Venezuela - Economic Briefing November 2004

Domestic Demand Recovery Adds to Buoyant Oil Sector (continued)

Outlook robust but also benefiting from low comparison base last year
The Central Bank expects gross domestic product (GDP) to expand 11.3% this year, driven by a 15.3% expansion in the oil sector and a 9.1% pick up in the non-oil economy.  The Central Bank is confident that the prospects for a strong final quarter remain good, given persistently high oil prices and the robust recovery in domestic demand.  Consensus Forecast participants share monetary officials’ optimism and anticipate economic growth to reach 12.2%, which is up 0.3 percentage points from last month’s Consensus Forecast figure.  Next year, the government estimates growth to decelerate to 4.0% to 6.0%, with non-oil sector activity rising 4.0% to 6.0% and the oil economy 5.0% to 7.0%.  Consensus Forecast participants, however, anticipate a more notable moderation in economic activity and see GDP to decelerate to 3.8%, which is down 0.3 percentage points from last month.

Government anticipates devaluation in currency next year
The Finance Ministry plans a devaluation of the currency of 12.7% next year to 2,150 bolivares to the US$.  The planned devaluation is less than the adjustment undertaken on 9 February this year, when the government devalued the currency 16.7%.  The majority of Consensus Forecast participants does not anticipate the government to undertake any further adjustment.  However, as some participants expect the currency to be devalued more notably, the Consensus Forecast figure for the exchange rate next year is at 2,299 bolivares to the US$, which represents a 16.5% nominal devaluation.  Consensus Forecast participants anticipate that inflation will be below the government’s estimate for this year.  This year, consumer prices are anticipated to rise 22.4%, which down 0.4 percentage points from last month and remains below the government’s 26.0% estimate.  However, next year, the Finance Ministry estimates that inflation will reach 15%, which is well below the Consensus Forecast estimate of 22.1%.  Since inflation is anticipate to outpace the currency devaluations both this and next year, the bolivar is likely to appreciate notably in real terms.

Government sends 2005 budget to Congress
On 19 October, the government sent its budget proposal for the coming year to Congress.  The total budget for 2005 is expected to reach 69.3 trillion bolivares (US$ 32.2 billion or 30.9% of GDP), which is up 18.8% from this year’s estimated budget in nominal terms.  Officials expect the oil price to drop with the average price reaching US$ 23 per barrel, average inflation at 18.0% and oil production at 3.3 to 3.6 mbpd.  Oil revenues from royalties and dividends from state-owned oil company Petróleos de Venezuela S.A. (PDVSA) are expected to provide 50.6% of total current revenues with the balance coming from tax collection and mining activities.  In terms of spending, outlays for social spending (education, health, housing, social development and social security) will account for 38.7% of total current spending, up from 36.9% this year.  The government sees the fiscal deficit reaching 1.4% of GDP, which is well below the Consensus Forecast figure of 3.5% of GDP.  The multi-annual budget plan sees the budget deficit widening to 2.5% and 2.6% of GDP in 2006 and 2007 respectively, which is much more optimistic than the 4.3% and 4.2% of GDP estimated by Consensus Forecast participants.