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Current oil price developments, however, do not bode well for the 2002
Budget. The oil price
continued its downward trend in October, dropping 7.7% following the 17.7%
decline in September and closed an additional 6.0% lower at US$ 15.62 per
barrel on 9 November. The government, however, remains confident that
OPEC cutbacks will boost oil prices and help buffer fiscal accounts. 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 mbpd. OPEC may cut
production by an additional one to one and a half million barrels per day
in its 14 November Vienna meeting. So far, this year’s cutbacks have
served to give a short-term boost to prices but have been relatively
ineffective in stemming the decline observed since February. If
Venezuela’s quota is cut back by 100,000 barrels per day (bpd) and
continued low oil prices force the government to maintain the new
production level next year – 307,000 barrels per day (mbpd) less than
budgeted - then the fiscal deficit is likely to rise by 0.5% of GDP.
Furthermore, if the average price should drop below the government’s
budgeted price, then for every US$ 1 drop in the oil price, the fiscal
deficit is likely to rise 0.4% of GDP, if production remains constant at
budget levels. Despite oil market uncertainties, this month’s Consensus
Forecast indicates that the panellists believe that the government will
meet its fiscal deficit target for this year but expect the goal for next
year to be overshot by 0.1 percentage points with the fiscal deficit
reaching 4.4% of GDP instead.
Government decrees cessation of payments to rainy day fund.
Even though the government clearly emphasizes its firm belief that oil
prices will recover to sustain the current spending plan, the decision to
revise legal requirements for the Macroeconomic Investment Stabilization
Fund (FIEM) clearly reflects lingering concerns that a rapid turnaround of
oil prices may not materialize. Thus, on 15 October, the government
decree to cease making payments to the FIEM went into effect. According
to the government’s revisions of the existing law, authorities will make
no payments to the FIEM in the final quarter of this year and throughout
all of 2002. Beginning 2003, the government will deposit 6% of oil income
in the FIEM and contributions will rise by 1% annually until they reach
10% in 2007. The government estimates that the reform will generate some
US$ 4.4 billion in additional revenues next year, which should help to
buffer fiscal balances from any oil-induced adjustments.
Central Bank confident in meeting inflation target.
The Central Bank remains optimistic about meeting its inflation target for
this year, despite the government’s announcement that it intends to pay a
bonus of three month’s salary to public sector employees in December. In
October, consumer prices increased 0.9%, which was down from 1.2% observed
in September. The October price increase kept the annual inflation rate
unchanged from September at 12.3%. Price increases in housing services
(+2.6%), food and non-alcoholic beverages (+2.4%) and health (+1.5%)
provided for rising prices in October. Panellists do not expect the
favourable inflationary environment to continue and have maintained their
year-end inflation forecasts at 13.2%, well above the Central Bank target
of 11%. Next year, inflation is likely to pick up as a result of
accelerated currency depreciation and higher government spending.
Consequently, panellists have revised their inflation forecast for 2002
upward by 0.3 percentage points to 15.4% next year, which is double the
Central Bank’s inflation target of 7-8%.
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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