The economy appears to be heading for a
deeper recession. Consumption trends indicate that recently approved tax
reforms and a weaker bolivar are likely to further undermine economic
activity, which is already plagued by a non-performing oil sector.
Nevertheless, higher oil prices may provide some light at the end of the
Economic recession likely to have deepened amid currency and political
According to recent indicators from the Central Bank, the downturn in
economic activity continued to deepen in the third quarter of this year.
Private sector manufacturing industry production (adjusted for inflation)
declined 8.3% in September over the same month last year, which
represented further deterioration compared to the 6.9% drop in August for
the same period. The most pronounced declines were observed in basic
metals and food, beverage and tobacco output, where activity was down
29.8% and 12.3% respectively over September last year. Furthermore, the
Venezuelan Chamber of Construction (CVC, Cámara Venezolana de la
Construcción) reports that activity remains depressed in construction as a
result of public sector infrastructure cuts and private sector investment
stagnation. According to the CVC, the sector is likely to contract
approximately 30% this year, following on a 13.0% expansion last year.
Finally, more than 40% of the 1.1 million construction workers are
unemployed and the Chamber estimates that this number will rise to over
50% by year-end.
Automobile sales tank despite imminent tax
Meanwhile, the contraction effects of the currency depreciation on real
incomes and unemployment continue to offset a recovery in consumption.
According to the National Statistical Institute (INE), unemployment rose
to 16.4% in July from 16.2% in June. To date, the Central Bank has yet to
release consumption data for 2002. As such, the only available updated
indicator to gauge consumption trends is vehicle sales. According to the
Venezuelan Automobile Chamber (CAVENEZ), vehicle sales were down 49.0% in
August over the same month last year, compared to the 43.7% contraction
reported for July. The August figure brought the moving 12-month average
growth rate of vehicle sales down to -7.4%, which was the first
contraction observed since May 2000. Vehicle sales were expected to
receive a strong boost in light of the entering into force of hikes in the
value added tax and the debit tax. Nevertheless, the strong depreciation
in the currency and the correspondent spike in prices, in addition to
continued tight credit conditions, curtailed a rebound.
Growth forecasts revised downward yet
The deepening of the current economic recession is being reflected in this
month’s forecast, as participants have again revised their projections
downward. Consensus Forecast panellists lowered the forecast for 2002
Gross domestic product (GDP) 1.3 percentage points from last month. The
Consensus figure is well below the official estimate of a 3.9% contraction
this year. Moreover, participants are increasingly sceptical about
prospects for next year with growth forecasts also well below the
government’s 3.5% to 4.5% growth estimate.
Accelerated currency depreciation persists
The bolivar continued along its weakening trend in September with
the currency losing 4.3% of its value to the US$, down slightly from the
5.9% depreciation in August. At 1,475 bolivares to the US$ the
currency is now 48.3% weaker than at the end of last year. The bolivar
weakened by an additional 0.7% through 4 October, closing at 1,485 to the
US$. A combination of continued political uncertainty, rising concerns
about the government’s fiscal position and mounting uncertainty of the
likely scope of regional contagion from Brazil are contributing to the
weakening of the bolivar. As concerns over the likely inflationary
pass-through of the currency depreciation to domestic prices mount, the
Central Bank responded by raising the benchmark discount rate from 38.5%
on 24 September to 40.0% on 1 October. The rate had remained unchanged at
37% for five consecutive months.
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Venezuela. For more details please click here.