Oil prices are anticipated to remain stable throughout the year, further boosting the economic recovery.  In addition, both consumption and investment are seen as exhibiting healthy growth.  However, the economic recovery remains highly dependent on oil price developments, since the government has so far adopted few policy changes to ease the likely fiscal effect of an oil price drop.

Unemployment drops.  According to the National Statistical Office (OCEI), unemployment dropped to 10.2% in December.  Even though unemployment typically drops significantly in December, due to seasonal hiring, the December figure was the lowest rate observed since December 1995 and confirms the downward trend in unemployment observed in the second half of last year.  The most recent data available indicate that consumption continues to rebound strongly.  According to the Venezuelan Automotive Chamber (CVA), automobile sales were up 45% in January over the same month last year.  In fact, this month’s Consensus Forecast indicates that consumption will grow 6.1% this year, driven by declining unemployment and a more favourable credit environment.

Investment rebound in the making.  Last year investment grew only a modest 2.0%, despite the healthy recovery in oil prices.  According to Central Bank data, foreign direct investment reached US$ 3.7 billion, up US$ 923 million from 1999.  However, approximately 80% of investment flowed to the oil sector with the balance flowing mainly into the telecommunications and retail trade, where investment doubled over 1999 levels.  Business sentiment for this year is optimistic, even though some 93% of companies surveyed by the Venezuelan Chamber of Commerce and Industry in early January lament current economic policy and another 68% claim that the current exchange rate policy is not in the interest of promoting non-oil investment and longer-term macroeconomic stability.  Nevertheless, some 60% of the businesses surveyed assert that they plan new investment for this year, while 86% expect sales to either increase or remain at last year’s levels.  Furthermore, this month’s Consensus Forecast indicates that investment should continue along a strong recovery path, expanding 9.0% in 2001.

Healthy growth to continue this year.  The Central Bank raised its growth projections for this year from 4-4.5% to 4.9%, encouraged by favourable oil price developments, increased macroeconomic stability and the downward trend in inflation, which provides room for a more accommodative monetary policy.  This month’s Consensus Forecast indicates that panellists are confident about further recovery this year, following the 3.2% expansion last year.  In fact, the economy is anticipated to exhibit healthy quarterly growth throughout the year with the annual rate of GDP expansion reaching 4.1%.

Inflation confirms downward trend.  Consumer prices increased 0.9% in January, down from 1.0% in December, which lowered the annual inflation rate to 12.6% from 13.4% in December.  Inflation continues to linger at lows not seen since the mid-1980s but remains well above the government’s 11.0% inflation target for this year.  Nevertheless, inflationary expectations have dropped as shown in this month’s Consensus Forecast.  Even though panellists expect the heightened economic activity this year to drive up inflation to 14.0%, this month’s figure is a full one and a half percentage point below the forecast for last month and 2.5 percentage points below the projection 90 days ago.

Fiscal stability contingent on oil price.  According to the National Tax Authority (SENIAT), non-oil tax collection last year reached US$ 9.8 billion, up just 5% from 1999 and only 78% of the actual target collection.  The tax figures were disappointing, particularly given the up-tick in economic activity and the government’s efforts to combat tax evasion.  Healthy oil revenue inflows (approximately 50% of the government’s income) helped maintain fiscal balances in check last year and, despite the 45.5% real spending increase, the fiscal deficit closed at 1.8% of GDP, just short of the government’s 1.7% of GDP target.  The government’s current economic agenda of healthy fiscal balances and a strong currency remains heavily dependent on favourable oil prices.  The continued build-up of reserves in the Macroeconomic Stabilization Fund (US$ 4.6 billion at the end of January) will provide a cushion for any adverse development in the fiscal accounts resulting from a decline in oil prices.  

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