Venezuela - Economic Briefing June 2004

Oil Drives Economic Activity but Domestic Demand also Rebounds

.  As expected, economic activity is rebounding strongly.  Key behind the recovery is the booming oil sector, which is benefiting from higher oil prices and volumes.  Nevertheless, the non-oil sector is also recovering notably amid a more favourable international outlook and more stable domestic conditions.  The strong pickup in activity, however, also reflects a very weak comparison base last year, when the economy was suffering the repercussions of a two-month nationwide strike.  Meanwhile, the recall referendum over the Chávez presidency is likely to proceed in early August.

Economy rebounds strongly in first quarter
In the first quarter, gross domestic product (GDP) grew 29.8% compared to the same quarter last year.  The first quarter figure was well above Central Bank’s preliminary forecast of 10.0% announced in April and even exceeded the Consensus Forecast estimate of 23.2% from last month.  Global demand grew 32.1% in the first quarter, which was driven by 17.7% growth in domestic demand and a 72.0% expansion in exports.  The strong first quarter reading was bolstered by the very weak comparison base in the first quarter of last year, when the economy was battling the detrimental effects of a nationwide strike in December 2002/January 2003 that wiped two months from the national accounting books.

Public sector drives up economic activity
In the first quarter, the strong oil price and higher associated oil revenues of the fiscal accounts lifted activity in the public sector by a whopping 42.0% compared to the first quarter last year, which was up from the already robust 14.8% expansion observed in the prior quarter.  Private sector activity expanded at a more moderate but buoyant 23.4% for the same period, which represented a significant pickup compared to the 5.4% growth registered in the final quarter of last year.

Favourable oil scenario bolsters economic rebound
In the first quarter, the oil sector grew 72.5% over the same quarter last year, which almost tripled the 25.0% expansion in the fourth quarter.  The higher oil price was the key behind the strong recovery.  In the first quarter the average price on the Venezuelan basket of crude oils was US$ 28.97 per barrel, which was 23.4% above the first quarter 2003.  Furthermore, according to data from the Organization of Petroleum Exporting Countries (OPEC), the average Venezuelan oil production in the first quarter of 1.63 million barrels per day was 87.2% above its levels for the first quarter last year. 

Non-oil economy picks up speed as manufacturing booms
Within the non-oil economy, all sectors experienced robust growth.  The manufacturing industry was particularly buoyant in the first quarter, as activity boomed 48.0% over the same quarter last year, up from a 15.7% expansion in the previous quarter.  Similarly, commerce and financial services experienced strong increases in activity with growth reaching 27.9% and 27.2% respectively over the same quarter last year.  The only sectors not to register double-digit growth rates were real estate and public services, where growth reached 8.5% and 7.1% respectively.  The gradual easing of exchange controls and declining interest rates have been a key factor behind the strong expansion in recovery of the non-oil economy.

Outlook improves amid robust pickup
The current oil price is well above the government’s budgeted US$ 18.50 per barrel and the difference is anticipated to generate between US$ 5 billion and US$ 7 billion in additional fiscal revenues, according to the Central Bank.  The additional resources are likely to ensure that the public sector continues to provide a key impetus to the current economic rebound.  Consensus Forecast participants expect GDP to grow 8.0% this year, which is up 0.7 percentage points from last month’s estimate but remains below the 9% to 10% government estimate.  Next year, economic growth is anticipated to decelerate notably, as the weak comparison base of the prior year gives way to more robust economic activity.  As a result, growth is seen to slow to 3.5%, which unchanged from last month’s forecast.