Venezuela - Economic Briefing November 2004

Domestic Demand Recovery Adds to Buoyant Oil Sector

The cyclical recovery from last year’s recession remains in place and is not decelerating as rapidly as anticipated earlier.  The oil sector of the economy, which is benefiting from high oil prices and rising output levels, provides the key explanation for the persistence of strong growth.  Nevertheless, domestic demand also recovers strongly, as interest rates and unemployment are gradually declining.

Healthy domestic demand helps drive economy
While official data for the third quarter have not yet been released, it is evident that the economy remained on a strong expansion path, as recent indicators show that domestic demand is recovering strongly.  National retail sales rose 28.0% in July over the same month last year.  The July figure represented the eighth consecutive month of robust double-digit year-on-year growth and was even slightly above the 26.6% growth rate observed in June.  The strongest growth rates were observed in automotive vehicle (+88.2% year-on-year), supermarket (+53.6% yoy), pharmaceutical/medical supplies (+51.3% yoy) and clothing (+41.4% yoy) sales.  On the downside motorcycle-related sales were unchanged over July last year.  The robust growth trend appears to have continued beyond the third quarter, since the Venezuelan Automobile Chamber (CAVENEZ, Cámara Automotriz de Venezuela) reports that automobile sales rose 120.8% in October over the same month last year, which was down from the 145.0% increase observed in September.

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 increased 102.3% in September over the same month last year, which was up from the already robust 91.5% growth rate registered in August.  Unemployment dropped to 14.5% in September, which was up moderately from the 14.2% observed the prior month.  Nevertheless, the annual average unemployment rate continued its downward trend and dropped from 16.1% in August to 15.8% in September.  The current average unemployment rate is now well below the 18.4% rate registered in the same period last year.  To a large extent the current downward trend in unemployment is attributable to the recovery in the labour-intensive construction industry but also increasingly manufacturing.

Oil sector provides additional growth impetus to non-oil economy’s rebound
In October, oil prices continued along a clear upward trend.  The price of the Venezuelan basket of crude oils reached US$ 43.45 per barrel at the end of October, which was well above of the US$ 39.86 per barrel price observed at the end of September and 28.3% above the levels observed in the same month last year.  As a result, the average year-to-date price reached US$ 33.48 per barrel well ahead of the government’s budgeted oil price of US$ 18.50 per barrel for this year, which should provide additional resources for increased public sector spending.  Continued uncertainty in the Middle East, concerns about inventory levels in the United States and a strike in the Nigerian oil sector were key factors behind the October price spike.  Despite several output increases by member countries of the Organization of the Petroleum Exporting Countries (OPEC) this year, the current oil price remains above the official OPEC price band of US$ 22 to US$ 28 per barrel used to guide production levels.  Starting 1 November 2004, members raised production levels by 1 million barrels per day (mbpd), which brings Venezuela’s quota to 3.1 mbpd from 2.9 mbpd.  Given that oil prices remain at historical highs, the increase in the Venezuela production quota will further benefit economic activity in the oil sector and the overall economic recovery.