Venezuela - Economic Briefing April 2004

Growth Recovering but Political Stalemate Limits Potential Rebound

The government is intent on continuing to block opposition efforts on a referendum to recall President Chávez.  While the National Electoral Council continues to draw out the verification of signatures with new bureaucratic procedures and deadlines, the government is using the judiciary to stall the process.  A drawn out political stalemate is therefore likely and the current economic recovery will remain below potential as a result.

Economy set for vigorous rebound in first quarter aided by weak comparison base last year
The acceleration of economic activity observed in the final quarter of last year appears to be carrying over into the first quarter.  Recent economic statistics indicate that the recovery is widening, as non-oil sectors benefit from dropping unemployment, the stable exchange rate and gradually declining inflation. 

Non-oil economy bolstered by manufacturing and retail
According to the Central Bank, private manufacturing rose 100.4% in January over the same month last year, which was down from the 179.9% year-on-year increase observed in the prior month.  A year ago, the economy had come to a virtual standstill amid nation-wide strikes staged by the opposition to topple President Chávez.  Mushrooming leather goods and textile production provided the key driver behind the strong January manufacturing figure.  Almost all sectors experienced annual growth over 100% with the exception of machinery and electrical equipment (+24.0% yoy) as well as food, beverages and tobacco (+31.8% yoy).

Similarly, private consumption is recovering strongly, as the stable exchange rate and the moderation in inflation are providing needed leeway for an increase in activity.  According to the Central Bank, retail sales (including automobiles) rose 41.3% in January over the same month last year, which was up from the 28.2% expansion observed in the previous month.  The pick up in retail sales was particularly pronounced in automobile fuels, automotive parts and clothing/textiles sales.

Oil sector rebound to persist as oil prices remain high and OPEC cuts
On 31 March, the Organization of the Petroleum Exporting Countries (OPEC) decided to cut oil production by 1 million barrels per day (bpd), to 23.5 million bpd as it had previously announced on 10 February in Algiers.  Despite the fact that the oil price has remained persistently above the official OPEC price band of US$ 22 to US$ 28 per barrel in the first quarter of the year, OPEC member countries decided that the world crude oil market remained well supplied, particularly given that the global economy was entering a period of traditionally lower demand and that crude stocks had been building up notably.  As a result of the OPEC cut, Venezuela’s production quota dropped by 115,000 bpd (4.1% over the previous quota) to 2.7 million bpd.  According to OPEC data, Venezuelan oil production remained below quota in February at 2.65 million bpd, which means that the country has leeway to step up output in the coming months.  The chance for increased production is likely to further bolster the rebounding oil sector, already benefiting from a persistence of high oil prices.  In March, the price on the Venezuela basket of crude oils closed at US$ 30.86 per barrel, which was 30.3% above the price observed at the end of the same month last year.  Furthermore, at its current level the average price for the first three months of the year of US$ 28.87 per barrel, is firmly above the government’s budgeted oil price of US$ 18.50 per barrel for this year.  The oil sector is essentially the backbone of the economy since it constitutes the key provider of foreign exchange and government revenues in terms of royalties and dividends.  Therefore, the current revival of growth will remain heavily contingent upon a sustained rebound in this sector.

Economic recovery underway but pace to moderate throughout year
The pronounced nature of the current economic rebound is in part overstated due to the very low comparison base last year, when the economy came to a standstill as the result of a two-month nationwide strike against the current government.  Nevertheless, some economic fundamentals have also improved, namely, the stability of the currency, the moderation of inflation, gradually declining interest rates and lower unemployment.  Favourable prospects for the oil sector and the improvement in the non-oil sector presage a further boost to economic activity in the first quarter of this year.  In fact, Consensus Forecast panellists expect gross domestic product (GDP) to have grown 23.2% in the first quarter over the same quarter last year.  But that comes on the back of a 27.9% contraction in the first quarter 2003 and thus falls short of a full recovery.  Moreover, the pace of economic growth is likely to moderate quickly in the succeeding quarters, as the low comparison base of last year falls away.  In addition, the persistence of the current political and social turmoil is likely to remain a key impediment to a more pronounced and sustainable economic rebound.  As a result, growth is seen to reach just 1.5% in the fourth quarter.  Annual GDP is seen to expand by 7.4%, which is up 0.4 percentage points from last month’s forecast.  The declining growth trend will carry over into next year, as economic growth is anticipated to reach a more moderate 3.7%.