The drop in demand from the United States is likely to affect not only Venezuelan oil but also non-traditional exports, since the US market is a prime market for Venezuelan trade.  In addition, the global softening is expected to put further downward pressure on oil prices, which continue to decline despite OPEC production cutbacks.  Lower oil prices will strain the country’s fiscal coffers, which remain highly dependent on oil revenues.

Oil price plummets and clouds economic prospects...  Even before the 11 September events, the Venezuelan economy was showing signs of a slowdown.  While the non-oil economy continued to benefit from expanding government spending, the oil economy was suffering the consequences of the production cutbacks implemented in accord with OPEC member countries.  This year, Venezuela has scaled back oil production by a total of 406,000 barrels per day (bpd) to the current quota of 2.67 million bpd.  The government had remained confident that the cutbacks would serve to bolster the oil price, which in turn would boost oil revenues in the second half of this year.  However, oil prices have not recovered and the protracted slowdown in US and global economic activity is likely to postpone any rebound.  In the week ending 7 September, the average price for the Venezuelan mix had dropped by 16.0% compared over the end of last year but at US$ 21.76 per barrel remained above this year’s budgeted price of US$ 20.00 per barrel.  However, following the US attacks the price for the Venezuelan basket registered additional strong declines, dropping from US$ 23.00 to the barrel on 14 September to US$ 18.01 per barrel on 28 September and even further to US$ 16.99 per barrel on 5 October. 

… and could erode fiscal balances.  To date, the Chávez administration has relied heavily on healthy oil prices to sustain its populist agenda.  The Finance Ministry reports that central government spending was up 51.6% nominally from January through July compared to the same period last year.  Of the total fiscal revenues, oil related revenues from PDVSA dividends, income taxes and royalties accounted for 54.9% of ordinary income.  According to LatinFocus estimates, a price change of one dollar for the Venezuelan basket results in a revenue loss of close to US$ 532 million, the equivalent of 0.4% of GDP.  If the global slowdown persists through the second quarter of next year as expected by the market, the drop in energy demand is likely to prompt further declines in oil output.  The resulting decline could force the government to adjust fiscal spending as oil revenues deteriorate.  Given the government’s current assumptions for the 2002 budget, the government should be able to cover with Macroeconomic Stabilization Fund (FIEM) resources.  Thus, as long as oil prices do not drop to the dramatic lows observed in 1998, government spending is likely to continue to drive the performance of the economy through the remainder of the year and next, since the government has some US$ 7.1 billion in resources to draw down from the FIEM.

The Planning Ministry stands firm with the government growth target of 4.5% for this year, as set forth in the Economic Programme for 2001.  The figure stands in contradiction with the Central Bank’s revised growth figure of 3.5-4.0% and remains above the Consensus figure for this year.  Participants expect the drop in oil prices to put further downside pressure on the economy next year.

Bolivar continues to weaken and Central Bank considers revision or year-end target.  The Bolivar continued to depreciate at a monthly rate well in excess of the Central Bank’s 0.58% target allowed under the current exchange rate regime.  In September, the exchange rate depreciated 0.8%, following the 1.2% and 0.9% monthly drops in August and July respectively.  The September rate brought the currency close to the year-end target of 750 Bolivares to the US$.  The Central Bank has said that further pressure could force a revision of the year-end target and the current exchange rate band.  Participants expect the currency to continue on its downward trajectory this year, above the ceiling for the current exchange rate band.  If the Central Bank decides to adopt further measures to tighten monetary reigns, the result may be further restriction of credit availability and a decline in consumption and investment.

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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