Venezuela - Economic Briefing March 2003

Exchange And Capital Controls Likely To Further Undermine Economy

The nationwide strike at the end of last year precipitated the recession even further and prompted the deepest economic downturn in more than fifty years. Political uncertainty and a lack of economic policy transparency are to forestall a recovery this year and deepen recession further. Furthermore, the onerous administrative procedures of the new exchange rate regime jeopardise the regular functioning of the external sector.

Economy tanks in final quarter amid strike-induced standstill
As expected, the Venezuelan economy headed for a steep nosedive in the final quarter of the year, as the nation-wide strike against the government of President Chávez in December practically wiped out the final month from the national accounting books. According to the Central Bank, gross domestic product (GDP) dropped 16.7% in the fourth quarter of 2002 over the same period in 2001. The final quarter figure was well below market expectations and followed on a 5.6% contraction in the third quarter. Moreover, the first two quarters of the year already registered notable declines in economic activity, which brought the annual contraction in GDP to 8.9%, the deepest recession observed in more than 50 years.

Unfavourable developments in GDP were reflected in both the oil and non-oil sectors of the economy, where economic activity declined 25.5% and 12.4% respectively during the fourth quarter. Public sector activity dropped 19.8% compared to 15.0% for the private sector.

In the oil sector, the fourth quarter results were affected principally by the virtual standstill of production and sales activities for crude oil and refined products during December. Nevertheless, private oil companies operating under the oil sector opening in the Orinoco belt continued increase their production levels. The contraction in the oil sector stands in stark contrast to the development of the oil price and breaks the traditional pattern of the Venezuelan economy to follow the boom and bust cycles of the oil price. The average oil price in the final quarter was more than 50% above the level observed in the same quarter in 2001.

The non-oil sector experienced very moderate growth in mining and communications only, where output rose 2.1% and 0.6% respectively. The December standstill in economic activity was particularly detrimental for manufacturing, commerce, construction, transport and storage.

In fact, the manufacturing industry registered a 22.9% decline in activity in the fourth quarter, determined by declines in all sub-sectors. The drop in construction activity was the result of lower public sector demand and lower volume of output in private sector residential and non-residential works. With regards to commerce, the poor showing reflects a strong decline in consumer spending in October and November and the fact that many shops were closed during the December strike. Finally, transport and storage output experienced a 17.4% decline, amid the strong 40.4% decline in imports of goods and services in the final quarter of the year.

Aggregate demand is expected to have dropped 20.7%, well above previous periods, amid the 21.6% decline in domestic and an 18.7% drop in external demand.

Participants do not anticipate a recovery soon, since the current political stalemate is unlikely to be broken until the end of the year and economic activity will be further stifled by strict foreign currency controls. As a result, participants see the recession to last until the last quarter, with economic activity dropping 11.7% for the full year, which is down 4.1 percentage points from last month. Growth should begin to recover strongly by the first quarter of 2004 and annual GDP is expected to expand 9.8% next year, a 3.0 percentage point upward adjustment from last month.