Venezuela - Economic Briefing January 2004

Economy May Be Exiting Recession but Politics Overshadows

The economy is showing first signs of emerging from one of the worst recessions the country experienced in the past decades.  However, price and currency controls continue to dampen the possibilities for a rapid turnaround.  Furthermore, the likelihood that politics will remain at the forefront for at least the first half of this year, will further undermine the prospects for a rebound in investment.

Recall referendum moves ahead
On 19 December, the opposition Democratic Coordinator (Coordinadora Democrática) submitted 3.5 million signatures to the National Electoral Council (CNE, Consejo Nacional Electoral), which easily exceeded the 2.5 million needed to convoke a referendum to recall president Chávez.  The CNE’s procedural requirements would provide for the organization of a referendum by April or May.  If the president is recalled, then new elections could be held in June.  The CNE’s current time schedule presumes that the Chávez administration does not legally dispute the recall referendum.  Impeding the electoral process would postpone a final resolution to the unrelenting political instability and serve to undermine the economic turnaround from the current depression.

Oil prices remain healthy but production level uncertainty clouds overall economy
The government and the state-owned oil company (PDVSA, Petroléos de Venezuela S.A.) assert that oil production levels have recovered fully from the shock induced by a two-month nationwide strike at the beginning of 2003.  However, even though the annual average oil price for the Venezuelan basket of crude oils was 15.9% above its 2002 level, the industry remained in recession for most of the year, implying that production levels did not reach full capacity as claimed by the government.  According to data from the Organization of the Petroleum Exporting Countries (OPEC) oil output in November reached 2.6 million barrels per day (mbpd), which was 12.5% below the level in the same month in 2002 and remained below the allotted OPEC quota of 2.8 mbpd.  Data indicate that the oil sector may have revived moderately in the final quarter of the year.  The development in the oil industry constitutes a key element for the speed and sustainability of the economic recovery expected for this year.  Continued meagre growth would drag down the overall performance of the economy, given that the sector accounts for more than a quarter of total economic activity.

Manufacturing industry lingering in recession but may be easing out
Recent indicators suggest that economic activity has experienced some recovery in the final quarter of the year.  According to the Central Bank, output in the private manufacturing industry was down 4.8% in October over the same month 2002, which represented an improvement when compared to the 5.3% drop in activity experienced in September.  Within the private manufacturing industry, furniture and textile output experienced the strongest turnaround from declines in activity to strong growth of 11.4% and 19.2% respectively over October 2002.  However, the majority of sub-sectors monitored by the Central Bank remained in recession with electrical machinery output experiencing the strongest decline in activity of 40.2%.  The small improvement in October was due to declining interest rates and increased credit availability.  The Central Bank’s main benchmark discount rate has come down 115 basis points from the end of 2002 to 28.5% in November.  Furthermore, commercial bank lending rose 12.5% in November over the previous month, which was strongly up from a 2.8% expansion in October and represented the fifth consecutive monthly increase.

Consumption easing out of the trough
Even though retail sales still remain in negative territory, data show improvement.  In October, retail sales activity was down 1.8% over the same month the prior year, which represented a notable pick up when compared to the 4.3% contraction observed in September.  Food, drinks and tobacco sales experienced the strongest increase in activity, followed by automotive fuel sales.  However, several sub-sectors, including automobiles and hardware experienced strong contractions.  On a positive note, the general wholesale and retail sales index experienced its first positive growth rate in October (+1.4% year-on-year) since January 2002.