Price of oil over the last 18 months.

Chávez’ innovative experiments in centrally-planned capito-socialist economy are looking pretty shaky these days. For one thing, the Venezuelan economy shrank 3.3% last year, which isn’t surprising except for the fact that the slump worsened in the 4th quarter – to 5.8% – just as the rest of Latin America is beginning to recover. The oil sector alone contracted 10%.

(Also, it’s a neat trick to have your economy shrink even while inflation is at 26%.)

It may get worse. Economists say a drop in demand due to the currency devaluation at the beginning of the year will depress GDP growth again in 2010, possibly keeping the economy in recession. Constant power outages are sure to be a drag on production as well.

Meanwhile, the government’s attempts to prop up the bolivar by auctioning massive amounts of dollar-denominated bonds have been an utter failure, as the parallel-market bolivar is at its lowest point in six months. The dollar auctions have stopped.

And to top it all off, the Venezuelan Chamber of Commerce says the government still owes US$12 billion for property it has expropriated (including private petroleum services contractors who were bought out last year) and US$7 billion in forex promised to exporters who need dollars to keep goods flowing to a country that no longer produces anything but oil domestically.

Which, speaking of, happens to be Chávez’ only way of financing his capito-socialist experiment. But because global crude consumption fell last year, there’s a glut on the market, meaning prices will have a hard time going up and might actually go down.

Did I mention Venezuela has legislative elections in September?

Related posts:

1. Bonding
2. Currency woes
3. More fear than greed

Interesting, then, that these dollar-denominated Argentine bonds (of which the Venezuelan government purchased US$6.5 billion between 2006 and 2008 in a show of “solidarity”) are in free-fall. Why would that be?

Simply enough, the Venezuelan government has declared war on the non-official exchange market, which means it needs to somehow flood Venezuelan investors with U.S. dollars, boosting the bolivar and making the parallel market less attractive. One way to do this is to increase dollar auctions, which it has done.

Another way is to increase the availability of those Argentine bonds, which is exactly what Venezuela’s state banks are doing. But with inflation up over 26% and billions of dollars fleeing Venezuela every year, it’s doubtful even this will sate the Venezuelan appetite for foreign currency.

Related posts:

1. More fear than greed
2. Less money, mo’ problems
3. Currency woes

The plan will fail because Chavez’s nationalizations and land seizures are prompting Venezuelans to pull money from the country, said Alberto Ramos, a Goldman Sachs economist. More than $93 billion has left the South American nation since 2005, according to the central bank’s capital account data.

The article says the Central Bank has been throwing about $100 million a week at propping up the bolivar, when real dollar demand is something closer to $100 million a day. Demand is high because no one who owns anything wants to keep it in Venezuela:

Venezuela, which last had a capital account surplus in 1998, the year before Chavez became president, posted a capital account deficit of $10.8 billion through the first nine months of 2009, the most recent central bank data show.

That means billions of net dollars in capital are fleeing Venezuela every year, despite strict foreign currency exchange controls. It’s going to get worse. With the bolivar now devalued by 50% against the dollar and the vast majority of goods consumed in Venezuela being imports, Morgan Stanley is projecting an incredible 45 percent.

Related posts:

1. Less money, mo’ problems
2. Bonding
3. “Expropriate it”