Chavez-era expansion of state control over the economy and oversaw the prohibition of a parallel currency market.

Giordani, who would smile pleasantly at Chavez's side but snarl at reporters who questioned his policies, was known for reluctance to meet with foreign investors. He will stay in the cabinet but as the less powerful planning minister.

In a sign of Merentes' more extroverted character, on his first day as finance minister he scheduled a chat with foreign reporters. Giordani rarely gave interviews.

Merentes in 2010 helped create a currency platform that used global bond sales to provide dollars alongside existing exchange controls, suggesting he may resume issuance this year.

Barclays analysts said in a research note that they expected $6 billion in bond sales for 2013.

"We expect Minister Merentes to foster a much better relationship with the private sector," wrote Barclays analysts Alejandro Grisanti and Alejandro Arreaza.

"Nonetheless, he will have a bigger challenge today than he had five years ago, given the increase in the size of the state and the number of the public enterprises after the expropriation policy that President Chavez started in 2007."

(Additional reporting by Marianna Parraga; Editing by Andrew Cawthorne and Steve Orlofsky)

http://www.globalpost.com/dispatch/news/thomson-reuters/130422/venezuela-finance-minister-pick-may-signal-more-pragmatic-econo