Venezuela - Economic Briefing March 2004

Political Volatility Set to Stay for the Time Being

The National Electoral Council invalidated almost half of the 3.4 million signatures collected by opposition forces to recall President Chávez.  In addition, authorities have instituted new procedures to delay a final ruling further.  The decision prompted massive nationwide protests and promises to cloud the prospects for resolution to the current political stalemate.  As a result, the economy is likely to rebound below potential.

Election agency delays prompt violent nationwide protests
On 2 March, the National Electoral Council (CNE, Consejo Nacional Electoral) finished its review of the 3.4 million signatures gathered by the opposition for a recall referendum over the Chávez presidency and pro-government legislators.  The CNE announced that just 1.8 million signatures were valid, which falls short of the 2.4 million (20% of electorate) needed to initiate the referendum process.  Authorities claim that additional time will be required for a recount and to verify the authenticity of an additional 1.1 million signatures.  CNE officials appear to have given in to the government, as new unwarranted verification procedures are being adopted arbitrarily following the mandated review period.  Officials now plan to set up centres all over the country to authenticate signatures and will release the final ruling on 31 March, which exceeds the legally mandated 30-day review deadline by more than one month and a half.  In response to continued delays in the CNE’s decision and the actual announcement on 2 March, opposition forces took to the streets again for several days at the beginning of March.  The clashes between police and protestors resulted in an estimated eight deaths but appeared to be abating amid efforts to restart government and opposition dialogue. 

If the opposition signatures are verified, a referendum would be held within 90 days.  Current opinion polls indicate that three quarters of the population would like to recall Chávez.  If the president is recalled, new elections would be held 30 days following the referendum, which could mean that national elections would take place in early August.  However, if the current referendum process is drawn out beyond 19 August (one year past the mid-term for the current presidency) and Chávez is recalled, the constitution requires that the vice-president assume the post and elections will be held at the end of the regular presidential term in 2006.  The government seems keen to protract the referendum beyond the August threshold date even at the risk of heightened political, social instability and a resulting delay in the economic recovery.

Central Bank devalues the currency
On 9 February, the Central Bank decided to devalue the currency by 20% in nominal terms to 1,920 bolivares to the US$.  The move was widely expected, as the 2004 budget assumptions had indicated the likelihood of a devaluation this year.  In last month’s publication, Consensus Forecast participants had anticipated the move to occur within the first quarter.  The devaluation was officially adopted to avert an excessive overvaluation of the currency and to stem speculation with imported goods.  However, the currency devaluation also favours the government’s domestic debt servicing at a time when officials are eager to step up spending to ease current political pressures.  Both the government and Central Bank reiterated that there will be no further devaluation this year.  Meanwhile, the currency has depreciated further in the parallel market, as investors continue to buy US$ by purchasing shares of the national telecommunications company (CANTV, Compañía Anónima Nacional Teléfonos de Venezuela) that are tradable for ADRs and thus convertible to US$.  The so-called “CANTV Dollar” is currently trading 40% above the new official exchange rate.  Consensus Forecast participants do not confide in the government’s assurances that the exchange rate will remain unchanged until the end of the year.  Instead, panellists see the bolivar devaluating by the end of the second quarter and see the currency at 2,590 bolivares to the US$ by year-end. 

Inflation remains controlled despite devaluation
The devaluation is unlikely to pose a significant threat to inflation, as most businesses had already factored the change into their prices following the 2004 budget announcement in October last year.  In February, consumer prices rose 1.6%, which was down from the 2.5% variation observed in the previous month.  The strongest increases were observed in recreation and transport prices, while housing and communications services prices remained well behaved.  As a result of the February consumer price increase, annual inflation dropped from 26.6% in January to 21.9%.  Consensus Forecast participants expect consumer prices pressures to rise throughout the year, particularly as the currency receives further adjustments.  As a result, the annual inflation rate is seen rising to 34.4%, which is up 1.8 percentage points from last month’s Consensus Forecast figures.  Next year, inflation is seen to moderate to 24.4%. 

Economy experiences strong oil sector-induced rebound in final quarter of last year
According to the Central Bank, gross domestic product (GDP) grew 9.0% in the final quarter of last year over the same quarter the previous year, which was well above the government’s estimates and market expectations.  The fourth quarter figure represented a very strong rebound in economic activity when compared to the 7.2% contraction observed in the third quarter.  It should be noted, however, that the growth comes on the back of a very weak comparison base in the year-ago period.  In the fourth quarter 2002, economic activity was crippled by a strike in the last month of the year, which practically wiped out the month from the national accounting books.  As a result, the economy contracted 16.7% in the fourth quarter 2002.  Therefore, even the robust 9.0% expansion recorded in the fourth quarter 2003 is not sufficient to compensate for the previous year’s devastating economic downturn.