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Venezuela - Economic Briefing May 2003

Currency and Price Controls Deepen Economic Recession

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.

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.

 

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Note:  The above text is an abridged version of the LatinFocus Consensus Forecast country briefing.  For more details please click here.

 

 

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