Venezuela - Economic Briefing January 2002

Oil Overshadows Growth Prospects

The oil price decline and additional production cutbacks are likely to put further downward pressure on the economy this year. Consumption and investment remain healthy but are likely to experience a deceleration, as the government spending plans may experience adjustment amidst lower oil income and investors delay decisions further until the current political commotion is resolved. The weakening economic fundamentals may raise pressures on the overvalued currency and the government has decided to revise its currency band to address the potential for more accelerated depreciation.

Growth slows due to oil but remains relatively strong

In his 30 December announcement, the Central Bank reported that Gross Domestic Product (GDP) grew 2.7% in 2001, which was one of the highest rates in Latin America last year and came in 0.2 percentage points below the Consensus figure last month.  Last year’s growth figure was below the 3.2% registered in 2000, as economic activity growth boosted by the strong 3.8% expansion in the non-oil sector, since activity in the oil sector dropped 0.9% amidst lower production and prices.  The oil sector sector downturn reflected Venezuelan cuts in its output three times last year.  Venezuela agreed to scale back production by a total of 406,000 barrels per day (bpd) to a 2.67 million bpd production level.  In addition, oil prices dropped significantly following the 11 September attacks, which put further pressure on performance of the oil sector.  In 2001, the price for the Venezuelan basket of crude oils averaged US$ 20.34 per barrel, which was down from US$ 25.91 in 2000. 

Leading the non-oil sector expansion was 13.0% growth in the construction industry, as the government stepped up spending on infrastructure and housing throughout the year.  Similarly, healthy growth was registered in the transport, storage and communications sectors, followed by commerce and manufacturing, all of which grew 8.1% 4.2% and 3.2% respectively.  The only sector to experience lower growth was the finance and insurance, where growth rose just 1.5% in 2001.

Aggregate demand and supply data show that consumption rose 4.9% in 2001, up from 3.9% growth in 2000.  Driving the consumption expansion was 5.9% growth in public consumption, while private consumption increased 4.7%.  Gross fixed investment (including changes in stocks of inventory) rose 12.0%, up from just 1.0% in 2000.

Persistence of oil price decline could prompt economic decline

The prospects for acceleration in the pace of economic growth this year are not promising.  The downward trend in oil prices has not abated.  Even though oil prices have shown some recovery in the beginning of the year, prices remain below the government’s US$ 18 oil price per barrel budgetary assumption for 2000.  On 11 January, the price on the Venezuelan basket of crude oil closed at US$ 17.23 per barrel.  The slump in global oil prices prompted OPEC to implement another 1.5 million bpd production cut starting 1 January 2002, following the decision of non-OPEC producing countries Angola, Mexico, Norway, Oman and the Russian Federation to cut back output by a total 462,500 bpd.  Consensus Forecast participants expect the oil price to recover moderately but to remain below the government’s budgeted oil price level, which is likely to prompt officials to draw down on the funds in the Investment Fund for Macroeconomic Stabilization (FIEM) rather than implement adjustments to the budget, particularly when the need for increased spending is running high given the continued deterioration in the President’s popularity and rising political tensions.

The need for production cutbacks is likely to put further downside pressure on the oil sector, which accounted for 26.4% of GDP in 2001.  The drop in economic activity within the oil sector is likely to spill over to the non-oil sector of the economy and will be reflected in national accounts, as panellists now expect the economy to grow just 1.3%, which is down 0.7 percent from last month.  This year’s growth forecast stands in stark contrast to the government’s 4.1% budget estimate.

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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