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The economy is likely to undergo the worst
recession in history this year, due to price and currency controls and the
shockwave of a two-month nationwide strike. Simultaneously, amid the
depressed domestic demand, prospects for the oil sector do not point towards
a significant jolt for exports. |
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Currency delivery delayed further amid bureaucratic burden
Even though the Central Bank has already transferred US$ 1.3 billion in
foreign currency to the Committee for the Administration of Foreign
Currency (CADIVI, Comisión de Administración de Divisas), the government
administrative agency has so far only authorized the release of US$ 101
million. Firms have not been able to access the funds since CADIVI
requires a host of administrative paperwork before final approval. The
delay in foreign currency delivery threatens to seriously undermine
economic activity, which was already been plummeting as a result of the
two-month nationwide strike. The lack of access to foreign currency is now
not permitting importers to deliver needed consumer goods to the domestic
market (Venezuela imports approximately 60% of its consumer goods) and
scarcity of consumer goods is beginning to emerge. The currency control
induced scarcity is aggravated further by domestic price controls.
CADIVI has been clear that it intends to deliver foreign currency only for
imports of products that the government considers necessary, such as
medicines and basic foods and for holders of foreign currency denominated
debt. Companies that do not fall under these categories are forced to seek
foreign currency in the black market, where the US$ is currently selling
at a 30% to 40% premium. Firms’ balance sheets will be undermined further
by the increased costs induced by the rigid exchange controls and further
bankruptcies are likely to exert additional downside pressure on the
economy. As a result, the financial system will be strained, further
fuelling the economic downward spiral.
Economy in freefall as exchange control cripples domestic demand
The current exchange rate controls, high interest rates, tight credit
conditions, rising unemployment and deteriorating real incomes have served
to force a strong downturn in private consumption. According to the most
recent Central Bank data, retail sales were down 48.3% in January over the
same period a year before, virtually unchanged from the 48.0% decline in
December. Even though both months were characterised by nationwide
strikes, additional data suggest that the plummeting of private
consumption persisted well through the end of the first quarter. According
to the Venezuelan Automobile Chamber (CAVENEZ, Cámara Automotriz de
Venezuela) annual automobile sales dropped 57.2% year-on-year in March,
which was down from the 54.5% contraction observed in February.
Preliminary estimates see activity in the non-oil economy as having
dropped by 15% to 20% in the first quarter.
Lower oil prices loom just as production recovering
According to data from the Organization of the Petroleum Exporting
Countries (OPEC), oil production has recovered to beyond its pre-strike
levels at the end of November last year, with output of 2.5 million
barrels a day in April still a notch below the allotted OPEC quota of 2.8
million barrels per day. However, the rapid conclusion of the Iraq war has
prompted a rapid erosion of oil prices. The price of the Venezuelan basket
of crude oils, which had briefly exceeded the US$ 30 per barrel threshold
in February, promptly dropped back to US$ 20.90 per barrel on 9 May. The
current oil price level is now 23.7% below the price observed at the end
of last year. When combined with the possibility that OPEC may consider
further production cuts this year, as oil from Iraq comes online, the
current oil price decline is even more worrying. Given the importance of
the oil sector in providing foreign currency and government income in
terms of royalties and dividends, a recovery of activity in the oil
sector, which has not seen positive growth since the first quarter of
2001, is essential if the government wishes to bring the economy back on
track.
Participants expect growth to remain absent through the first three
quarters of this year with the economy experiencing successive
double-digit contractions. Therefore, the expected expansion in the fourth
quarter will not be sufficient to compensate for the current weakness and
GDP is expected to plummet for the full-year. While growth will rebound
next year, the expansion is very modest considering the deep contractions
that the economy will have experienced and not enough to bring the economy
back to pre-crisis levels. |
