Venezuela - Economic Briefing May 2004

Economic Recovery Spreading as Domestic Demand Rebound Complements Oil Sector

The economy is experiencing a more broad-based recovery, as the oil sector’s rebound is now being accompanied by pronounced growth in domestic demand.  Robust growth rates, however, reflect a very weak comparison base last year, when the economy entered deep recession following a nationwide strike that practically erased two months from the national accounting books.  Sustainability of the current growth trajectory remains heavily dependent on oil prices and a resolution to the current political and social gridlock.

Economy recovers amid high oil prices and rising domestic demand
While official data for the first quarter have not yet been released, it is evident that the economy has exited the recession of last year in the first quarter, as recent indicators show that domestic demand is undergoing a healthy recovery.  According to the Central Bank, national retail sales rose 26.2% in February over the same month last year.  The February figure represented the third consecutive month of robust double digit year-on-year growth but was well below the 41.3% growth rate observed in January.  The strongest growth rates were observed in household goods and supermarket sales, where activity was up 65.1% and 59.8% respectively over the same month last year.  On the downside automotive vehicle, textiles and clothing as well as pharmaceutical sales dropped over February last year.  The accelerating growth trend appears to have continued beyond the end of the first quarter, since the Venezuelan Automobile Chamber (CAVENEZ, Cámara Automotriz de Venezuela) reports automobile sales rose 111.0% in April over the same month last year, which was down from the 181.8% increase observed in the previous month.  As with most other indicators, the growth rates reflect a very weak comparison base last year, when the economy entered a severe economic downturn due to a nationwide strike that wiped two months of economic activity from the national accounting books.  

Private consumption benefits from lower unemployment and credit easing
Declining unemployment, decelerating inflation and the easing of credit are key factors behind the current recovery in private consumption.  According to the Superintendence of Banks and Other Financial Institutions (SUDEBAN, Superintendencia de Bancos y Otras Instituciones Financieras), consumer loans were up 15.4% in February over the same month last year.  The February figure was up from the already robust 12.0% growth rate registered in January.  The most recent unemployment data from December last year indicate that the jobless rate experienced a strong decline throughout the year to reach 14.1% by year-end, which was down from 20.7% at the beginning of 2003.

Robust manufacturing recovery underway
The manufacturing industry is also experiencing a strong rebound.  In February, private manufacturing rose 33.4% over the same month last year, which was down from a much more pronounced 90.7% expansion in activity the prior month.  Virtually all sectors experienced double-digit growth over February last year.  In particular, manufacturing output was bolstered by strong growth in leather goods, wood products and automotive vehicles production.  Electrical equipment and machinery in addition to food beverage and tobacco output actually declined over the previous year.  The decline in interest rates, improved credit conditions and a gradual easing of exchange controls have helped bolster manufacturing activity.  According to the Foreign Currency Administration Commission (CADIVI, Comisión de Administración de Divisas), the release of US$ 4.6 billion was approved in the first quarter of the year, which was almost 50% of the total for 2003.

Construction sector activity reviving
The construction sector has also exited recession.  According to the Central Bank, wholesale volume of construction materials rose 55.1% in February over the same month last year.  The February figure was above the already robust 49.0% expansion observed the prior month.  More recent data from the Venezuelan Cement Producers Association (AVPC, Asociación Venezolana de Productores de Cemento) confirms a robust expansion in the construction industry, as cement sales for construction rose 59.9% in the first quarter over the same quarter last year.  According to AVPC, the current expansion in the construction sector is attributable to increased private sector activity, as government infrastructure investment remains absent.

Oil sector likely to provide additional growth impetus to non-oil economy’s rebound
Oil prices continue along a clear upward trend.  The price of the Venezuelan basket of crude oils reached US$ 31.21 per barrel at the end of April, which was the highest level observed since November 2000 and was 35.9% above last year’s price.  In addition, the average price for the first four months of the year of US$ 29.20 per barrel exceeded the government’s budgeted oil price of US$ 18.50 per barrel for this year, which should provide additional resources for increased public sector investment.  Rising uncertainty in the Middle East and declining inventories in the United States have been key drivers behind the current rally in international oil prices, which have remained well above the official OPEC price band of US$ 22 to US$ 28 per barrel for several months.  The persistence of high oil prices has OPEC officials back peddling on the recent 360,000 barrel per day (bpd) production cut adopted by OPEC members on 1 April.  The 4% cutback in the quota to 23.5 million bpd could be reversed in the 3 June meeting in Beirut, since member countries are increasingly concerned that continued high prices could begin to threaten the global economy.  An increase in the Venezuela production quota from the current 2.7 million bpd would further benefit the current rebound in the oil sector and the overall economic recovery.