Venezuela - Economic Briefing June 2004

Oil Drives Economic Activity but Domestic Demand also Rebounds (continued)

Inflation remains subdued amid price and exchange controls
Despite the robust pickup in economic activity, inflation has remained contained.  In May, consumer prices rose 1.28%, which was down slightly from the 1.32% increase observed in April and represented to lowest monthly rate observed since December 2002.  With the exception of restaurants/hotels and food/non-alcoholic beverages, all other categories experienced more subdued increases in May.  As a result of the more moderate May increase, annual inflation dropped from 23.1% in April to 21.8%.  Consensus Forecast participants expect annual inflation to rise this year, however, as the anticipated exchange rate devaluation is likely to exert pressure on domestic prices.  As a result, consumer prices are seen as rising 30.7% by the end of the year, which is down a full percentage point from last month’s forecast but remains well above the government’s 26.0% estimate.  Next year, the Consensus expects inflation to moderate to 23.8%.

Current account surplus widens further and covers capital account deficit
In the first quarter, the current account balance registered a surplus of US$ 3.5 billion, which was below the US$ 4.1 billion expected by the Consensus Forecast.  Nevertheless, the first quarter surplus was above the US$ 2.7 billion recorded in the final quarter of last year and well ahead of the US$ 787 million surplus registered in the same period in 2003.  The improvement over last year’s first quarter current account balance is mainly due to the surge in the trade surplus, which more than doubled from US$ 2.1 billion in the first quarter of last year to US$ 4.9 billion.  Booming exports, which grew by 90.7%, accounted for the widening of the trade surplus, as imports expanded at a strong but lesser 50.2% for the same period.  Oil exports expanded a vigorous 104.8% in the first quarter, amid higher oil prices and an increase in production volume.  Non-oil exports also experienced a strong boost of 40.3% over the same quarter last year, as the recovery in global demand translated into increased activity.

The strong current account surplus was more than sufficient to cover the capital account deficit of US$ 1.8 billion in the first quarter.  The first quarter figure was considerably above the deficit recorded in the preceding quarter (US$ 976 million) and contrasted the small surplus observed in the same quarter last year (US$ 1 million).  The worsening over last year’s surplus resulted from higher foreign direct and portfolio investment outflows. 

This year, Consensus Forecast participants expect the current account surplus to narrow considerably throughout this year from the US$ 12.3 billion annualized balance in the first quarter to US$ 8.5 billion by year-end.  Furthermore, according to the Consensus, the narrowing in the trade surplus next year, amid a less propitious oil export setting, is likely to narrow the current account surplus further to US$ 5.5 billion.

Recall referendum approved by electoral authorities
On 27 to 31 May, the National Electoral Council (CNE, Consejo Nacional Electoral) re-verified some 1.2 million contested signatures gathered by the opposition for a referendum to recall president Chávez.  According to the CNE, more than the necessary 2.44 million signatures were considered valid following the re-verification.  If the government does not impede the current electoral process further with legal challenges, a nationwide referendum is likely to be held on 8 August.  If voters decide to recall the President, then new elections would be held 30 days following the referendum, which could mean that national elections could take place in early September.  A March poll by the local firm Datanalisis shows that 59% of the electorate is in favour of a recall.  If the president is not recalled, then Chávez would remain in office through the end of his term in February 2006.