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Economic activity remains in slump but oil sector provides shield
In the second quarter, gross domestic product (GDP) contracted 9.4% over
the same quarter last year. The second quarter figure was better than the
14.4% drop expected by the market and represented an improvement when
compared to the 27.6% year-on-year contraction (revised upwards from a
previously reported 29.0% decline) observed in the previous quarter.
However, it marks the sixth consecutive quarter of negative growth and has
set back the economy to levels last seen in 1994.
Non-oil economy remains mired in deep recession amid exchange controls and
depressed demand
The non-oil sector of the economy was principally responsible for the
second quarter decline, as activity declined 10.4% over the same quarter
last year (Q1: -19.0% yoy). With the exception of the communications
sector, which registered 0.9% growth in the second quarter over the same
quarter last year (Q1: -1.1% yoy), all sectors remained in negative
territory. The construction industry and the commerce sector experienced
the most pronounced declines, with activity dropping 50.7% (Q1: -61.5%
yoy) and 17.4% (Q1: 30.5% yoy) respectively. The non-oil economy continues
to suffer the consequences of rigid exchange controls, tight credit
conditions, high unemployment and continued political uncertainty, which
undermine any possibilities for a rapid recovery from the devastating
first quarter recession. According to the Central Bank, the government
agency responsible for administering the exchange controls, the Committee
for the Administration of Foreign Currency (Cadivi, Comisión de
Administración de Divisas), is delivering just US$ 20 million in foreign
currency to businesses daily, which is only one third of the average
levels before the adoption of exchange rate controls. As a result, the
highly import-dependent domestic firms have to rely on the black market to
obtain foreign currency, where the bolivar is currently trading at a 30%
to 40% premium to the official rate of 1,600 bolivares to the US$.
Oil
output rising but not sufficient to buffer economy from strong decline
Even though the oil sector economy contracted 2.9% over the same quarter
last year, the second quarter figure represented a major improvement when
compared to the first quarter, when the sector recorded a massive 47.3%
fallout. The oil sector has been bolstered by healthier oil prices, which
were up 7.4% in the second quarter compared to the same period last year.
Furthermore, the government has almost doubled oil output to an average
2.6 million barrels per day (mbpd) in the second quarter, compared to just
1.4 mbpd in the first quarter, according to data from the Organization of
the Petroleum Exporting Countries (OPEC). The second quarter production
figure remains just below the allotted OPEC quota of 2.8 mbpd. According
to the state-owned oil company, Petróleos de Venezuela S.A. (PDVSA), oil
production is back up to normal output levels. However, oil sector experts
remain concerned about the deterioration in PDVSA’s managerial capacity.
Earlier in the year, the Chávez administration fired almost the entire
management. Missing management experience and low oil sector investment so
far this year could undermine the sustainability of the current production
recovery.
Unemployment levels virtually unchanged in July
Employment data for July corroborate the dismal state of the economy.
According to the National Statistical Institute (INE), open unemployment
dropped a notch from 18.4% in June to 18.1% in July. The July figure
confirmed the slight improvement in unemployment notable since February
but remained well above the 16.4% unemployment rate registered in July
last year. The combination of high unemployment and deterioration in real
wages, in the wake of currency depreciation and the ensuing higher
inflation, will continue to exert downward pressure on private
consumption.
Participants expect the oil price to remain firm throughout this year,
which should help maintain the oil economy stable throughout 2003.
Nevertheless, the non-oil sector of the economy is likely to continue to
drag down economic performance. As a result, participants expect the GDP
to contract 12.6% this year. This month’s figure is 0.6 percentage points
better than last month but still confirms a historic decline in output
this year. Given the very weak comparison base set by this year’s
recession and better prospects for the domestic economy; growth is likely
to come in at a robust 6.8% next year, which is 0.3 percentage points
below last month’s forecast.
Consumer prices moderate amid controls and weak domestic demand
In August, consumer prices rose 1.3%, which was down from the 1.8%
increase observed in the previous month. The strongest monthly increases
were observed in recreational and transportation prices. The increases
were partially compensated for by education and housing service prices,
which declined over the previous month. As a result of the August figure,
annual inflation dropped from 31.9% in July to 30.4%, which is beneath the
official government year-end inflation forecast of 35% to 36%. Despite the
declining inflationary trend observed in the past few months, participants
have revised their forecast for this year upward, as uncertainty over the
government’s intentions over exchange rate policy through the end of the
year continue to raise concerns over a possible inflationary bout prompted
by eventual exchange rate devaluation. As a result, the current year-end
inflation forecast of 38.2% still remains above the government’s official
projection. Despite the likelihood of a pickup in the domestic economy and
exchange rate devaluation, participants anticipate inflation to drop to
32.5% next year, which is up 2.5 percentage points from last month’s
forecast.
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