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Venezuela's economic slide surprisingly worse than expected

CARACAS
Petroleumworld.com, Nov 18, 2009

Venezuela on Tuesday announced a surprisingly large third-quarter economic fall, shocking analysts and leaving the South American oil exporter's economy on course for a bigger contraction then previously thought in 2009.

Despite previous assurances by President Hugo Chavez's government that its version of "21st century socialism" would protect Venezuelans, the Central Bank said lower oil revenues and the international downturn brought a 4.5 percent decline in the quarter.

It was the second straight quarterly drop this year, and local economists said Venezuela was now in recession even though the government has not formally said that.

"This is much, much worse than we expected," said Asdrubal Oliveros, director of Venezuelan group Ecoanalitica.

The bank's figures showed the effects of lower oil income spreading through the economy, with parts of the private sector shrinking by double digits.

The oil economy shrank 9.5 percent in the latest quarter, compared with the same period in 2008, and non-oil gross domestic product was down 3.0 percent. Those figures meant the Venezuelan economy contracted 2.2 percent in the first nine months, compared with the same period of 2008.

"This behavior has come in a climate strongly affected by the consequences of the global financial crisis and the weakening of oil prices," the bank said.

Nations have differing definitions of recession, but many use two consecutive quarters of negative growth as the measure.

Finance Minister Ali Rodriguez avoided the word recession, but forecast a contraction of up to 2.2 percent in 2009.

"Our objective was to reach zero growth, but that has not been possible," he said in a television interview. The minister said the government was not considering a change to Venezuela's strict exchange controls, such as a devaluation.

"AWFUL"

Boris Segura, senior Latin American analyst for RBS, said the third-quarter figure was "huge" and "awful" for Venezuela.

"The hope and the expectation was that the worst was over with the last quarter, but this shows that the recession in Venezuela is deepening," he said.

The government is hoping for a moderate recovery in 2010, when it is likely to increase public spending on social projects ahead of legislative elections in September.

Venezuela's oil export revenues so far in 2009 have fallen to about half their 2008 level, and socialist leader Chavez ordered government spending cuts and restrictions on dollar sales to importers earlier in the year.

The public sector grew a little in the three-month period. But the auto sector shrank 24 percent, metals by 40 percent and the politically important food sector by 7.3 percent.

Private investment has withered in recent years, following a series of nationalizations. Minister Rodriguez blamed the poor performance of the private sector on import restrictions.

"The policies of the country are run not by economics but by politics and that has clear ramifications, from the oil sector to a complete collapse of the private sector," said Kathryn Rooney, senior emerging market strategist at Bulltick Capital Markets in Miami.

Ecoanalitica's Oliveros said he was worried by the fall in the oil sector given recent debt issues by state oil company PDVSA, with another one due this year. For more, see: [ID:nN0436688]

"We are producing less and indebting ourselves more," he said, predicting a 1.7 to 2 percent GDP contraction this year.

Venezuela's economy contracted by 2.4 percent in the second quarter. In 2008, the economy grew 4.8 percent.

The last time Venezuela experienced annual contraction was in 2003, when the economy shrank 7.8 percent, due largely to a lengthy shutdown of the oil sector as part of an opposition campaign to oust Chavez.

In its trade portfolio for the third quarter, Venezuela posted a $5.1 billion current account surplus, less than the $17.3 billion surplus a year earlier, the Central Bank said.

The capital account showed a deficit of $1.7 billion for the quarter, well below the $10.4 billion deficit in the same period of 2008, the bank said.

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