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Social unrest brings economy to standstill as oil production thwarted
The fourth general strike in a year against the Chávez government -
spearheaded by trade unions and business federations alike - has persisted
up to now. The strike, which began on 2 December, has now seized virtually
all economic sectors, including the strategic oil industry. Workers in
virtually all economic sectors have succumbed to opposition pressures to
bring the economy to a standstill. The refuses to cease its activities
until Chávez either resigns or decides to sanction an initiative, to hold
a national consultative referendum to call for new elections. The
government remains firm in its conviction to oppose the initiative,
claiming that the constitution does not permit the referendum until half
way through the administration’s term, which would be in August 2003. The
government is opposed by the National Electoral Council (CNE, Consejo
Nacional Electoral), which has voted again to conduct a consultative
referendum on 2 February 2003. The Supreme Court had mandated that the CNE
vote a second time on a technicality. If the government decides to let the
vote go ahead and the CNE has sufficient resources to finance a
referendum, the current stalemate may be broken temporarily. However, if
the government resists, further polarization and heightened political
instability is likely and the economic recession will deepen further.
Since mid-December, government and opposition have been in a deadlock,
while an international initiative sponsored by the Organization of
American States (OAS) attempts to bring the parties back to the
negotiation table. So far, the government has reacted to opposition
strikes, protest marches and sabotage by increasing the use of armed
forces to guarantee security.
Since mid-December, the strike has spread to the all-important oil
industry. Workers from state-owned oil company Petróleos de Venezuela S.A.
(PDVSA) have joined the opposition, as sympathies for Chávez, who has
curbed generous privileges, are running low. Oil exports account for more
than 80% of total exports and more than half of government income.
According to some private sector estimates, crude oil production is down
to 190,000 barrels a day, which is approximately 6% of the normal
production of 3.2 million barrels per day. Furthermore, gas production is
down by 80%, with current output targeted to generate electricity for
household consumption. The shutdown in the oil industry in combination
with a virtual standstill in economic activity during the Christmas season
is likely to have made a strong dent in fourth quarter gross domestic
product (GDP). A majority of industrial plants were shut down at the
beginning of the strike with inventories sufficient to last for one month
of staple food. In addition to gasoline, some beverages have begun to run
out already. All foreign and local franchises have been closed since early
December. Some commercial banks are operating just three hours a day,
permitting only deposits and withdrawals, while forbidding other banking
services. Ports are closed and customs officials have joined the strike.
Since many businesses receive the bulk of their revenues during December,
the lack of economic activity is likely to render salary payments
difficult, which may result in reductions of personnel. As a result,
unemployment, which is already at a historic high (17.0% in September), is
likely to rise further. Once the current stalemate comes to an end and
activity resumes, many companies are likely to face payment difficulties,
as receivables will be difficult. This will exerts severe strains on the
financial system, as credit repayment delays or outright delinquencies are
likely to rise.
As a result of the dire economic state of play, Consensus Forecast
participants see the economic recession to have deepened substantially.
Panellists have revised their estimate for fourth quarter 2002 growth
downward substantially from an annual 5.3% contraction expected last month
to a 9.6% drop. In addition, the estimate for the full year GDP variation
was lowered again over last month – by 0.7 percentage points – to a 6.9%
contraction. The government estimates that oil production will not be back
to normal levels until May even if the strike ends soon. Thus, overall
economic activity is unlikely to pick up well into the second half of this
year. As a result, the recession is expected to persist with economic
activity contracting 1.0% this year, which is down 1.9 percentage points
from last month. However, growth forecasts for this year continue to
exhibit great variation with projections ranging between 3.2% growth on
the upper to a 10.0% contraction on the lower end.
Financial markets weaken amid political instability
Due to the more volatile political setting, the sell-off of Venezuelan
assets has accelerated. As a result, the currency deteriorated notably in
December, depreciating 4.5% in nominal terms over the prior month and
closing at 1,401 bolivares to the US$. The December close of the currency
brought the annual depreciation to 45.6% last year, the highest rate since
1996. In the past year, the currency was marred by heightened volatility
with strong monthly variations. A persistence of the observed exchange
rate volatility cannot be dismissed, particularly if the Chávez government
decides not to adopt a more conciliatory tone with opposition forces. As a
result, economic activity is likely to be undermined further, as domestic
prices will fluctuate in line with the exchange rate and will thus render
effective business planning difficult. In the week ending 10 January, the
bolivar lost additional ground, depreciating 6.0% over the end of December
to close 1,490 bolivares to the US$. Participants anticipate the bolivar
depreciation to moderate this year but to remain high, as the currency
drops 21.4% in nominal terms to the US$ to close at 1,809 at year-end. |
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