Government spending continues to fuel growth.  According to Central Bank data, central government spending increased 30.0% nominally in January over the same month last year to reach US$ 2.28 billion.  The Chávez administration continues to be optimistic about the oil price trajectory for this year and the pace of spending reflects this enthusiasm.  Last year, high oil prices not only enabled the government to keep the fiscal deficit at 1.8% of GDP but also to increase spending by 49% in nominal terms over 1999.  However, the administration appears to be ignoring the fact that that the price on the Venezuelan basket of basket of crude and refined products is currently at US$ 21.19 per barrel (6 April) and the average for this year is US$ 22.35 per barrel, both just a notch above this year’s budgeted price of US$ 20 per barrel and well below last year’s average of US$ 26.59.  The probability for further downward pressure on prices is increasing.  Most oil analysts believe that the recent OPEC-induced cutbacks in production, which represents a 10% drop in export volume, is not going to be compensated for by higher prices, since the current U.S. slowdown along with a Japanese recession and an associated downturn in Asia and Europe, is likely to suppress international demand.  The stability of public finances, particularly given the Chávez government’s expansionary fiscal policy, depends heavily on oil prices.  Strong oil revenue inflows last year (approximately 50% of the government’s income) managed to maintain fiscal balances stable.   Macroeconomic Stabilization Fund reserves (US$ 6.0 billion at the end of March) will help bolster against any oil price-induced adverse developments in the fiscal accounts in the short term.  However, a strong and persistent decline below the budgeted oil price level could quickly erode fiscal stability.  This month’s Consensus Forecast indicates that panellists are likely to be awaiting a more definitive signal for a clear downward trajectory in oil prices to assess the possible effect on fiscal balances.  Some panellists have revised their fiscal deficit forecast upward substantially and as a result the Consensus remains well above the government’s 3% deficit target for this year.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Venezuela.  For more details please click here.

For five-year forecasts, please click here.