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The economy is currently in its worst
recessions in recent history. The fallout of the two-month nationwide strike
and the extended lag in delivery of foreign currency resulting from
draconian exchange rate controls, is choking off economic activity. If oil
prices remain stable throughout the year, the resumption of production is
likely to help bolster the economy. Nevertheless, the contraction will reach
a record level in the history of Venezuela national accounting books. |
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Economic activity plummets dramatically in first quarter
Data for first quarter economic activity released by the Central Bank
confirmed the worst expectations of a devastating decline, wiping off
almost one third of last year’s first quarter output. Gross domestic
product (GDP) contracted 29.0% in the first quarter over the same quarter
last year. The first quarter decline in economic activity represented a
historic drop and, as expected, was well below the 16.7% contraction
observed in the final quarter of last year and just a notch short of the
30.3% decline presaged by market expectations. The nationwide strike at
the beginning of the year along with draconian price and currency controls
were the key determinants of the dire first quarter economic downturn, as
public sector GDP dropped 34.8% over the same quarter last year compared
to a 25.6% decline in private sector economic activity.
Non-oil GDP developments indicate declines in economic activity throughout
all sectors. The Construction sector experienced the most pronounced
decline, contracting 64.0% in the first quarter over the same quarter last
year. Manufacturing and commerce activity dropped 35.1% and 33.5%
respectively for the same period. On the low end, even the traditionally
stable communications sector, which had registered double-digit growth
rates for five consecutive years until the end of 2001, dropped into
negative territory, experiencing a 1.1% decline over the same quarter in
2002.
The very gradual pick up in oil production since the virtual standstill
during the nationwide strike in December and January was reflected in the
oil sector, which dropped 46.7% in the first quarter over the same quarter
last year. The decline was double the drop observed in the final quarter
of last year and represented the eighth consecutive quarterly decline in
oil sector activity. A notably higher oil price in the first quarter – the
quarterly average price per barrel was 64.6% above its level for the same
period last year – was offset by the staggering scale back in oil
production and investment activities. According to Organization of the
Petroleum Exporting Countries (OPEC) statistics, average production in
Venezuela in the first quarter was 42.5% below its levels for the same
quarter last year. In May, production is likely to have rebounded to its
pre-strike levels of 2.8 million barrels per day, which along with a
special OPEC exception that enables production above quota to recover
December and January short-falls, should boost the oil sector in the
second quarter. In addition, the price of the Venezuelan basket of crude
oils is showing signs of modest improvement, as the price rose 3.2% in May
to US$ 23.7 per barrel. The recovery of the oil sector will bolster the
ailing economy, as the oil sector is an essential provider of foreign
currency and government income.
Despite the positive impact of the rebounding oil sector, a series of
factors is likely to continue to impede any notable recovery in domestic
demand, key among them foreign currency scarcity, price controls, high
unemployment, tight credit and high interest rates. The economy is
anticipated to experience its worst economic contraction in history this
year, with GDP seen to decline well above the 10% contraction announced by
the Central Bank on 4 June. Growth should begin to emerge in the final
quarter of the year but the acceleration and the robust annual growth rate
for next year will be insufficient to correct for the dramatic declines
observed in the past two years.
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