COUNTRY REPORT Venezuela Venezuela at a glance: 2002-03 OVERVIEW The president, Hugo Chávez, will become more isolated. Opposition groups will step up antigovernment campaigns, but will struggle to rival Mr Chávez s popular appeal among the poor. Higher oil prices than previously forecast will boost government revenue in 2002-03, but the real economy is unlikely to feel the benefit. Oil production will remain flat, capital flight will stay high and tight monetary policy, designed to contain exchange-rate slippage and inflation, will keep interest rates at cripplingly high levels. The Economist Intelligence Unit expects the economy to contract by 1.4% in 2002. Our forecast for 2003 of growth of 4.1% represents a correction rather than a recovery of economic momentum. Depressed demand will restrain price increases, but inflation will still average 29% in the forecast period. Key changes from last month Political outlook The nationwide strike on April 9th may prove a turning point in the stand-off between the government and its opponents. Economic policy outlook Despite increased oil revenue and the recent devaluation, the public finances will remain in deficit, owing to higher spending. On April 7th the government announced an increase in the minimum wage of 20%, effective from May 1st, which will fuel inflationary pressures. In March consumer prices rose by 4.2%, the highest monthly rate since 1996, taking accumulated consumer price inflation for the first three months to 7%. Economic forecast Upward revisions to our global forecast and tensions in the Middle East have caused us to revise up our oil price forecast. We now expect Brent crude to average US$23.04/barrel in 2002 and US$22.94/b in 2003, implying an average price of US$20.20/b for Venezuelan crude, previously forecast at US$17.30/b. April 2002 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom
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Venezuela 1 Outlook for 2002-03 Political outlook Domestic politics Political instability will rise in the short term as the opposition intensifies its criticism of the government and divisions in the ruling Movimiento Quinta República (MVR) increase. The opposition has led a number of well-supported antigovernment protests, and these mobilisations will continue as opponents of the president, Hugo Chávez, seek to maintain pressure on his government. Although united in its hostility towards the government, the opposition has no common platform and its demands range from the rescinding of government policies to a military coup. Nor does the opposition have a single spokesperson. The historically powerful parties displaced by Mr Chávez in the elections of 1998 play a central, but slightly covert, role in the opposition front, as they remain unpopular and have failed to embrace the internal reforms required to make them a legitimate alternative to the current administration. The government has responded to the opposition rallies with countermobilisations that have been characterised by increasing levels of violence. The maintenance of this counter-mobilisation strategy will serve both to exacerbate the perception of escalating risk and to polarise domestic politics further. The emergence of the opposition has precipitated splits within the ruling MVR, with moderate factions calling for dialogue and the more radical elements of the party, popularly dubbed talibanistas, supporting more drastic reform. Recent cabinet changes, including the replacement of the interior minister and leader of the moderate faction, Luis Miquilena, may serve to increase the leverage of the radicals in Mr Chávez s inner circle, further undermining opportunities for dialogue between the government and its opponents. In a recent survey by a polling company, Datanalisis, support for Mr Chávez fell to 35%. This was not, however, mirrored by a rise in support for opposition parties, most of which remain discredited and unpopular. Instead, the fall in support for Mr Chávez is indicative of a growing popular alienation with the political stalemate. Despite the emergence of a powerful body of opposition, Mr Chávez s administration shows little inclination to compromise. Indeed, it has become more determined. Mr Chávez has refused to rescind the controversial executive board changes introduced at Petroléos de Venezuela (PDVSA, the state-owned oil company). On April 7th he announced the dismissal of seven high-ranking managers who had protested against the changes. The administration is also challenging the legality of the results of the October 2001 trade union elections, which led to victory for the opposition in the votes for leadership posts of the Confederación de Trabajadores Venezolanas (CTV, the main trade union confederation). There is additional concern over the increasing levels of political violence between pro- and antigovernment forces and the unwillingness of the government to rein in the Bolivarian circles, comprising MVR activists committed to the defence of the revolution. An opportunity to test the relative popularity of the political parties will come in August. Under the terms of the 1999 constitution, the mandate of mayors and state governors can be revoked at mid-term if supported by a majority of voters
2 Venezuela in each constituency. The MVR is expected to lose at least four of the 12 state governorships it currently controls, having prevailed in the elections to these governorships with a margin of less than 1%. International relations Venezuela is becoming increasingly isolated on the world scene. Relations with the US have yet to improve from the low ebb reached in October 2001 when Mr Chávez condemned US military action in Afghanistan and voiced support for countries and organisations the US has dubbed terrorists or supporters of terrorism. Howver, Mr Chávez did strongly support the decision by the president of Colombia, Andrés Pastrana, to break off peace negotiations with the left-wing Fuerzas Armadas Revolucionarias de Colombia guerrillas, with whom Mr Chávez s government has repeatedly been accused of maintaining links. Exclusion from the ongoing trade negotiations for a Free-Trade Area of the Americas will deepen the country s isolation in the short term. Economic policy outlook Policy trends Monetary policy Fiscal policy The decision in February to abandon the crawling-peg exchange rate, which had contributed to an unsustainable overvaluation of the bolívar, is a positive development. However, the policy environment remains inconsistent and unpredictable. The stand-off between PDVSA and the government is threatening a prolonged period of damaging industrial action, while a contentious land reform is generating violence and uncertainty in the countryside. Since it came to power in 1999, the government has failed to improve the structure of the public finances. An overstaffed, corrupt bureaucracy will continue to hamper institutional efficiency, while persistent policy uncertainty will deter investment in manufacturing and services, where most employment is created. A controversial package of 49 laws passed hastily in 2001 under the expiring Ley Habilitante (enabling legislation) and currently under consideration by the Supreme Court is also generating debate and protest. Even if the Court upholds the package of laws, the controversial nature of some of the new legislation, particularly those laws covering hydrocarbons and land reform, will probably continue to deter both foreign and domestic investment. In an attempt to contain rising inflation, fuelled by currency devaluation, the Banco Central de Venezuela (BCV, the Central Bank) has resorted to a continued liquidity squeeze, pushing up interest rates. The average lending rate charged by the six largest commercial banks rose from 28.6% in October- December 2001 to 35.4% in January and to 54.7% in February-March. By the end of February, M2 (comprising bank deposits and currency in circulation) had contracted by 10.2% since the start of the year, compared with 4.9% at the same point of 2001 and 2.8% at the same point of 2000. A series of fiscal adjustments was announced at the same time as the devaluation. The revised budget is based on a forecast for Venezuelan oil prices of US$16/barrel, down from US$18.50/b previously, while projected debt issuance has been more than halved, to Bs4.1trn (US$3.9bn). Overall revenue is now
Venezuela 3 estimated at Bs20.6trn, down by 22% on the previous projection of Bs26.4trn, while estimated public spending has been reduced by 7%, to Bs22.7trn. The spending budget for PDVSA for 2000 has been cut by 28%. The temporary funding initiatives entrench reliance on oil revenue and suggest that forecast rising oil prices will be relied upon to mask the urgency of the need for structural reform. To make up for any shortfalls, the government intends to use US$2.6bn from the Fondo de Inversión para la Estabilización Macroeconómica (FIEM, the Macroeconomic Stabilisation Investment Fund) and will claim Bs1trn in unrealised profits from the Central Bank s foreign-exchange accounts. However, even this revised budget will prove unachievable if, as forecast by the Economist Intelligence Unit, GDP growth falls below official projections. We expect a budget deficit of 1.5% of GDP in 2002. Economic forecast International assumptions We have revised up our forecast for US GDP growth in 2002-03. We now expect growth in the US to reach 3% in 2002, compared with our previous forecast of 2.2%, following a further upward revision to the official estimate of growth in the fourth quarter of 2001. First-quarter growth is expected to prove strong, with investment and consumption growth likely to exceed earlier expectations. Monetary tightening during 2003 will slow the economy from 2004. Higher growth in the US will contribute to higher oil demand. This, combined with upward pressure on prices stemming from tensions in the Middle East, has led us to raise our oil price forecast for 2002-03. We now expect Brent crude to average US$23.04/b in 2002, compared with US$19.40/b previously, and US$22.94/b in 2003, up from US$20.50/b previously, implying an average price of around US$20.20/b for Venezuelan crude, previously forecast at US$17.30/b. International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.3 2.7 4.1 OECD 3.8 1.0 1.5 3.0 EU 3.4 1.6 1.3 2.6 Exchange rates (av) :US$ 107.8 121.5 134.3 129.8 US$: 0.924 0.896 0.885 0.970 SDR:US$ 0.758 0.785 0.800 0.770 Financial indicators 3-month interbank rate 4.48 4.28 3.43 4.35 US$ 3-month Libor 6.53 3.78 2.22 5.07 Commodity prices Oil (Brent; US$/b) 28.5 24.5 19.6 20.5 Gold (US$/troy oz) 279.3 271.1 281.7 287.0 Food, feedstuffs & beverages (% change in US$ terms) 6.1 0.9 6.1 11.2 Industrial raw materials (% change in US$ terms) 13.4 9.8 5.5 11.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.
4 Venezuela Economic growth A contraction in growth will be hard to avoid this year. The beneficial effects of the devaluation will be outweighed by the credit squeeze and political tensions, while rising inflation will erode real incomes and depress consumer spending. The 20% increase in the minimum wage announced on April 7th is unlikely to have a major impact on real demand. Not only is the increase well below forecast inflation, but the large size of the informal sector will limit the base of beneficiaries, while excess liquidity is more likely to be channelled into capital flight than into real increases in consumer spending. Instead, unemployment is forecast to rise on the back of weak private demand. We expect GDP to contract by 1.4% in 2002, after expansion of 2.7% in 2001. Our growth forecast for 2003 of 4.1% represents a correction rather than a recovery of economic momentum. The only significant upside risk to the forecast is the possibility that the government might use increased oil revenue to step up capital investment. However, this would require a degree of administrative coherence that has not been in evidence so far. Downside risks are more numerous. An escalation of political tension, growing capital flight and rising inflation, with consequences for state finances, monetary policy and private demand, could all lead to a stronger contraction in growth. Forecast summary (% unless otherwise indicated) 2000 a 2001 b 2002 c 2003 c Real GDP growth 3.2 2.7 1.4 4.1 Gross agricultural production growth 2.4 2.6 2.5 2.5 Unemployment rate (av) 13.9 12.1 14.5 14.3 Consumer price inflation Average 16.2 12.5 a 31.6 26.5 Year-end 13.4 12.3 a 49.4 10.7 Short-term interbank rate 25.2 23.1 46.1 40.2 Central government balance (% of GDP) 1.7 3.5 1.5 1.3 Exports of goods fob (US$ bn) 33.0 26.2 25.3 27.2 Imports of goods fob (US$ bn) 15.5 17.1 15.1 16.0 Current-account balance (US$ bn) 13.1 4.2 5.5 6.6 % of GDP 10.8 3.2 4.9 5.7 External debt (year-end; US$ bn) 34.4 b 34.7 34.7 34.9 Exchange rates Bs:US$ (year-end) 699.8 763.0 a 1,255.8 1,435.3 Bs: 100 (av) 631.0 595.5 1,000.1 1,311.2 Bs: (year-end) 651.1 672.4 1,468.2 1,827.9 Bs:SDR (year-end) 911.7 958.9 2,008.6 2,389.6 a Actual. b EIU estimates. c EIU forecasts. Inflation The end-2001 inflation rate of 12.3% will not be bettered in 2002. As long as uncertainty over the BCV s monetary policy targets persists, and until it becomes clear how much the bolívar will adjust in the short term, the inflation forecasts for 2002 can be little more than guesses. However, even if weak domestic demand limits the fuelling of domestic prices to some degree, the most optimistic scenario still leaves prices up by at least 20-30% by the end of the year. Historical comparisons also give cause for concern; prices rose by
Venezuela 5 103% in 1996 on the back of a 63% currency devaluation. Given anecdotal evidence of retail price behaviour after the recent policy change, we expect inflation to rise to almost 50% by end-2002 and to average around 32% for the year. The increase in the minimum wage will add to upward pressure on prices. With the volatile economic climate, and Mr Chávez s shrinking support base, additional increases later in the year are also possible. Exchange rates Following the decision to float the bolívar in mid-february, Venezuela s currency initially fell to over Bs1,000:US$1, from a close of Bs793:US$1 the day before the announcement. After the first volatile month, it stabilised somewhat, and recovered to Bs892:US$1 by the end of March, implying a 14% nominal depreciation since the start of the year. However, while the bolívar may have stabilised in the short term, the BCV still finds itself in a difficult position. In an effort to contain the rate of depreciation (and thus limit inflationary pressure), it is auctioning US$48m in the market on a daily basis, reduced from an initial daily amount of US$54m. Despite two reductions in the discount rate in March, which took it from 50% to 46%, interest rates remain excessively high, and will have to be lowered to spur economic growth. However, raising liquidity in the system may well result in higher capital outflows, in the absence of political confidence. We expect the bolívar to end the year at Bs1,256:US$1, which, given our inflation forecast, implies a real deprecation of just under 10%, insufficient to correct the estimated 48% real appreciation of the currency between end-1997 and end-2001. Our forecast for 2003 implies a further real depreciation of around 4%. Gross domestic product by expenditure (Bs bn at constant 1984 prices; % change year on year in brackets unless otherwise indicated) 2000 a 2001 b 2002 c 2003 c Private consumption 314.7 329.6 311.5 317.7 (3.7) (4.7) ( 5.5) (2.0) Public consumption 58.8 62.3 61.0 61.6 (5.0) (5.9) ( 2.0) (1.0) Gross fixed investment 77.9 87.2 78.5 82.4 (1.1) (12.0) ( 10.0) (5.0) Final domestic demand 451.4 479.1 451.0 461.7 (3.4) (6.1) ( 5.9) (2.4) Stockbuilding 23.1 17.6 23.5 28.5 (1.4) ( 0.9) (1.0) (0.8) Total domestic demand 474.4 496.6 474.5 490.2 (5.0) (4.7) ( 4.5) (3.3) Exports of goods & services 235.3 240.5 242.4 252.9 (5.5) (2.2) (0.8) (4.4) Imports of goods & services 125.6 137.4 125.2 127.4 (15.4) (9.4) ( 8.9) (1.8) Foreign balance 109.8 103.1 117.2 125.5 ( 0.8) ( 1.1) (2.3) (1.4) GDP 584.2 599.8 591.7 615.7 (3.2) (2.7) ( 1.4) (4.1) a Actual. b EIU estimates. c EIU forecasts.
6 Venezuela External sector The change to our oil price forecast for 2002 provides a substantial boost to our projections for Venezuela s external accounts, assuming that disruption to oil exports stemming from industrial action proves short-lived. Oil export earnings are forecast to rise in 2002, while import spending will fall, as the devaluation makes foreign goods more expensive and domestic demand remains depressed. These trends will see the merchandise trade surplus rise to US$10.2bn in 2002 and, assuming production growth of 4% in 2003 in line with OPEC quotas, to US$11.2bn in that year. Rising US interest rates from 2003 will push up outgoings on the income account, relating to interest payments on Venezuela s external debt, while the traditional deficit on the services account will widen as imports pick up. The forecast rise in export earnings will outweigh these trends, pushing the current-account surplus up from US$5.5bn in 2002 to US$6.6bn in 2003. Political pressures and policy inconsistencies will result in further capital flight, however, with particularly large outflows expected in the first quarter of 2002. Editors: Justine Thody (editor); Ondine Smulders (consulting editor) Editorial closing date: April 8th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: london@eiu.com Next report: Full schedule on www.eiu.com/schedule