 Economy |
Venezuela is rich in natural resources, but poor economic policies over the past two decades have led to disappointed economic performance. A demand-led temporary boom in growth during the 1973-74 rise in oil prices was followed by negative per capita growth each year from 1979 to 1985-despite a second round of oil price increases over 1979-80. By 1985, even after the windfall gains of the two oil price increases and with prices still high, per capita GNP was significantly below the level of 1972. Expansionary policies were followed from 1986 to 1988, leading to a temporary rise in growth, but the policies followed were unsustainable. Inflation rose, external reserves declined, and widespread shortages developed.
Following a short period of economic growth during the early 1990s, Venezuela's economic conditions deteriorated considerably during 1993-1994 due to a number of adverse shocks, such as falling oil export prices, political instability, and a major banking crisis. As a result, non-oil GDP fell, inflation accelerated, and international reserves declined. In response to these conditions, the government embarked on an economic program in early 1996 that included exchange rate unification, initially under a floating system which was later replaced by exchange rate bands; liberalizing interest rates; abolishing most price controls, and adjusting domestic fuel prices. By 1997, the economy recovered but inflation and unemployment remained high. However, the economy again deteriorated in 1998 and turned into a deep recession in 1999. The deterioration in 1998 was caused by a sharp decline in international oil prices, compounded by a worsening of the external financial environment that limited Venezuela's access to international financial markets, and by high domestic real interest rates.
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One of the problems during the last decade has been the economic dependence on oil and general declines in real oil prices and revenues. The share of oil-GDP in total GDP increased from about 21% in the early 1990s to about 26% in the late 1990s. At the same time, the share of agriculture in total GDP decreased from about 6% in 1990 to about 4% in 1999, the share of manufacturing decreased from about 13% to about 10%, and the share of the service sector remained around 60% of GDP. The share of non-oil exports in total exports has been on average below 25%, reflecting the lack of export diversification away from the oil sector, and the impact of currency overvaluation on external competitiveness over time.
In this environment, real wages fell significantly and unemployment rose. Between 1990 and 1999, average real wages fell by about 23%-despite the existence of mandatory minimum wages for most of the period. The real wage drop affected all sectors of the labor market, including the oil sector. Even so, unemployment rose, affecting particularly unskilled workers, women and young people, and urban residents. Moreover, although there is no consensus on the precise level of poverty in Venezuela, there is consensus that it was unambiguously higher in the late 1990s than in the early 1980s. Both poverty and inequality have, however, remained below the average for the Latin American region.
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| RECENT ECONOMIC DEVELOPMENTS |
The government of President Hugo Chavez, in office since early 1999, inherited an economy heavily dependent on the oil sector with major structural imbalances, including a growing fiscal deficit, a deficit in the external current account, and high unemployment. The scale of the crisis made it necessary to act quickly. The government adopted a set of economic policies that included: reducing the rate of public expenditures by limiting public sector wage increases to an average of 17.5% and by cutting investment outlays of the government and public enterprises; increasing public sector revenues by, among other things, reducing the sales threshold of firms subject to VAT; cutting back oil production in agreement with other oil exporters to increase the oil price in the international market; and, maintaining a strong exchange rate policy in the context of the existing exchange rate band system. On August 2, 2000, Mr. Chavez further outlined his plans for the economy going forward. The program, intended to be implemented by an "Economic Constituent Assembly" similar to the body which rewrote the nation's constitution under President Chavez's guidance last year, included measures to reactivate economic growth, promote private investment and alleviate poverty and inequality.
In the year 2000, GDP grew by 2-3% year-on-year in the second quarter (following an expansion of about 0.3% in the first quarter), suggesting that an economic recovery is underway after a decline of 7.2% in 1999. Inflation slowed to 15% in August, a 14-year low and well within the government's target of 16% for the year 2000. The decline in inflation has been at the cost of an economic recession and a fall in consumption and investment, and the government estimates that unemployment reached 13.5% in July. A combination of an overvalued exchange rate and low real interest rates has created conditions for some pressure on the external sector. However, there is no immediate balance of payments constraint, capital outflows have been more than offset by the expansionary effect of high oil prices on export revenues, while imports have been kept in check by the recession. The average price of Venezuelan Oil Basket was about US$28 through mid-September, compared to about US$16 for the whole of 1999.
Foreign reserves have risen to more than US$18 billion, including US$2.3 billion set aside in the macroeconomic stabilization fund, the equivalent of 16 months of imports. The exchange rate reached 690 Bolivars to the dollar by end-August and it is likely to remain stable for the rest of the year, as the Central Bank still has full control of exchange rate movements. Even after the recent monetization of the non-oil fiscal deficit, international reserves cover at least 2.1 times the monetary base and more than 75% of M2.
As a result of high oil revenues, the overall public sector was in surplus in the first semester of 2000. However, key government actions early in the year, such as a 1% reduction in the VAT rate, the elimination of the bank debit tax, and increased current expenditures together with low tax collection and revenues due to low economic growth, have led to a deterioration in the non-oil fiscal deficit.
| MEDIUM-TERM PROSPECTS |
Given the significant increase in oil export prices during 2000, the government has greater room for "jump-starting" the economic recovery through an acceleration of public expenditures. In our view, under the assumption that the government will continue to accelerate public spending during 2000 and given its dependency on the oil sector, the economic outlook for 2000 and 2001 will primarily be determined by the behavior of public sector consumption and public investment, including PDVSA's investment in the oil sector (it is expected that public sector expenditure including that of state-owned enterprises will increase significantly).
The projected scenario is based on an average oil export price of about US$28-29 per barrel for 2000 (the average oil price through mid-2000 was already about US$26), and about US$25-26 per barrel in 2001. This scenario assumes a slow recovery of private investment and of non-oil output, resulting from the large real appreciation of the exchange rate, and implementation of some structural reforms, such as the privatization of state companies. During 2000, real GDP growth is projected to recover to about 2.5-3%, while inflation would decelerate to about 16%. Total investment is projected to increase as a proportion of GDP over the projection period, mainly as a result of public sector investment increases led by the acceleration of both public sector and PDVSA's investment expenditure. This will be complemented by an acceleration of public sector consumption.
| At the same time, domestic saving would increase as the public sector balance will change from a deficit of about 1.2% of GDP in 1999, to surpluses of about 1.5% in 2000, and 1 to 2% in 2001. The external current account would also show an improvement with a surplus of about 9% of GDP in 2000 and of about 6-7% of GDP in 2001. The main risk of this scenario is that the non-oil fiscal deficit is large that additional domestic financing may be needed, putting pressure on the Central Bank to monetize the deficit (or on domestic interest rates). Stimulating output growth by increasing public spending may widen macroeconomic imbalances and weaken confidence, delaying private sector investment and sustainable growth.
| AGRICULTURE |
The Venezuelan government passed the Agrarian Reform Law in 1960, which is aimed at expanding and diversifying agricultural production. Agriculture, including forestry and fishing, employed 13 percent of the workforce; in 1998 it contributed 5 percent of the GDP. The principal crops include sugarcane (7.1 million metric tons in 1999); fruits such as bananas, plantains, and oranges (2.8 million); maize (1 million); rice (722,000); cassava (487,685); and coffee (78,000). Livestock raising is carried on chiefly on the Llanos and east of Lake Maracaibo. In 1999 the livestock population numbered 12.7 million head of cattle, 3.2 million hogs, 4 million goats, 0.8 million sheep, and 100 million poultry.
| FORESTRY AND FISHING |
Although forests cover much of Venezuela, the timber industry is underdeveloped largely because of the inaccessibility of the forest areas. Timber is used mainly as fuel and by the building, furniture manufacturing, and paper industries. In 1998, 2.2 million cubic meters (76 million cubic feet) of timber were produced.
The rich fishery resources of Venezuela include a wide variety of marine life. The most important commercial catch is shrimp, followed by tuna and sardines. Important pearl fisheries are located off Margarita Island. The fish catch in 1997 was 502,728 metric tons.
| MINING |
Petroleum, located in the Maracaibo Basin and in the eastern part of the country, dominates the Venezuelan economy. Crude and refined oil are the main source of government revenue and account for about one-quarter of the GDP. In 1997 Venezuela produced 1.16 billion barrels. Much of its oil is exported to the Netherlands Antilles for refining. Venezuela is a founding member of the Organization of Petroleum Exporting Countries (OPEC). The Venezuelan government nationalized the petroleum industry in 1976, although private investment and foreign participation has been permitted since 1992. The country has petroleum reserves estimated at 78 billion barrels, including those in an oil field discovered in 1989, which increased known reserves by at least one-third. The country also is a major producer of natural gas; output in 1998 was 28.3 billion cubic meters (0.99 trillion cubic feet). Venezuela has tapped its vast reserves of bitumen to produce liquid coal, an emulsion of bitumen and water principally for use in power plants.
Other commercially exploited minerals include bauxite, diamonds, gold, silver, platinum, coal, salt, copper, tin, asbestos, phosphates, titanium, and mica. Iron ore, in extensive deposits, was discovered near the Orinoco River in the 1940s. In 1998, 10.4 million metric tons of iron ore were mined, most of which was exported. Margarita Island, off the northern coast, has substantial magnesite reserves.
| MANUFACTURING |
Since the early 1960s the government of Venezuela has given high priority to the development of the manufacturing sector of the economy. Founded in 1961 in an area rich in natural resources, Ciudad Guayana is now a major center for industrial development. The leading manufactures of Venezuela include refined petroleum and petroleum products, steel, aluminum, fertilizer, cement, tires, motor vehicles, processed food, beverages, clothing, and wood items.
| ENERGY |
Much of Venezuela's electricity is produced in hydroelectric facilities, particularly at the Guri Dam, a major installation on the Caroní River. Venezuela generated 70 billion kilowatt-hours of electricity in 1998.
| CURRENCY AND BANKING |
The basic unit of currency is the bolivar, consisting of 100 centimos (548 bolivars equal U.S.$1; 1998 average). The Banco Central de Venezuela, founded in 1940, is the government banking agent, the sole bank of issue, and the clearinghouse for commercial banks. The country's principal stock exchange is in Caracas.
In 1994 the government assumed control of 13 banks, including some of the largest institutions in the country, in a banking crisis precipitated by the collapse of Banco Latino, Venezuela's second largest bank. The bank, which had enjoyed loose government supervision, failed due to poor credit decisions and possible corruption. This failure spurred a loss of confidence in other domestic banks, and government attempts to rescue the national banking system cost an estimated one-half of the annual budget. By early 1995 the government had provided financial assistance to more than half the country's commercial banks. Sixteen banks were nationalized or forced to shut down. In an attempt to recover some of the costs of the bailout, Venezuela sold three of the largest banks to foreign investors in December 1996.
| EXPORTS |
The principal exports of Venezuela are petroleum and petroleum products, which together account for 79 percent of foreign sales. Other exports include bauxite and aluminum, steel, chemicals, agricultural products, and basic manufactures. Total exports were estimated at $17.5 billion in 1998. Main imports include raw materials, machinery, transportation equipment, chemicals, foodstuffs, and basic manufactures. Imports were estimated at $16.8 billion in 1998. Principal trading partners for exports are the United States, Japan, The Netherlands (primarily petroleum to the Netherlands Antilles for refining), and Italy. Chief sources of imports are the United States (which represents 50 percent of the total sales), Germany, Japan, The Netherlands, and Canada. Venezuela is a member of four international trade organizations, the Andean Group, Latin American Integration Association (LAIA), Group of Three, and the Association of Caribbean States (ACS). These organizations work toward improving conditions within member countries by increasing economic integration and international trade. |
