|
The oil sector is beginning to recover amid
continued favourable oil prices and the resumption of oil production to pre-crisis
levels. The recovery of the oil, sector promises to bolster the economy from
a more pronounced contraction this year. However, as long as an end to
political tensions remains out of sight, the economy is unlikely to recover
to full potential. |
|
Government presents 2004 budget
On 9 October, the government presented its 49 trillion bolivares (US$ 25.0
billion) draft budget for 2004. The draft was approved by the council of
ministers and will now go to the legislature for approval. The
government’s draft banks heavily on a robust economic recovery and
indicates that devaluation will be undertaken next year. The government
assumes that the economy will expand 6.5% next year, a notable pickup but
modest when considering the staggering declines in output that the economy
experienced over the past two years. Furthermore, the government
anticipates an adjustment to the current exchange rate, which is currently
fixed at 1,600 bolivares to the US$. The average exchange rate of 1,960
bolivares to the US$ implicit to the government’s budget represents a
16.2% devaluation when considering the average exchange rate estimated for
this year. Despite the likelihood that economic activity will pick up and
price pressures resulting from devaluation, annual average inflation is
seen to drop to 26.0%.
Price and currency controls bring down inflation further
Consumer prices rose 1.4% in September, which was up from 1.3% registered
in the prior month but lower than expectations of 2.2%. Higher education
as well as food and non-alcoholic beverages prices accounted for the
consumer price hike observed in September. Transport prices as well as
alcoholic beverages and tobacco prices, on the other hand, remained
virtually unchanged. As a result of the September reading, the annual
inflation rate declined from 30.4% in August to 26.6%, well below the
government’s year-end estimate of 35% to 36%. Wholesale prices, however,
continue to increase at a faster pace than consumer prices, which may
indicate that inflationary pressures persist, as wholesalers are unable to
transfer higher prices to consumers amid the dire state of the economy and
government-imposed price controls. In September, wholesale prices rose at
a more pronounced 2.8%, up from the 1.8% pace observed in August; the
annual rate dropped from 46.5% in August to 43.5%. The declining trend in
consumer price increases registered in the past four months has prompted
Consensus Forecast participants to again lower their forecast for this
year. Panellists have cut 7.2 percentage points off last month’s year-end
inflation forecast, which brings the Consensus figure of 31.1% below the
official forecast. Since some participants continue to believe that the
currency is likely to be devaluated in the final quarter of the year,
which would exert upward pressure on consumer prices, the year-end rate
remains above the September annual rate. With the likelihood for a
devaluation increasing over time, inflation is likely to experience
further upward pressure next year, more so since economic activity is
expected to rebound. Thus, Consensus Forecast participants anticipate
year-end inflation rising to 33.1% - 0.6 percentage points above last
month’s figure.
Unemployment remains high at beginning of second half and draws down
private consumption
Unemployment reached 17.8% in August, which was down from 18.3% observed
in the previous month but remained 1.6 percentage points above the rate
observed for the same month last year. Furthermore, the annual average
unemployment rate, which smoothes out monthly volatilities, rose to 0.2
percentage points from July to 18.3% in August. Additionally, if the
government would not be maintaining its dismissal freeze, unemployment
would most likely have spiked even more. The lack of a more pronounced
improvement in employment is stifling consumption activity. According to
the Central Bank, retail sales were down 11.3% in July over the same month
last year, which represented an improvement from the 20.7% drop observed
in June. The decline in retail activity was particularly pronounced in
small supermarket (- 59.3% year-on-year), automobile (- 53.4% yoy) and
textiles (- 43.8% yoy) sales. The only sector that did not experience a
notable drop in retail activity was gasoline sales, which rose 8.6% in
July over the same month last year.
|
