The drop in the oil sector prompted a significant slowdown in overall economic activity and does not bode well for the future performance of the economy.  The economy has relied heavily on the oil sector for recovery, since consumption has remained subdued and private sector investment in other sectors has also lagged.  Meanwhile, continued depreciation in the value of the Bolivar and the resulting international reserve loss are likely to force the government to adopt further capital controls or consider an adjustment to the current exchange rate regime.

Oil industry slows economy.  On 28 August, the Central Bank reported that the Gross Domestic Product (GDP) grew 2.9% in the second quarter over the same quarter last year, which was just below last month’s Consensus of 3.0% and the government’s 3.2% estimate.  The second quarter figure brought the growth rate for the first half to 3.4%, which compares favourably to the 1.9% growth rate registered in the first half of last year.  Aggregate demand expanded 5.8%, while private consumption was up 5.6% and fixed capital investment rose 18.1%.  Thus, the external sector proved the main break on economic growth, despite relatively stable oil prices.  Exports dropped 15.1% (oil exports -18.2%), while imports experienced a 6.5% expansion.  Growth data show that growth is slowing, since growth was well below the 6.1% and 3.8% expansion rates in the last quarter of 2000 and first quarter of this year respectively.  The key force behind the second quarter expansion was 4.8% growth in the non-oil economy over the same period last year.  Economic activity in the non-oil economy actually picked up over the first quarter, when growth reached a lesser 4.1%.  The construction and communications sectors experienced particularly healthy expansions, growing 20.8% and 12.9% respectively.  The construction sector benefited substantially from increased government spending on housing and infrastructure programmes, while increased consumer demand for telephony services offered by new entrants into the telecommunications market growth in that industry. 

Less encouraging, however, was the 2.3% contraction in the oil economy, the strongest contraction since the 1999 recession, when the economy plummeted 6.1% because of historically low oil prices.  The government attributes the oil sector downturn to the production cutbacks effectuated under the auspices of OPEC.  Since the beginning of the year, Venezuela has cut back production three times by a total of 406,000 barrels per day (bpd) to the current quota of 2.67 million bpd.  In addition, oil prices have seen a steady decline this year, further straining growth in the oil sector.  In the second quarter, the average price for the Venezuelan mix of crude oil was 14.7% below the same period last year.  Subsequently, the average oil price lost further ground dropping to US$ 22.00 per barrel on 7 September.

The economic slowdown has prompted the government to revise its growth forecast for this year downward from 4.5% to 3.5 - 4.0%.  According to officials, the downside pressures of high unemployment (13.1% in May), lagging private investment and the decline in the oil sector warranted and the adjustment, despite the fact that government spending on public works projects is likely to expand in the second half of the year.  The data for the first half actually indicate that the public sector grew a very modest 0.2% versus 5.8% growth in the private sector.  The Consensus anticipates oil prices to remain stable through the end of the year with the price on the average on Venezuela mix dropping only moderately to US$20.90 by the end of December on target with the government’s estimate for this year.  The government expects the oil price to drop further next year to US$ 18.00 per barrel, which remains well above the Consensus estimate of US$ 16.41 per barrel.  If the oil price does drop below the government’s target, then fiscal cuts are inevitable, which, in turn, would stifle economic growth.

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

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