Editorial / Commentary / Opinion
Pedro M. Burelli: The performance of real activity
economy continues to deteriorate - Goldman Sachs
On the back of the largest oil boom in the country's history, the only thing we see in the horizon is the disastrous, actually ruinous, effect of 10 years of an incompetent and corrupt government. The consequences of the Bolivarian revolution are beginning - finally - to affect the popularity of its unhinged leader and will negatively impact Venezuelans for years - and maybe decades - to come. This report should be seen as the report card for a regime that has earned a solid F.
Venezuela: Real GDP Contracts a Much Larger Than Expected 4.5% YoY During 3Q2009; Growing Symptoms of Stagflation and Dutch Desease
The performance of real activity economy continues to deteriorate and the economy is developing growing symptoms of Dutch Disease (atrophy on non-commodity tradable sectors of the economy) and stagflation (inflation continues to accelerate despite the contraction of the economy during 2009).
Real GDP declined a larger than expected 4.5% yoy during 3Q2009 (down from -2.4% yoy during 2Q2009); the market consensus was for a decline between -2.0% and -1.0%.. The very poor performance of real GDP during 3Q was driven the large 10.7% yoy decline in domestic demand. Private consumption declined -4.8% yoy during 3Q (from -2.6% yoy during 2Q), and investment spending retrenched a large -14.5% yoy (from -2.8% yoy during 2Q). Public consumption grew 2.6% yoy during 3Q. Private consumption spending continues to slow down as entrenched inflation (core inflation is running above 36% yoy) is eroding real disposable income and credit growth is decelerating fast while investment has been impaired by a business unfriendly policy mix.
Exports declined a large 16.3% yoy in real terms during 3Q2009; we highlight that over the last 15 quarters only once did real exports show a positive yoy growth rate, which attests to the growing lack of competitiveness of the Venezuelan economy. The retrenchment of imports accelerated to -25.5% yoy during 3Q from -9.1% yoy during 2Q2009 driven by declining domestic demand and the limitations imposed by CADIVI in the delivery of dollars to the economy. Due to the sharp decline in import penetration the contribution of the external sector (net exports) to growth improved to +6.2 percentage points of GDP during 3Q2009, up from +1.0 percentage points during 2Q2009.
Non-oil GDP growth decelerated to -3.0% yoy during 3Q2009 from -1.7% yoy during 2Q2009. The oil sector declined a large 9.5% yoy during 3Q2009.
On the supply side, the most dynamic sectors during 2Q were communications (+11.4%), water and electricity (+4.0%), and construction (4.3% yoy). The contraction of manufacturing production deepened to -9.2% yoy (from -4.7% yoy during 1H2009). Again, the non-tradable sectors of the economy were the most dynamic, which is symptomatic of Dutch disease triggered by the significant appreciation of the real exchange rate (since the last step devaluation of the VEF in March 2005, inflation has increased a whopping 157%).
Real GDP Down 2.2% YoY During Jan-Sept 2009
Comment: (-) Potential GDP continues to decline due to insufficient private investment and the inefficiencies created by the ever-growing reach of the public sector, directly, and indirectly via stifling regulation. Furthermore, despite statements by public officials that the economy was well insulated from the global economic and financial crisis in spite of declining oil prices, the contraction of activity during so far in 2009 attests to the fact the oil export income is still the ultimate engine of growth in an increasingly less diversified economy (e.g., the value added generated by the private sector declined 5.8% yoy during 3Q2009).
Up to 3Q2008, the large wealth transfer from abroad through terms of trade gains (high oil prices) was recycled back into the economy via unremitting and increasingly opaque fiscal spending. However, the growth-multiplier of fiscal spending is declining rapidly due to the clear inefficiencies in fiscal execution and the ongoing fast expansion of the public sector (retreat of private-sector activity) through a number of nationalizations/ expropriations of private businesses. Contrary to the example of Chile, where the large copper price windfall during 2006-08 was mostly saved, in Venezuela, the oil windfall was depleted in the pursuit of a markedly pro-cyclical fiscal stance that aimed to maximize short-term growth even if through mechanisms that are patently unsustainable.
In addition, monetary policy has also been quite loose, as evidenced by the persistence of significantly negative domestic real rates. Domestic financial conditions have been exceptionally expansionary over the last few years, undermining the fixed exchange rate’s effectiveness as the economy’s nominal anchor. Consequently, despite a fixed nominal exchange rate for over three years, a plethora of price controls, and a contracting economy, inflation remains entrenched above 30%.
Loan and Deposit Rates Deeply in Negative Territory
We expect the economy to benefit from higher oil prices as we go forward although the positive impact of firmer terms of trade is likely to be somewhat offset by growing supply bottlenecks, and the business/ investment-unfriendly environment which is impairing private investment. In all, we expect the economy to contract around 1.0%-1.5% in 2009 despite the presence of markedly loose fiscal and monetary policies.
Alberto Ramos + 212 357 5768
Emerging Markets Economic Research – Americas
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Pedro M. Burelli is a financial consultant, a former member of PDVSA board of director and ex head of JPMorgan Capital Corporation – Latin America. Petroleumworld does not necessarily share these views.
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Petroleumworld News 11/18/09
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