Venezuela - Economic Briefing November 2003

Referendum On Track As Election Authorities Set Time Line

Election authorities have set the dates for signature gathering to recall President Chávez and his coalition legislators in the National Assembly. However, the government is likely to challenge the referendum and the process towards a referendum could prove lengthy. Therefore the current political and social conflict is likely to persist well into next year and the economy will continue to suffer.

Electoral council authorizes signature collection for recall referendum
On 13 October, the National Electoral Council (CNE, Consejo Nacional Electoral) authorized the gathering of signatures for a recall referendum over the Chávez presidency and simultaneously ruled that pro-government legislators could also be subject to the recall intiative. Even though the signature collection will take place in relatively short order on 28 November - 1 December, the process of approving and verifying the signatures is lengthy and is likely to put off the referendum until April next year, assuming that the CNE takes the full amount of procedural time allotted. If President Chávez is recalled, then new elections would be held 30 days after the referendum, which would be in May of next year. The current time schedule would assume that the government does not impede the path towards a referendum by continued legal challenges. Ongoing recalcitrance from the Chávez administration would delay the resolution to persistent political instability and social strife further, thus undermining the possibilities for a more rapid economic turnaround from the current depression.

Annual inflation inches downward amid dire economic state of play and controls
In October, consumer prices rose 1.5%, which was up from the 1.4% increase in the prior month. Nevertheless, the annual inflation rate continued its downward trend observed since May, declining from 26.6% in September to 25.7% in October. Notably higher food and non-alcoholic beverage (+3.6%) and household goods prices (+2.1%) drove consumer prices up in October, whereas price increases in most other categories remained moderate. Wholesale prices are also coming down gradually, as the monthly increase of 1.7% in October was well below the 2.8% hike in the prior month. Nevertheless, the annual wholesale price increase of 42.3% still remains well above the consumer prices variation. The continued divergence of wholesale and consumer prices points towards underlying inflationary pressures, as the government price controls and depressed economic activity do not enable wholesalers to pass through higher prices to consumers. Consensus participants anticipate a 7.6% devaluation of the currency to 1,731 bolivares to the US$ by the end of the year, which is likely to exert some upward pressure on domestic prices. As a result, annual inflation is seen rising moderately from the October level to reach 30.4% by year-end, which is, nevertheless, below the government’s estimate of 35% to 36%. Further devaluation next year and the pickup in economic activity are likely to raise price pressures, as Consensus panellists expect the annual inflation rate to rise to 32.5% in 2004.

Non-oil economy downturn weighs heavy
While activity in the oil economy may pick up some speed in the third quarter, the depression in the non-oil economy is likely to drag down the activity in the economy as a whole. According to the Central Bank, economic activity remained in deep negative territory. In August, retail sales were down 12.2% over the same month last year, which represented a deterioration compared to the prior month, when activity had dropped 11.3% for the same period. With the exception of retail gasoline (+13.5% year-on-year) and food, beverages and tobacco (+10.5% yoy) sales, all sub-sectors contracted strongly. Private manufacturing also deteriorated in August, as activity declined 13.6% over the same month last year, which was down from the 10.8% contraction observed in the previous month. The majority of sub-sectors in the private manufacturing sector remained in deep recession, excluding textile output (+7.0% yoy) and print production (+10.3% yoy).

A series of factors constitute strong impediments for a recovery: foreign currency scarcity due to exchange controls, price controls, high unemployment, tight credit and high interest rates. The Finance Ministry estimates that the economy experienced a contraction of 8% to 9% in the third quarter over the same quarter last year, which is well below the 10.5% contraction anticipated by Consensus participants this month. As a result of the strong contractions in the first three quarters of the year – the government sees gross domestic product (GDP) shrinking by 10% to 11% for this year as a whole, despite the expected pickup in the final quarter. The Consensus figure is roughly in line with the government’s estimate, as participants see a contraction of 11.1%. The economy should receive a strong growth spurt next year, however, the 5.3% growth estimate – well below the government’s 6.5% figure - will be insufficient to correct for the dramatic economic declines observed in the past two years.