Overview of Venezuela Economy:-Venezuela
remains highly dependent on oil revenues, which account for roughly 95% of
export earnings, about 55% of the federal budget revenues, and around 30% of
GDP. A nationwide strike between December 2002 and February 2003 had
far-reaching economic consequences - real GDP declined by around 9% in 2002 and
8% in 2003 - but economic output since then has recovered strongly. Fueled by
high oil prices, record government spending helped to boost GDP by about 10% in
2006, 8% in 2007, and nearly 5% in 2008, before a sharp drop in oil prices
caused a contraction in 2009-10. This spending, combined with recent minimum
wage hikes and improved access to domestic credit, has created a consumption boom
but has come at the cost of higher inflation - roughly 32% in 2008, and slowing
only slightly to 30% in 2010, despite the lengthy downturn. Imports also jumped
significantly before the recession of 2009. President Hugo CHAVEZ's continued
efforts to increase the government's control of the economy by nationalizing
firms in the agribusiness, financial, construction, oil, and steel sectors have
hurt the private investment environment, reduced productive capacity, and
slowed non-petroleum exports. In the first half of 2010 Venezuela faced the
prospect of lengthy nationwide blackouts when its main hydroelectric power
plant - which provides more than 35% of the country's electricity - nearly shut
down. In January, 2010, CHAVEZ announced a dual exchange rate system for the
Bolivar and closed the unofficial foreign exchange market - the
"parallel" market - in an effort to stem inflation and slow the
currency's depreciation. The foreign exchange system offers a 2.6 Bolivar per
dollar rate for imports of essentials, including food, medicine, and industrial
machinery, and a 4.3 Bolivar per dollar rate for imports of other products,
including cars and telephones.
GDP (purchasing power parity):
|
$344.2 billion (2010 est.)
(country comparison to the world: 35)
$354.1 billion (2009 est.)
$366.2 billion (2008 est.)
note: data are in 2010 US dollars |
$285.2 billion (2009
est.)
|
|
-2.8% (2010 est.)
(country comparison to the world: 208)
-3.3% (2009 est.)
4.8% (2008 est.)
|
|
$12,600 (2010 est.)
(country comparison to the world: 92)
$13,200 (2009 est.)
$13,900 (2008 est.)
note: data are in 2010 US dollars |
|
agriculture: 4.1%
industry: 34.9% services: 61.1% (2009 est.) |
|
13.3 million (2009
est.)
(country comparison to the world: 40) |
|
agriculture: 13%
industry: 23% services: 64% (1997 est.) |
|
12.1% (2010 est.)
(country comparison to the world: 130)
7.9% (2009 est.)
|
|
37.9% (yearend 2005
est.)
|
|
lowest 10%: 1.7%
highest 10%: 32.7% (2006) |
|
41 (2009)
(country comparison to the world: 57)
49.5 (1998)
|
|
16.4% of GDP (2009
est.)
(country comparison to the world: 122) |
|
Revenues: $50.12
billion
expenditures: $56.53 billion (2009 est.) |
|
25.5% of GDP (2010 est.)
(country comparison to the world: 98)
18% of GDP (2009 est.)
|
|
29.8% (2010 est.)
(country comparison to the world: 224)
27.1% (2009 est.)
|
|
29.5% (31 December 2009)
(country comparison to the world: 3)
33.5% (31 December 2008)
|
|
19.89% (31 December 2009 est.)
(country comparison to the world: 12)
22.37% (31 December 2008 est.)
|
|
$69.36 billion (31 December 2010 est)
$93.19 billion (31 December 2009 est)
|
|
$78.11 billion (31 December 2010 est.)
$107 billion (31 December 2009 est.)
|
|
$54.22 billion (31 December 2010 est.)
(country comparison to the world: 62)
$75.87 billion (31 December 2009 est.)
|
|
$NA (31 December 2008)
$NA (31 December 2007)
$8.251 billion (31 December 2006)
|
|
corn, sorghum,
sugarcane, rice, bananas, vegetables, coffee; beef, pork, milk, eggs; fish
|
|
petroleum,
construction materials, food processing, textiles; iron ore mining, steel,
aluminum; motor vehicle assembly
|
|
-8% (2009 est.)
(country comparison to the world: 166) |
|
113.3 billion kWh
(2007 est.)
(country comparison to the world: 29) |
|
83.02 billion kWh
(2007 est.)
(country comparison to the world: 34) |
|
540 million kWh (2007
est.)
|
|
1.651 billion kWh
(2007 est.)
|
|
2.472 million bbl/day
(2009 est.)
(country comparison to the world: 11) |
|
740,000 bbl/day (2009
est.)
(country comparison to the world: 23) |
|
2.182 million bbl/day
(2007 est.)
(country comparison to the world: 8) |
|
0 bbl/day (2007 est.)
(country comparison to the world: 207) |
|
97.77 billion bbl (1
January 2010 est.)
(country comparison to the world: 7) |
|
23.06 billion cu m
(2009 est.)
(country comparison to the world: 29) |
|
24.86 billion cu m
(2009 est.)
(country comparison to the world: 31) |
|
1.8 billion cu m
(2009 est.)
(country comparison to the world: 48) |
|
4.983 trillion cu m
(1 January 2010 est.)
(country comparison to the world: 9) |
|
$22.07 billion (2010 est.)
(country comparison to the world: 15)
$8.561 billion (2009 est.)
|
|
$64.87 billion (2010 est.)
(country comparison to the world: 44)
$57.6 billion (2009 est.)
|
|
petroleum, bauxite
and aluminum, minerals, chemicals, agricultural products, basic manufactures
|
|
US 35.18%,
Netherlands Antilles 8.56%
note: excludes oil exports; Venezuela last published petroleum figures by country in 2008 (2009) |
|
$31.37 billion (2010 est.)
(country comparison to the world: 57)
$38.44 billion (2009 est.)
|
|
agricultural
products, raw materials, machinery and equipment, transport equipment,
construction materials
|
|
US 23.66%, Colombia
14.43%, Brazil 9.13%, China 8.44%, Mexico 5.47% (2009)
|
|
$29.49 billion (31 December 2010 est.)
(country comparison to the world: 35)
$35 billion (31 December 2009 est.)
|
|
$55.61 billion (31 December 2010 est.)
(country comparison to the world: 54)
$53.58 billion (31 December 2009 est.)
|
|
$37.71 billion (31 December 2010 est.)
(country comparison to the world: 58)
$41.21 billion (31 December 2009 est.)
|
|
$20.97 billion (31 December 2010 est.)
(country comparison to the world: 39)
$17.67 billion (31 December 2009 est.)
|
|
bolivars (VEB) per US
dollar - 4.3039 (2010), 2.1522 (2009), 2.147 (2008), 2,147 (2007), 2,147
(2006)
|
Economic Development, Recession, and Recovery:
As can be seen in Figure 1, the Venezuelan economy grew very
rapidly from the first quarter of 2003, after the oil strike that had caused a
severe recession came to an end. This expansion lasted for nearly six years,
producing cumulative record economic growth for the country, with GDP expanding
by 95 percent from trough (Q1 2003) to peak (Q4 2008). During this expansion,
poverty was reduced by 47 percent and extreme poverty by 70 percent (see Table
3). Real social spending per person tripled, and there were greatly expanded
public programs in health care and education; unemployment fell by half and
there were large gains in employment.It is also worth noting that, according
the UN Economic Commission on Latin America, Venezuela had the sharpest
reduction in inequality in the Americas during this expansion. The fall in the
Gini coefficient from 50.0 to 41.2 from 2002-2008 gave Venezuela the least
unequal distribution of income in Latin America. Table 1 shows annual data for
the Venezuelan economy since 2002; Table 2 shows quarterly data (seasonally
adjusted) since 2007. In both tables it can be seen that the economy slowed
significantly in 2008; and Table 2 shows that growth was negative for each
quarter of 2009. For 2010, the first quarter came in at negative 2.0 percent at
an annualized rate, and second quarter growth is positive 5.2 percent. Thus the
recession appears to be over. This point is important because it has not yet
been recognized that the Venezuelan economy is very likely in recovery. As
noted above, the projections and media reports are generally very pessimistic.
One technical reason for this could be the use by many sources of
year-over-year data, which is not as good an indicator for whether the economy
is recovering, as is the change in GDP from one quarter to the
next. Thus, second quarter 2010 GDP, seasonally adjusted, is up 5.2 percent
over the first quarter of 2010 at an annualized rate; whereas compared to
second quarter of 2009 it is down 1.9 percent. The story is similar for the
first quarter of 2010: it is down 2.0 percent of GDP, seasonally adjusted, from
the previous quarter, but down 5.2 percent of GDP as compared with the first
quarter of 2009.
As noted above, the
quarterly numbers in this paper are seasonally adjusted. The data from the
Central Bank of Venezuela, for the first two quarters of 2010, are not
seasonally adjusted; this may have contributed to the slowness of most analysts
to recognize the likely economic recovery underway in Venezuela. Without
seasonally adjusted data, it is impossible to measure quarter-on quarter
growth, since there is a strong seasonal component to the variation in
quarterly GDP data.
We therefore performed
a seasonal adjustment, using standard methodology, which yielded the data cited
above, and shown in Figure 1 and Table 2.
Looking at the most
recent data by sector, it can be seen that manufacturing, which has been in
decline for seven of the last eight quarters, grew by 4.2 percent. Manufacturing
is about 15 percent of the Venezuelan economy, and has been hard hit recently
by electricity shortages; water and electricity supply continued their sharp
decline in the second quarter, at -14.5 percent. As this crisis has now passed,
we would expect that a recovery of electricity supply would contribute to a
stronger overall recovery in the quarters ahead.
The change in exchange
rate regulation also depressed growth in the second quarter, by causing
considerable disruption due to lack of availability of foreign exchange. The
new currency market, regulated by the Central Bank, went into effect in June.
The increased availability of foreign exchange, relative to the second quarter,
is also likely to boost growth in the quarters ahead, so long as it is
maintained.
Another positive sign
is the recovery of gross fixed capital formation, which had collapsed during
2009. For the first two quarters of 2010, it is up by 1.7 and 48.0 percent,
respectively.
To be sure, any
conclusion drawn from just one or two quarters of data is necessarily
tentative, and especially with so much depending on the second quarter.
Moreover, the near future will depend enormously on what the government does.
Nonetheless, the data indicate that it is more likely that not than an economic
recovery is already under way and that the recession is probably over.
Future
Prospects for the Venezuelan Economy
If the
Venezuelan economy is indeed recovering, the question remains whether this
recovery will accelerate and be sustainable. It appears that this will depend
primarily on government policy.
As noted
above, there are many arguments that the Venezuelan economy will remain mired
in recession or stagnation, and/or is doomed to long term decline. Here we will
consider these possibilities and arguments. One possibility is that the
government has created an unfavorable investment climate, and that this will
severely limit the country’s growth and development. As noted above, private
capital formation as a percentage of GDP has declined significantly, even
before the 2009 recession. This is to be expected with the kinds of policy
changes that Venezuela has had, since most of the private sector has been
against most of the policy changes and against the government in general. The
governments of Bolivia and Ecuador have also faced some of the same hostility
from sectors of the business community, as have historically most left or
left-of-center governments. The question is whether this necessarily means that
the Venezuelan economy, which grew very rapidly in the last expansion from
2003-2008, is likely to face significant constraints on its future growth due
to negative investor sentiment.
The answer
to this question is most likely no. As can be seen in Figure 3, private capital
formation rebounded very rapidly as the economic recovery began in 2003, despite
intense hostility on the part of the most powerful business interests – which
had just completed two attempts within one year to overthrow the government.
This indicates that many domestic investors, when there are profitable
opportunities to invest within the country, will take advantage of them.
Although most business people in Venezuela are conservative and against the
government, they can also be pragmatic. The probability of any investor losing
money to expropriation in Venezuela remains very small; it is doubtful that
this is a serious practical consideration for most private investment
decisions, as compared to the normal risks associated with uncertainty over
prices of inputs and output, and demand conditions.
The
government can also compensate for the current fall-off in private investment
by increasing public investment. This was done successfully in 2008, as can be
seen in Figure 3. As the recent electricity crisis has shown, Venezuela has a
great need for public investment in infrastructure. The government can also
invest in residential construction, transportation, hospitals, and other public
needs. All of this can compensate for weak private investment, as necessary.
And as can be seen in Table 2, private consumption follows the growth of the economy.
Eventually, if it becomes clear that the government is committed to maintaining
economic growth, we would expect private investment to increase, as it did from
2003-2006.
The
government can increase and maintain economic growth so long as it does not
face a foreign exchange crisis. It is important to understand that this is the
binding constraint on countries that do not have “hard” currencies (as compared
to the U.S., which can pay for its imports in dollars). The fiscal deficit is
not a binding constraint, since it can be financed with domestic currency.
Venezuela
is not in danger of a foreign exchange crisis. Its official reserves at the
Central Bank are currently at US$28 billion. This is a reasonably high level of
reserves, however: approximately half of imports for 2008 and over two-thirds
for the reduced imports of 2009. (The most widely used benchmark
is that international reserves should be sufficient to cover three months of
imports.)
Furthermore, Venezuela
probably does not need as much of a reserve cushion than most countries,
because of its currency controls. It is believed that the government has other
reserves in addition to those at the Central Bank, although it is impossible to
know exactly how much. Over the past year, Venezuela’s current account surplus
was US$19.8 billion, or about 6.3 percent of GDP, which is sizeable.
Furthermore, in the
case of a collapse of oil prices, the government has considerable borrowing
capacity. This was demonstrated in April with a $20 billion credit from China.
Venezuela’s total central government public debt is just 18.4 percent of GDP;
and its foreign public debt is 10.8 percent of GDP. Even if we add in the debt
of PDVSA, the state-owned oil company – about 6 percent of GDP – this is a low
foreign and domestic public debt burden, which gives the government plenty of
room to borrow if there are unforeseen external shocks. It is worth noting that
the U.S. Energy Information Administration forecasts oil prices at $85 per
barrel over the next
5 years, this is 20%
above the current price. Venezuela’s inflation rate is another often mentioned
problem, which is generally reported as “the highest in Latin America.” Figure
3 shows monthly year-over-year inflation at 30.9 percent. This is high
inflation, although there are no signs that it is accelerating: inflation over
the last three months is running at an annualized rate of 26 percent, and core
inflation has been declining since last September. So long as it does not
accelerate, Venezuela’s inflation is not by itself necessarily a significant
impediment to future economic growth, and can be lowered gradually. It is also
worth emphasizing that the predicted surge in inflation following the
devaluation did not happen – sources quoted by the media were in the range of
40-60 percent annual inflation for this year. In fact, the 26 percent inflation
over the last three months is lower than inflation for the three months prior
to the January devaluation.
The main impact of
inflation has been an indirect effect, through its influence on the real
exchange rate. The nominal exchange rate was fixed at 2.15 from March 2005
until January of 2010. With the exchange rate fixed and inflation averaging
about 20 percent annually over the last seven years, the Bolivar appreciated rapidly
in real terms. This has made imports increasingly cheap and non-oil exports
increasingly expensive, in real terms. During the expansion, manufacturing
basically held its own at about 16 percent of GDP; the fastest growing sectors
were non-tradable such as finance and insurance, communications, and
construction.
In
January of 2010, the government devalued the bolivar to 4.3 to the dollar for
most imports, bringing it much closer to a competitive level. At the same time,
a rate of 2.6 per dollar was established for sectors deemed essential, which
include food, education, science and technology, health, machinery and
equipment, family remittances and transfers to students living abroad. In June
2010 the government implemented a new currency market intended to replace the
parallel market, regulated by the Central Bank; the exchange rate for this
market has most recently been about 5.3 bolivars Fuertes to the dollar.
The devaluations have
reversed a good part of the real appreciation of the currency over the last 5 years,
but not all of it. If Venezuela wants to diversify its economy away from oil –
which it has not done over the last decade – it will most likely need a more
competitive exchange rate.
Nonetheless, for the
narrow question at hand here – whether the Venezuelan economy can resume and
sustain strong economic growth – the exchange rate is unlikely to be
determinative. It will affect the sectoral mix of economic growth, tilting it
toward non tradable as during the previous expansion. But the pace of economic
growth is more likely to be determined by the government’s other macroeconomic
policies, most importantly public spending.
Of course it will be
better if Venezuela can diversify away from oil sooner rather than later, and minimize
the inefficiencies associated with controlling its exchange rate and
maintaining currency controls. And as noted above, because Venezuela’s
inflation is much higher than that of its trading partners, it will continue to
cause unwanted real appreciation of the Bolivar until inflation is brought to
lower levels.
But because of
Venezuela’s position as an oil exporter – and one sitting on 500 billion
barrels of oil, perhaps the largest reserves in the world – it is very unlikely
to run into foreign exchange constraints. Therefore its growth, especially in
the near future, will depend overwhelmingly on the government’s commitment to
maintaining adequate levels of aggregate demand. (In that respect, its
immediate situation is similar to that of the United States, the Euro zone
economies, and many other economies whose recovery is currently weak and
uncertain.) In the immediate future, the
Venezuelan economy’s
dependence on oil is not a particular disadvantage, as countries dependent on
manufacturing exports, for example, are at least as likely to be hard hit by a
global slowdown – if it happens – as are oil exporters.
If the government
maintains adequate levels of aggregate demand – including a commitment to
strong counter-cyclical policies as necessary – the Venezuelan economy will
grow, and the progress in employment, living standards, poverty reduction, and
income equality that were seen during the previous expansion will continue. Of
course this is not guaranteed – it depends on whether the government is willing
to make, and maintain, this commitment to growth. The government will also have
to make sure that sufficient foreign exchange is made available for imports
that are inputs to production. If these commitments are met, then economic
growth, as well as the accompanying social progress, can continue for years,
regardless of inefficiencies, development strategies (or lack thereof), or
other economic problems. This is very different from the situation of many
countries (e.g. the U.S., UK, Spain) in 2007, for example, where asset bubbles
had reached the point that a serious collapse in demand was guaranteed, and a
severe recession could be predicted – although even in these countries, the
recession and subsequent long-term unemployment could have been far more
limited if the proper fiscal policies were implemented. Although there are a
number of analysts who are predicting that the Venezuelan economy is on the
verge of inevitable (and long-anticipated) ruin, there is nothing in the recent
data – or that of the last decade – to indicate that this is true.
References:
·
2011 CIA World Fact
book.
·
Encyclopedia of
Nations.
·
Banco Central de Venezuela. 2010. “Información
EstadÃstica.”
·
Economist Intelligence Unit. 2010a. “Latin America
economy: Rates hikes in fashion?” 10 June.
·
Forero, Juan. 2010. “Venezuelan Consumers Fear
Inflation, Dump Cash After Chavez Devalues
·
Bolivar.” Washington
Post. 13
January.
Bolivar.” Washington
Post. 13
January.
