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Middle East
turmoil sustains oil price rebound
The oil price recovery has persisted almost unabated since the end of last
year. According to the Ministry of Energy and Mines (MEM), the price of
the Venezuelan basket of crude oils has increased by 38.7% since the end
of December to reach US$ 22.71 per barrel on 5 April and the year-to-date
average price of US$ 17.90 per barrel is now firmly above the government’s
budgeted oil price of US$ 16 per barrel.
Iraq oil
export stop and Venezuelan general strikes likely to boost oil prices
further
The Chávez government had attributed the oil price rebound exclusively to
successful production cutbacks implemented under the auspices of OPEC over
the past year. Venezuela has trimmed its output quota three times since
the beginning of 2001 by a total of 406,000 barrels per day (bpd) to the
current 2.67 million bpd production level. While the production scale-back
may be responsible for the first phase of the oil price recovery, the more
recent oil price spike is mainly due to the escalation of the Middle East
crisis. In addition, the decision on 8 April by Iraq to halt oil
production for a month as a political tool to force an ending of Israeli
hostilities in Palestinian territories, has raised concerns that other
Arab countries may follow suit in solidarity. Nervousness over world oil
supply had been fuelled further by the fact that general strikes in
Venezuela would persist and threaten to temporarily halt exports and would
thus induce an all-out oil crisis. Even though an easing of the current
Middle East and the domestic crisis could easily prompt a sudden reversal
of the upward trend in international oil prices, Consensus Forecast
participants believe that oil prices are likely to stabilize at higher
levels than anticipated earlier in the year. Accordingly, the Consensus
Forecast for the oil price for this year has been revised upward from the
March edition to this month.
Adverse
economic policy setting thwarts positive impulse from healthy oil price
Despite the increased optimism about higher oil prices, Consensus
participants have not undertaken any revisions to their economic growth
forecasts, as tight credit conditions and accelerated currency
depreciation are likely to undercut any broad-based economic recovery.
Current forecasts do not yet factor in the newest political developments
and a possible change in economic policy. As such, current forecasts
foresee the adverse economic scenario that stifled growth last year to
persist this year, with prospects dimmed further by the likely downside
effect that devaluation and higher inflation will have on aggregate
demand, as a contraction of real incomes will stifle consumption.
According to the Consensus the economy has entered into recession in the
first quarter of this year. The slump is expected to deepen further
through the third quarter of the year with the economy not easing out of
the recession until the first quarter of 2003, when growth is expected to
resume. The scope of the expected recession for this year has been revised
further downward by 0.3 percentage points since last month. Even though
the officials lowered the growth estimate from 3.5% to 1-2% for this year
on 4 April, the current expectations for economic activity still remain in
stark contrast to the panellists'
pessimism.
Inflation on the upswing but likely to
drop
According to the National Statistical Institute (INE), consumer prices
surged 4.2% in March, which was the highest monthly increase observed
since October 1996. The strongest increases were experienced in transport
as well as food and non-alcoholic drink prices, which rose 8.5% and 6.1%
respectively. The March increase in consumer prices raised the annual
inflation rate to 17.6%, a strong upward surge when compared to the 13.7%
registered in February. As a consequence, the annual inflation rate in the
first quarter was on target with the level expected by Consensus
participants.
If the current pace of price increases persists unabated through the end
of the year, annual inflation would reach 55.3% by year-end. Nevertheless,
participants expect the price pressures to ease towards the end of the
year, which should help to keep the annual inflation rate contained by the
end of the year. In fact, some participants have been encouraged by the
recent exchange rate strengthening and are revising their forecasts for
inflation accordingly. As a result, this month’s inflation forecast has
been lowered by 2.3 percentage points from the March figure. However, the
current Consensus number remains well above the government’s revised
inflation figure of 20% announced on 4 April. Furthermore, participants
are less optimistic about next year, anticipating inflation to drop only
moderately.
Currency
rebounds despite uncertain prospects
The bolivar continued to recover from the strong depreciation experienced
in February immediately following the devaluation. After depreciating
27.9% nominally in February, the currency appreciated 19.0% in March,
closing at 891.75 bolivares to the US$ on 27 March. The currency continued
to hold its ground at the beginning of April appreciating 5.8% through
prior to the military coup. The currency bounced back further on 12 April
by appreciating 3.4% in one day to reach 815 bolivares to the US$. The
recent bolivar recovery has been attributed principally to the recent
spike in oil prices, the maintenance of high interest rates and to the
income tax season, which is temporarily fuelling bolivar demand and is
expected to reverse by April. It remains to early to see a trend towards a
stronger bolivar as the result of the most recent turmoil but more
favourable economic policy may serve to bolster the currency further.
On the other hand, developments in the country’s external balances begin
to raise concerns among analysts. The Central Bank confirmed that the
current account reverted to a deficit in the last quarter of 2001, as
import growth remained strong (+6.5% over the same quarter in 2000) amidst
a strong deterioration in export performance (-35.5% over Q4 2000).
Panellists are likely to monitor developments in the current account
closely in the first quarter of this year, as any further deterioration is
likely to prompt a further weakening of the currency. Participants expect
the bolivar to deteriorate rapidly following the current respite with the
currency depreciating further by
year-end. According to participants, the deterioration in the exchange
rate is expected to ease next year as the currency depreciates at a
lower rate.
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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