Inflation down amidst speculation on economic impact of Colombia conflict

Caracas, March 4, 2008
(venezuelanalysis.com) – The Venezuelan economy experienced a drop in the
inflation rate in February, closing off the month at 2.2%, down from 3% in
January. Venezuelan Planning Minister, Haiman El Troudi, also announced new
measures to control inflation and liquidity including the creation of a
macroeconomic coordinating committee, and assured that in 2008 the Venezuelan
economy will grow an estimated 6-8%. Meanwhile, Venezuela and Colombia
suspended commercial relations in the wake of attacks by Colombian armed forces
in Ecuadorian territory, spurring speculations about the maintenance of
Venezuela`s food supply.

El-Troudi told the
press Monday that "while inflation is under control, we have good employment,
we achieve sustained economic growth, and we have levels of popular satisfaction
that are the envy of other economies of the world, we will be able to say that
we are on the correct path of growth, not only economically but also socially,
that is, the integral development of the country."

Price assessments
conducted by Venezuela`s Central Bank in two major cities, Maracaibo and
Caracas, revealed that in February the inflation on food, restaurants, home
rental, and communications, fell below the average of 2.2% in Feburary. Prices
rose faster than average for clothing, communications, and home furnishing.
Inflation in health care costs and transportation was at 3.8% and 3.9%
respectively, which represented a deceleration compared to January.

Last month's inflation
decrease followed a 24.4% increase over the previous 12 months, an increase
which will be replicated this year if the economy continues at the February
rate. However, El Troudi said while the government is on track to decreasing
inflation it should reconsider the 2008 price index goal, which it set at 11%.

The minister pointed
out that inflation has decelerated by 50% since November 2007 as a result of
government measures to combat speculation and food contraband, create new
distribution chains, and facilitate imports. El Troudi urged Venezuelans to
consider the reasons for the previous year`s enormous price hikes, especially
the increased government spending which boosted consumer buying power.

He also asserted that
Venezuela is "importing inflation," referring to the 200% growth in the
international price in milk, the unforeseen hike in global grain prices which
has doubled the cost of pasta, and international shortages of rice and oatmeal,
which have caused these basic food items to be either scarce or absent from
shelves in Venezuela, a country which depends on imports for nearly 70% of its
food consumption.

El Troudi urged
consumers to maintain a "rational use of credit cards". In order to increase
saving incentives, decrease prolific spending, and boost national productivity,
the Venezuelan Central Bank last weekend made a series of interest rate
adjustments which El Troudi applauded as important for the "majorities," who
benefit from the growth stimulated by "7 million savings accounts in the
country and 1.6 million credit cardholders."

The maximum interest
rate for money spent on credit was increased from 26.2% to 32%, while the
interest rate for savings accounts was raised from 10% to 13%, including an
increase on interest for long-term deposits from 11% to 14%. Interest rates on
loans to the agricultural sector dropped from 15% to 14%, and loans to the
manufacturing sector from 28% to 19%.

The interest rate for
loans to financial institutions was raised to 32.5%, part of a series of
measures to limit liquidity of funds in Venezuela`s financial intermediation industry,
which has led the private sector in growth during President Hugo Chàvez`s term
so far at 171%.

In recent weeks the
government has also converted nearly half a million dollars of funds from the
National Development Fund (FONDEN), which spent more than $30 billion in the
last three years on social programs and other national development, into
"structured notes" in the form of bonds from Argentine and Ecuadorian debt
bought up by the Venezuelan government in efforts to strengthen alliances with
those countries and help them overcome debt burdens. Currently, $4.5 billon in
FONDEN resources are held in structured notes, which are owned by dozens of
private banks.

According to
Venezuelan news reports, the bonds of Andean countries, including Ecuador and
Venezuela suffered a drop in value Monday as a result of the judicial attacks
of Exxon Mobil corporation against the foreign assets of the Venezuela state
oil corporation PDVSA last month, and the recently aggravated conflict with the
Colombian government.

The attack by
Colombian armed forces on encampments of the Armed Revolutionary Forces of
Colombia (FARC) inside Ecuadorian territory last Saturday also led to the total
suspension of bilateral commerce between Colombia and Venezuela, which was
valued at $6 billion in 2007. Colombia,
ordered its customs service to refuse passage to all Venezuelan shipments, and
the Venezuelan government has mobilized troops to close the border with
Colombia.

Speculations about the
effects on the economy are abundant. José Manuel González, the president of the
Venezuelan Federation of Chambers of Commerce (FEDECAMARAS), claimed the
closure will worsen food shortages in Venezuela, since Colombia provides close
to 30% of the products consumed in Venezuela, including vegetables, chicken and
eggs, beef, oil, and dairy products.

However, Felix Osorio,
the Venezuelan Food Minister, assured that Venezuela will find other markets
from which to purchase foods previously imported from Colombia, "like what
occurred last year, when the Colombian Agricultural Minister decided in a
unilateral manner to limit cattle sales, and we began buying from Brazil."

Venezuela has also
signed numerous accords to import beef, milk, and other products from
Argentina, and Argentine President Cristina de Kirchner is scheduled to meet
with President Chávez this month to sign more economic accords related to
Venezuela`s food security, according to news reports.

"The Venezuelan people
understand that here there is a government that is committed and we will do
everything that we must do in order to guarantee food security," Minister
Osorio proclaimed.

On February 22,
President Chávez decreed limits on the exportation of foods found in short
supply in Venezuela. Government entities have also met extensively with the
private sector to ensure proportionate food distribution around the country.

In conclusion,
El-Troudi invited the productive sectors of the national economy to the
"dialogue tables" along with the state and organized communities, with the intention
of stimulating investment and achieving full industrial capacity in the
country.

The Venezuelan economy
as a whole has registered 17 consecutive trimesters of growth, including an
8.5% increase in the GDP in the final trimester of 2007, the bulk of which was
concentrated in the private sector, according to the Central Bank.