February 24, 2005
Venezuela: economic performance exceeds expectations

Published by Oxford Analytica

"EVENT: GDP expanded by 17.3% year-on-year in 2004.

SIGNIFICANCE: A strong rebound in 2004 following two years of severe recession was crucial in order for the government to advance its programme of poverty alleviation and reinforce increased levels of political and social stability. Economic performance across the board in 2004 surpassed all expectations, though its sustainability remains in question.

ANALYSIS: Venezuela's economy grew by 11.2% in the fourth quarter of 2004, resulting in 17.3% growth for the year as a whole -- the highest annual rate on record. There are four major factors which help to explain this:

Low base . Given GDP contractions of 8.9% in 2002 and 7.6% in 2003 (figures that were improved following recalculations in August 2004, using 1997 rather than 1984 as the base year), the starting point for the current recovery was very low.

Relative political stability . The debilitating strikes and insecurity of the previous three years were not repeated.

High oil prices . Oil sector output growth of 8.7% was significantly lower than non-oil sector growth of 17.8%, and oil exports (which constitute 80% of total exports) grew by 9.2% compared to non-oil export growth of 23.1%. Nevertheless, oil-related revenues -- principally taxes and royalties -- make up about half the government's revenues, and higher oil prices contributed substantially to an estimated 52% year-on-year rise in the government's oil-related income. (...)

Banking recovery . The rise in aggregate demand was facilitated by a 109% year-on-year increase in the value of bank loans disbursed, as the banking sector completed its strong return to health. Lower interest rates encouraged private sector consumption to increase by 16.6% in 2004, as did a marked fall in inflation and a rise in the supply of imported goods. The lower cost of credit also contributed to the sharp 43.0% rise in gross fixed investment.

While all major economic sectors posted strong growth rates in 2004, the rebound was strongest in the private sector, which grew 18.6%, compared to 11.0% for the public sector. In the private non-oil economy, key industries such as construction (up 31.8%), manufacturing (25.7%), retail (25.4%) and transport (25.0%) have been booming. Foreign direct investment reached some 1.1 billion dollars, below the 2.7 billion recorded in 2003 but above the 2002 figure of 782 million.

Short-term outlook . The outlook for 2005 is generally good. High levels of consumer confidence, particularly among the low-income groups that have benefited from the government's social programmes, have been reinforced by slowly falling unemployment (...). This suggests that private sector consumption will continue to strengthen in 2005. Public sector consumption and investment are also likely to continue to rise, given the sufficiently positive oil price outlook, though far less quickly than in 2004 (..)

Strong fiscal position . As long as the price of Venezuelan oil remains above the 23 dollars per barrel assumed for the 2005 budget, which is likely to be the case this year, the government will face no serious fiscal problems. The current strength of the state's fiscal position suggests that the economy would be able to withstand, at least over the short term, even a severe downturn in the oil price. Despite continuing to run a fiscal deficit, there would be two cushioning factors in such a scenario:

  1. International reserves . The current recovery has been characterised by a rise in Venezuela's international reserves to over 24 billion dollars -- more than twice the level reported two years ago. The continuation of foreign exchange restrictions, though significantly less rigid than a year ago, is likely to contribute to a further rise in international reserves this year.
  2. Tax collection . Total taxes collected in 2004 more than doubled to 24.6 trillion Bolívars, from 12.0 trillion in 2003. While this is partly thanks to increased imports, it is mainly due to a successful reduction of tax evasion by the Integrated National Service of Tax and Customs Administration (SENIAT), whose improved efficiency is widely recognised and is likely to be sustained (...)

CONCLUSION: The current momentum will generate growth of at least 5% in 2005, still relatively strong though inevitably much lower than 2004 as the effect of the rebound ends. Any drop in the oil price would need to be very substantial to dent this momentum in the short to medium term (...)".