Venezuela - Economic Briefing July 2004

Economy Remains Poised for Strong Rebound but Political Woes Continue

Economic expansion is quickly decelerating from the booming growth observed since the beginning of year, as the weak comparison base of last year gives way to a recovering economy.  However, improved economic fundamentals, particularly the high oil price and declining unemployment, are likely to provide a solid backdrop for robust growth this year.  Nevertheless, the sustainability of the current recovery remains heavily dependent on a resolution to the current political stalemate, which could persist in spite of the 15 August recall referendum.

Economy rebounds strongly in first quarter
The strong expansion in the first quarter – aided by a very weak comparison base last year – is likely to have persisted into the second quarter.  While the external sector was buffered further by the robust oil price, the domestic economy benefited from the more stable exchange rate, declining unemployment and lower interest rates.

Manufacturing rebound continues but moderates
Private manufacturing rose 24.6% in April over the same month last year, which was down from the 42.2% year-on-year increase observed in the prior month.  The moderation in growth rates observed since December is the result of the lower comparison base from a year ago, when the economy had come to a virtual standstill amid nation-wide strikes staged by the opposition to topple President Chávez.  The weak comparison of last year is giving way.  Mushrooming leather goods, automotive vehicle and textile output provided the key driver behind the strong April reading of the manufacturing sector.  The majority of the sub-sectors in manufacturing experienced healthy growth with the exception of machinery and electrical equipment (-8.4% year-on-year) as well as common metals (-13.3% yoy).

Private consumption bolstered by declining unemployment
Similarly, private consumption is rebounding strongly but growth rates appear to be moderating.  The gradual decline in unemployment, improved credit conditions and declining inflation are serving to boost activity.  According to the National Statistical Institute (INE), nationwide unemployment reached 15.6% in March, which was down from 17.1% observed in the previous month and 3.5 percentage points below the rate observed for the same month last year.  Furthermore, the annual average unemployment rate, which smoothes out monthly volatilities, dropped 0.4 percentage points from February to 17.4% in March.  Private sector assessments of unemployment trends confirm the decline.  According to Datanalisis, a local research firm, unemployment reached 17.2% in May, which was unchanged from April but down 1.3 percentage points from March.  Furthermore, the May unemployment rate was well below the 23.3% registered for the same month last year.  The decline in unemployment remains a key factor behind the private consumption recovery.  According to the Central Bank, retail sales rose 24.7% in April over the same month last year, virtually unchanged compared to the already very strong 24.3% increase registered the previous month.  The improvement in retail activity was particularly pronounced in small supermarkets (+39.2% yoy), hardware (+28.7% yoy) and textiles (+27.1% yoy).  The only sector to experience a notable drop in retail activity was household appliance sales, which declined 25.3% in April over the same month last year.

High oil prices and OPEC production cuts likely to bolster economy further this year
The economy has received a healthy boost by high oil prices in the second quarter.  According to the Ministry of Energy and Mines, the price on the Venezuela basket of crude oils averaged US$ 31.87 per barrel in the second quarter of this year, which was 36.3% above the price in the same quarter last year.  Moreover, according to data from the Organization of the Petroleum Exporting Countries (OPEC), average Venezuelan oil output for the first two months of the second quarter was 2.66 million barrels per day (mbpd), which was 1.3% above production levels for the same period last year.  At current production levels the government still has room to raise output to the 2.9 mbpd OPEC quota allotted to Venezuela as of 1 July.  Moreover, at its current level the oil price remains firmly above the government’s budgeted oil price of US$ 18.50 per barrel for this year.  Given the importance of the oil economy as a key foreign exchange and government revenue supplier, the persistence of a healthy rebound in this sector will be critical to reviving the both the public and private sectors of the economy.