Strong economic performance stimulated the use of financial cards in Venezuela

Author: Fflur Roberts

Date published: 6 Jul 2007

Since 2004, high oil prices have increased public spending by the Venezuelan government. High oil exports allowed the Central Bank of Venezuela to accumulate its highest level of International Reserves yet, which have been used to satisfy the increase in demand for foreign currency to pay for imports. This has boosted real money growth, producing high amounts of liquidity and low interest rates in a capital control environment. This also produced an increase in per capita income, employment and private consumption. This, in turn, has been responsible for a boom in the use of financial cards in Venezuela. Improving employment has led to increasing income and consumer confidence and, therefore, consumption. This increased consumption, in turn, caused many consumers to turn to financial cards as a mode of payment due to their added convenience and, in the case of credit cards, the credit they offer to help finance these purchases. This was a powerful force behind the healthy performance by financial cards in 2005-2006.

Economic policy in 2006 was expected to have the final objective of winning presidential elections by a large margin of votes. As a consequence, an acceleration of government spending and an increase in money supply was expected. This was likely to have a strong effect on boosting consumption, with record historical import levels expected to be reached. However, the explosive behaviour of government spending and the huge amounts of liquidity have created time inconsistency problems and inflationary pressures. If oil prices cannot maintain the growth shown in the last three years, the Venezuelan Government may need to devaluate the Bolivar in 2007, hurting purchasing power, employment and private consumption. As a result, it is most likely that economic growth will be moderate in the forecast period.

In the short term, the strong oil economy will give financial institutions huge amounts of resources for lending, and they will therefore be able to offer better benefits, such as lower interest rates, longer payment periods, and special promotions. Card use will be increasing in the short term due to the expansive fiscal policy. Transactions as well as the number of cards in circulation will also increase. However, there is a reasonable possibility that government spending will become unsustainable and slow down in the forecast period, worsening consumption possibilities. However, if interest rates are kept fixed, the use of credit cards will not be affected. On the contrary, debit, ATM and charge card transactions could suffer. In general, the economy will help to propel strong growth, which will quickly fade towards the end of the forecast period.