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Country Report December 2002
Venezuela
December 2002
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
Venezuela at a glance: 2003-04
OVERVIEW
The political environment will remain highly unstable and the military may beforced to assume a central role in mediating the deepening conflict. It looksincreasingly likely that one of the opposition’s tactics to secure the earlyremoval of the president, Hugo Chávez, whose elected term is scheduled torun until 2007, will succeed. Unless his enemies are more successful indiscrediting Mr Chávez than the Economist Intelligence Unit believes will bethe case, he would become a destabilising force in opposition if he were to beousted. Owing to the opposition’s problems, it is possible that Mr Chávez couldbe ousted and still win new national elections, although his mandate wouldbe weak. Mr Chávez’s loss of control of major state institutions will inhibitgovernability if he manages to cling on to power. Resort to heterodox measuresto tackle the fiscal imbalance in 2002 will complicate fiscal management in2003-04. After a sharp contraction of GDP in 2002, the rebound in 2003-04 willbe weak owing to depressed non-oil activity. Despite firm oil prices, theexchange rate will come under pressure owing to political uncertainties andunorthodox policies.
Key changes from last month
Political outlook• The Ministry of the Interior’s intervention of the Caracas Metropolitan
Police in November and the opposition’s launch of a nationwide strike onDecember 2nd reflect the escalation of hostilities between the governmentand the opposition.
Economic policy outlook• A large domestic debt swap operation carried out in November has eased
the government’s cash-flow position in 2003. However, the partial currencyguarantees included in the swap have set a worrying precedent.
Economic forecast• The decline in real GDP decelerated in the third quarter, taking the
contraction for the first nine months to 6.4%. However, strike action will setback production in December, resulting in a contraction of 6.4% for thefull year.
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ISSN 1350-7133
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Venezuela 1
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Contents
3 Summary
4 Political structure
5 Economic structure
5 Annual indicators
6 Quarterly indicators
7 Outlook for 2003-04
7 Political outlook
9 Economic policy outlook
10 Economic forecast
12 The political scene
19 Economic policy
24 The domestic economy
26 Oil and gas
28 Mining and industry
29 Foreign trade and payments
List of tables
10 International assumptions summary
12 Forecast summary
20 Operations of consolidated public sector
20 Central government finances
23 Domestic bond swap, November 2002
25 Gross domestic product growth
26 Consumer price inflation
29 Trade balance
30 Balance of payments
31 Foreign reserves
List of figures
12 Gross domestic product
12 Bolívar real exchange rate
22 Venezuelan export basket
25 Real GDP
26 Consumer and producer prices, 2002
Venezuela 3
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Summary December 2002
The political environment will remain highly unstable and the military may be
forced to assume a central role in mediating the deepening conflict. It looks
increasingly likely that one of the opposition’s tactics to secure the early removal
of the president, Hugo Chávez, who was elected to serve until 2007, will
succeed. However, unless the opposition is more successful in discrediting
Mr Chávez than the Economist Intelligence Unit believes will be the case, he is
likely to become a destabilising force in opposition if ousted and prevented from
standing in elections. If Mr Chávez manages to cling on to power, he will be
much weakened for the remainder of his term by the loss of control of major
state institutions. Resort to heterodox measures to tackle the fiscal imbalance in
2002 will complicate fiscal management in 2003-04. After a sharp contraction of
GDP in 2002, the rebound in 2003-04 will be weak owing to depressed non-oil
activity. Despite firm oil prices, the exchange rate will come under pressure
owing to political uncertainties and unorthodox policies.
The opposition’s campaign to force Mr Chávez’s resignation has become focused
on a proposed consultative referendum which could be held in early February.
As the government insists that the results will have no bearing on Mr Chávez’s
tenure, the military will probably have to mediate. The escalation of hostilities
between the government and the opposition prompted the interior ministry to
take control of Caracas Metropolitan Police. A rebellion by a group of senior
officers has exacerbated fractures in the military. Divisions within the ruling
MVR have deepened and Mr Chávez’s popular support has declined sharply,
although this has not translated into an increase in support for the opposition.
The deterioration of the central government’s finances in the third quarter
showed that the first-half improvement had been achieved through
unsustainable cuts in spending. The 2003 budget draft has been criticised for its
optimistic growth assumptions. A large domestic debt swap operation has eased
the government’s cash-flow position in 2003 but the partial currency guarantees
included have set a worrying precedent. The Central Bank Law was modified to
accelerate the transfer of foreign-exchange profits to the Treasury. A tightening of
monetary policy in the third quarter helped to stabilise the exchange rate.
The decline in real GDP decelerated to 5.5% year on year in the third quarter,
taking the contraction for the first nine months to 6.4%. Oil activity rebounded
from its collapse in the second quarter, but other areas of the economy
continued to decline. Inflation has continued to rise despite depressed demand.
Rising exports and falling imports took the trade surplus to a record US$5.2bn in
July-September. The increase in the current-account surplus was outweighed by
the deterioration in the capital account, and reserves fell by US$333m.
Editors: Justine Thody (editor); Ondine Smulders (consulting editor)
Editorial closing date: December 4th 2002
All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]
Next report: Full schedule on www.eiu.com/schedule
Outlook for 2003-04
The political scene
Economic policy
Foreign trade and payments
The domestic economy
4 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Political structure
The Bolivarian Republic of Venezuela
Federal republic comprising 72 federal dependencies, 23 states, two federal territories and
one federal district
The president is elected for a renewable six-year term and appoints a Council of
Ministers; Hugo Chávez began a fresh six-year term following elections in July 2000 to
relegitimise public posts under the 1999 constitution
165-member unicameral National Assembly, headed by the president, which replaced the
bicameral Congress abolished by the new constitution adopted in December 1999
Supreme Court at the apex of the court system; appoints judges and magistrates in
consultation with civil society groups.
July 2000 (presidential, legislative and state government); December 2000 (municipal
authorities); next elections due in 2005 (legislative) and 2006 (presidential). A revocatory
referendum is possible in August 2003, half-way through Mr Chávez’s term. A non-
binding consultative referendum may occur before then, in February 2003.
Government: Movimiento Quinta República (MVR), a faction of Movimiento al
Socialismo (MAS) and Patria Para Todos (PPT).
Opposition parties: Acción Democrática (AD); the Comité de Organización Política
Electoral Independiente (COPEI); Movimiento al Socialismo (MAS); Primero Justicia (PJ);
La Causa Radical (LCR); Convergencia Nacional (CN)
President Hugo Chávez Frías
Vice-president José Vicente Rangel
Office of the presidency Brigadier-General Carlos Eduardo
Martínez
Communications and information Nora Uribe
Defence Colonel Luis Enrique Prieto Silva
Development & Social economy Nelson Merentes
Education, culture & sport Aristóbulo Istúriz
Energy & mines Rafael Ramírez
Environment & natural resources Ana Lisa Osorio
Finance Tobías Nóbrega Suárez
Foreign affairs Roy Chaderton Matos
Health & social development María Lourdes Urbaneja
Higher education Héctor Navarro
Infrastructure (transport, communications
& urban development) General Eliécer Hurtado Soucre
Interior & justice Diosdado Cabello
Labour María Cristina Iglesias
Planning & development Felipe Pérez Martí
Production & trade Ramón Rosales
Science & technology Nelson Merentes
Diego Luís Castellanos
Form of government
The executive
National legislature
Legal system
National elections
Main political organisations
Central Bank governor
Official name
Key ministers
Venezuela 5
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Economic structure
Annual indicators
1998 a 1999 a 2000a 2001 a 2002 b
GDP at market prices (Bs bn) 52.5 62.6 82.5 90.4 109.4
GDP (US$ bn) 95.8 103.3 121.3 124.9 92.1
Real GDP growth (%) 0.2 -6.1 3.2 2.7 -6.4
Consumer price inflation (av; %) 35.8 23.6 16.2 12.5 22.5 a
Population (m) 22.8 23.2 23.5 23.9 24.3
Exports of goods fob (US$ m) 17,576 20,819 32,998 26,726 26,543
Imports of goods fob (US$ m) -15,105 -13,213 -15,491 -17,391 -12,805
Current-account balance (US$ m) -3,253.0 3,559.0 13,030.0 3,931.0 7,988.8
Foreign-exchange reserves excl gold (US$ m) 11,920.0 12,277.0 13,089.0 9,239.0 11,898.4 a
Total external debt (US$ bn) 38.2 38.2 38.2 37.4 b 35.4
Debt-service ratio, paid (%) 28.2 23.7 15.7 22.9 b 21.9
Exchange rate (av) Bs:US$ 547.6 605.7 680.0 723.7 1,187.6 a
a Actual. b Economist Intelligence Unit estimates.
Origins of gross domestic product 2001 % of total Components of gross domestic product 2001 % of total
Petroleum 26.4 Private consumption 68.2
Manufacturing 14.3 Government consumption 8.0
Construction 5.6 Investment incl change in stocks 18.7
Agriculture 4.9 Exports of goods & services 22.7
Services and others 48.9 Imports of goods & services 17.6
Principal exports fob 2001 US$ m Principal imports fob 2001 US$ m
Oil 21,710 Oil 1,878
Non oil 5,346 Non oil 15,404
Main destination of exports 2000 % of total Main origins of imports 2000 % of total
US 60.0 US 35.8
Brazil 5.5 Colombia 6.8
Colombia 3.5 Brazil 4.5
Italy 3.5 Italy 3.9
Spain 3.4 Germany 3.1
6 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Quarterly indicators
2000 2001 2002
4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr
Central government finance (Bs bn)
Ordinary revenue 4,910.4 3,650.0 4,868.6 4,221.6 3,695.7 3,099.8 5,405.4 n/a
Ordinary expenditure 6,531.6 4,184.6 5,219.3 6,082.7 5,909.9 3,708.8 5,075.9 n/a
Balance -1,621.2 -534.6 -350.7 -1,861.1 -2,214.2 -609.0 329.5 n/a
Net extra-ordinary revenue 1,737.6 416.4 247.3 1,640.7 2,024.3 597.2 1,485.8 n/a
Output
GDP at constant 1984 market prices (Bs m) 152,679 144,356 150,592 151,448 154,092 138,737 135,934 143,083
GDP at constant 1984 market prices (% change, year
on year) 5.7 4.0 3.1 3.3 0.9 -3.9 -9.7 -5.5
Employment & Prices
Consumer prices (1997=100) 204.1 209.1 215.7 223.3 229.5 239.5 256.4 278.7
Consumer prices (% change, year on year) 14.2 12.6 12.4 12.7 12.4 14.6 18.9 24.8
Producer prices (1997=100) 158.4 160.1 162.8 165.8 168.4 179.0 198.7 179.0
Producer prices (% change, year on year) 10.7 8.8 7.5 7.1 6.3 11.8 22.1 36.7
Venezuelan crude basket (US$/barrel; spot) 27.58 22.09 22.50 21.25 15.77 17.46 22.81 24.39
Venezuelan crude basket (% change, year on year) 26.3 -12.7 -10.3 -23.6 -42.8 -21.0 1.4 14.8
Financial indicators
Exchange rate Bs:US$ (av) 695.37 702.60 713.57 731.92 747.04 864.33 1,012.92 1,391.04
Exchange rate Bs:US$ (end-period) 699.75 707.75 718.25 743.00 757.50 891.75 1,316.75 1,475.00
Deposit rate (av; %) 15.85 13.25 12.65 16.55 19.59 31.07 33.96 24.27
Lending rate (av; %) 25.95 18.04 19.52 25.87 26.38 43.05 39.90 30.80
Money market rate (av; %) 8.70 5.93 12.57 19.87 14.93 42.63 26.70 19.07
M1 (end-period; Bs bn) 8,016 7,456 7,405 7,427 9,072 7,252 7,599 8,466
M1 (% change, year on year) 31.5 32.1 28.3 23.0 13.2 -2.7 2.6 14.0
M2 (end-period; Bs bn) 16,285 15,278 14,834 14,906 16,976 14,707 15,289 16,269
M2 (% change, year on year) 27.8 22.0 14.8 11.2 4.2 -3.7 3.1 9.1
BVC Caracas stockmarket index (end-period; Dec
1993=1,000) 6,825 7,357 7,560 7,043 6,570 6,875 7,452 7,410
BVC Caracas stockmarket index (% change, year on year) 26.0 33.9 7.5 2.6 -3.7 -6.6 -1.4 5.2
Sectoral trends
Crude oil production (m barrels/day) 2.99 3.00 2.80 2.77 2.67 2.27 2.35 2.52
Crude oil production (% change, year on year) 8.7 7.1 -2.4 -5.1 -10.7 -24.3 -16.1 -9.0
Aluminium production ('000 tonnes) 144.4 141.7 143.9 137.2 147.8 149.7 151.1 151.8
Aluminium production (% change, year on year) 2.2 1.7 0.6 -4.7 2.4 5.6 5.0 10.6
Iron ore production (‘000 tonnes) 4,312 5,062 5,269 5,124 4,535 4,838 4,849 4,988
Iron ore production (% change, year on year) -13.8 -7.4 -6.9 11.1 5.2 -4.4 -8.0 -2.7
Foreign trade & payments (US$ ma)
Exports fobb 8,571 7,299 7,112 7,014 5,301 5,479 6,473 8,238
Petroleum & products 8,076 6,029 5,816 5,699 4,030 4,353 5,144 6,897
Imports fobb -3,990 -3,964 -4,443 -4,696 -4,288 -3,438 -3,278 -3,032
Merchandise trade balanceb 4,581 3,335 2,669 2,318 1,013 2,041 3,195 5,206
Servicesb -816 -782 -793 -924 -835 -711 -697 -651
Income balanceb -311 -81 -193 -497 -681 -845 -825 -593
Net transfer paymentsb -71 -97 -168 -180 -172 -281 -85 -145
Current-account balanceb 3,383 2,375 1,515 717 -675 204 1,588 3,817
Reserves excl gold (end-period) 13,089 12,045 10,460 8,959 9,239 6,156 7,642 8,154
a Balance of payments basis. b Source, Banco Central de Venezuela.
Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Banco Central de Venezuela, Indicadores Econúmicos; VenEconomy, VenEconomy Monthly.
Venezuela 7
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Outlook for 2003-04
Political outlook
It is increasingly likely that the military will be forced to assume a central role in
mediating Venezuela’s deepening political conflict. The opposition will press
ahead with its campaign to secure the early removal of the president, Hugo
Chávez, whose term is scheduled to run until 2007. In the coming weeks this
campaign will centred on convening a consultative referendum on whether the
president should stand down. Although the results of a consultative referendum
would be non-binding, the opposition hopes that a large vote against Mr Chávez
would force him to resign and call fresh national elections. Despite a ruling by
the national electoral authorities that this referendum could take place on
February 2nd, government supporters have insisted that the constitution permits
only one means of removing Mr Chávez before the end of his term�a
revocatory referendum which cannot be held until August 2003. As the
government and the opposition are unlikely to come to an agreement on the
validity of the consultative referendum, the military could be forced to act as
final arbiter.
A decisive struggle over the next few weeks will therefore be played out
between different currents of the armed forces. If the pro-Chávez ‘Bolivarians’
prevail, the military will support Mr Chávez remaining in power at least until a
revocatory referendum can be held in August 2003. If the Bolivarians are
overruled, Mr Chávez would be forced to step down if a consultative
referendum yielded a decisive vote against him. The parameters of what
constitutes a ‘decisive’ vote would therefore need to be clarified, not least given
the likelihood that the referendum will be marked by high levels of abstention.
Although Mr Chávez’s support among the poor has declined sharply, this has
not resulted in a rise in support for the opposition. Mr Chávez’s series of
electoral successes in 1999-2000 were themselves tainted by high rates of
abstention. However, the escalation of hostilities since then will make
abstention a particularly critical issue in any referendum aimed at securing
Mr Chávez’s removal. Consequently, a consultative referendum would have to
deliver an overwhelming result in favour of Mr Chávez’s resignation for the risk
of widespread violence to be contained if he is forced to step down.
In the event that Mr Chávez is forced to step down and national elections are
called, the outlook will still be extremely unstable. Despite his problems,
Mr Chávez remains the country’s most popular politician. Over 20% of the
electorate claim they would vote for him in the event of fresh presidential
elections. The opposition, by contrast, is fundamentally divided. If Mr Chávez is
displaced, a struggle for power between disparate opposition factions would
ensue. The only factor uniting the member groups of the heterogeneous
Coordinadora Democrática (CD) umbrella is antipathy to Mr Chávez. The
chances that the oppostion will unite behind a single presidential candidate thus
appear extremely slim. The CD lacks both a unified leadership and a ‘transition
strategy’. Finally, unless the opposition is more successful in discrediting
Mr Chávez than the Economist Intelligence Unit believes will be the case, he
would become a destabilising force in opposition if he were to be ousted and
Domestic politics
8 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
barred from standing in new national elections. Whether an ousted Mr Chávez
and his followers would choose to act within or outside the institutional
framework is a source of speculation and concern. For Mr Chávez to be
discredited, irrefutable evidence would need to be advanced of his involvement
either in corruption or acts of state-sponsored violence. Such an outcome
appears to be highly unlikely given the politicisation and discredit of the
judiciary.
Should Mr Chávez survive a consultative referendum, deadlock will persist
through to the August 2003 revocatory referendum. For Mr Chávez to be
defeated in a revocatory referendum, a greater number of voters would need to
reject him than voted in his favour in 2000, when he was elected with the
support of 34% of the electorate (or 60% of the vote, owing to record numbers of
abstentions). Should Mr Chávez cling onto power beyond 2003, the effectiveness
of the executive will be undermined owing to defections from the ruling
coalition and Mr Chávez’s loss of influence over key state institutions. Policy
stalemate will therefore persist and political alienation is likely to deepen. The
military’s vital role in mediating the conflict underscores the collapse of
credibility of Venezuela’s democratic institutions. Future governments will face a
colossal task in attempting to reverse the decay and promote greater political
stability over the long term.
A modus vivendi between the government and the US has developed since April,
when bilateral relations suffered a sharp deterioration owing to speculation that
the US was involved in the failed coup attempt. Such speculation was fuelled by
Washington’s failure to condemn Mr Chávez’s removal. Since April the
government has made a conscious effort to improve links with the US,
promoting two of the administration’s few English speakers to the posts of
foreign minister and ambassador to Washington. Bilateral relations will remain
strained, however, as conservative elements within the Republican Party will
maintain pressure on the Bush administration to adopt a more overtly critical
line towards Mr Chávez. On the Venezuelan side, Mr Chávez’s deep-seated
opposition to US policies on international trade and the “war on terrorism” is
unlikely to diminish. Mr Chávez’s influence within Latin America will remain
limited because of his reputation as a maverick, although the election of Luis
Inácio ‘Lula’ da Silva in Brazil in October and of Lucio Gutiérrez in Ecuador in
November will go some way towards reducing his isolation. Relations between
Mr Chávez and his Colombian counterpart, Alvaro Uribe, have been cordial
since Mr Uribe took office in August. However, underlying bilateral tensions
over security and trade are unlikely to be resolved in the near term.
If an anti-Chávez administration comes to power within the forecast period,
foreign policy would undergo a rapid, wholesale reversal. Relations with Cuba
would be drastically scaled back, co-operation would be given on the Free Trade
Area of the Americas (FTAA) initiative and Caracas would fall closer into line
with US policy on antiterrorism. Yet such an about-turn would prove highly
contentious domestically if, as seems likely, Mr Chávez retains popular
credibility. This would militate against the emergence of a market-friendly
government with broad popular support. The relationship with OPEC would
also undergo major revisions, and although we would expect Venezuela to stay
International relations
Venezuela 9
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
within the cartel, which it co-founded, an anti-Chávez administration would be
expected to maximise oil production.
Economic policy outlook
Although oil prices are forecast to stay firm in 2003, the public-sector finances
will remain fragile. This is because the lack of access to both domestic and
external financing is likely to remain acute. Furthermore, with political tensions
set to stay high, the government may find it increasingly difficult to contain
spending. In 2002, depressed demand contained the inflationary pass-through
of the maxi-depreciation of the bolívar but this still leaves a backlog of price
pressures to be worked out when demand picks up. The longstanding policy
dilemma inherent in attempting to promote growth while controlling inflation
within a lax fiscal environment will therefore sharpen. Erratic policymaking will
continue to be a hazard as the authorities attempt to respond to these conflicting
tensions. The introduction of protectionist import measures in September
despite the large devaluation exemplifies the policy incoherence to which these
tensions have led in recent months. The change to the Central Bank Law to
permit the Treasury to access foreign-exchange profits twice yearly is another
example of the resort to heterodox policies. Furthermore, with political tensions
set to remain high, the government may find it increasingly difficult to contain
spending. Against this backdrop, there will be continued pressure to eke out
revenues from every available source. Doubts will continue as to whether OPEC
oil production quotas will be strictly adhered to. The picture will worsen in
2004 as oil prices decline.
The deterioration of the central government finances during the third quarter
underscored the unsustainable nature of the adjustment in the first half, which
was achieved mainly by draconian cuts to capital spending and transfers to the
regions. A major domestic debt swap carried out in November will ease the
government’s liquidity position by reducing the bunching of public debt
amortisations. Nevertheless, the Treasury’s gross financing requirement (fiscal
deficit plus amortisations) is still officially projected to be close to 5% of GDP in
2003, even on the basis of optimistic growth assumptions. The swap also sets a
worrying precedent in that it marks the first time that the government has
offered a currency guarantee for domestic debt. If this becomes a habit, the
government’s domestic debt dynamics risk becoming unsustainable, particularly
given pressures on the exchange rate. The Ministry of Finance will probably
attempt another swap in 2003, perhaps even involving external bonds. A
currency guarantee would provide a strong incentive to holders of domestic
debt, but it is doubtful that any swap proposal involving external debt would
meet with a favourable reception from bondholders. The government’s revenue
base will weaken in 2003-04 as oil prices trend downwards while spending
commitments rise owing to worsening social conditions. There will be
growing pressures for wage adjustments, employment-creating public invest-
ment and programmes to alleviate poverty.
The monetary authorities’ recent success in containing pressure on the currency
and domestic prices will probably encourage the Banco Central de Venezuela
Fiscal policy
Policy trends
Monetary policy
10 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
(the Central Bank) to stick with the tighter monetary posture which it adopted
during the third quarter. Assuring that sufficient liquidity exists for banks to
purchase government debt has become a less critical issue following the recent
swap operation which rolled over around a quarter of 2003 maturities. The
other factor which favours the maintenance of relatively tight policy stance is
the realisation that until political conditions improve, monetary easing will be
largely ineffective in stimulating economic activity.
Economic forecast
International assumptions summary(% unless otherwise indicated)
2001 2002 2003 2004
Real GDP growth
World 2.0 2.7 3.3 3.9
OECD 0.7 1.6 1.9 2.6
EU 1.4 0.9 1.6 2.2
Exchange rates
¥:US$ 121.5 125.5 128.8 130.5
US$:€ 0.896 0.948 1.070 1.053
SDR:US$ 0.785 0.771 0.737 0.744
Financial indicators
€ 3-month interbank rate 4.26 3.33 2.75 3.38
US$ 3-month Libor 3.78 1.85 1.44 3.25
Commodity prices
Oil (Brent; US$/b) 24.5 24.9 24.5 19.1
Gold (US$/troy oz) 271.1 308.0 307.5 290.0
Food, feedstuffs & beverages (% change
in US$ terms) -1.9 15.4 14.5 0.2
Industrial raw materials (% change in US$ terms) -9.8 0.2 6.1 9.7
Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.
We have cut our forecast for world GDP and trade growth in 2003, reflecting
weakness in OECD economies in the second half of 2002, limiting forward
momentum. Strong average annual GDP growth in the OECD is now unlikely to
resume before 2004. A major risk to our global forecast is the prospect of a US
war with Iraq, particularly its potential impact on oil prices. Our central forecast
assumes that any conflict would be brief, resulting in Saddam Hussein losing
power, and that consequently the spike in oil prices would be short-lived.
However, several risks exist to this benign forecast, including the risk that the
war may become prolonged, that its scope will widen or that it will detonate a
sustained campaign of global terrorism. If a prolonged war has a negative effect
on US consumer confidence, the correction of long-standing imbalances such as
negative private savings rates and a wide current-account deficit would be
precipitated, delivering a major shock to global demand. Once the Iraq situation
is resolved, oil-market fundamentals will reassert themselves. The high prices of
the past few years have stimulated massive investment in additional oil capacity,
particularly in non-OPEC countries. From 2004 prices will tend to fall as the
exploitation of spare capacity pushes the market towards oversupply. Our
forecast assumes that stronger global growth will absorb part of the increase in
production, preventing a sharper decline in prices.
International assumptions
Venezuela 11
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
After shrinking by an estimated 6.4% in 2002, real GDP will remain weak in
2003 as political conflict and difficult credit conditions will continue to depress
economic activity. Venezuelan industry has rarely been able to respond robustly
to changes in relative prices. This time, the potential for a positive expenditure-
switching impact of the more competitive bolívar, in the shape of export
expansion and import substitution, will be even weaker than in the past, owing
to years of underinvestment in many sectors. In addition to the problem of
underinvestment, another factor inhibiting companies’ ability to respond is the
high volatility exhibited by the real exchange rate, making it difficult for
companies to gauge the structure of relative prices and thereby to plan ahead.
Although there is little prospect of a meaningful recovery in 2003-04, there
should still be a modest increase in real GDP. Foreign investors are continuing to
demonstrate a willingness to invest in capital intensive sectors such as
hydrocarbons (especially downstream and natural gas) and mining. Such growth
will be narrowly based and will not significantly increase employment. Should
the confrontation between the government and the opposition degenerate into
more widespread violence, the outlook for GDP growth would be worse than
we currently expect. There is little upside risk to this forecast: in the event that
Mr Chávez’s term were to end prematurely, political dynamics would not be
conducive to the election of a market-friendly government with broad-based
support.
The slight easing of inflation in October and November largely reflects the
depressed state of demand. Underlying inflationary pressures remain strong,
particularly in view of the monetisation of the fiscal deficit. A domestic debt
swap has lifted some of the immediate pressure on the fiscal front, but the
financing problem remains severe. The widening disparity between consumer
and wholesale price increases in 2002 provides an indication of repressed
inflation. With demand forecast to remain weak, a renewed sharp depreciation
of the exchange rate would not necessarily feed directly through to higher
prices. It would, however, compound the inflationary backlog which will exert
upward pressure on prices for several years.
With the political environment set to remain extremely tense, the currency will
continue to be vulnerable. The moderate appreciation of the exchange rate in
October and November was underpinned by growth in foreign reserves. In
2003-04, both reserves and the bolívar will remain sensitive to political tensions
and to fluctuations in oil prices. If oil prices spike owing to tensions in the
Middle East, the bolívar could stage a marked recovery after the maxi-
depreciation of 2002. Equally, the currency would quickly come under pressure
again were world oil prices to drop sharply. At US$12.4bn at the end of
November, reserve levels are relatively comfortable, although this level could
quickly diminish should the Central Bank be forced to intervene in defence of
the currency. Below the ‘psychological barrier’ of US$10bn, the risk of exchange
controls increases sharply.
As the devaluation of the bolívar will keep import spending depressed and oil
prices are forecast to stay firm, the current-account surplus will widen again
External sector
Inflation
Exchange rates
Economic growth
12 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
in 2002-03. Thereafter, these trends will reverse as oil earnings drop owing to
declining prices and limited growth of production, and as imports return to
positive, albeit modest, growth. Oil will be the principal determinant of external
performance in the medium term. Oil export earnings, which dwarf all other
items in the trade account, will keep the trade balance in substantial surplus. In
late 2002 monetary easing in the US restrained the expansion of the income
deficit, but this trend will start to be reversed from 2004, boosting interest costs
on the external debt.
Forecast summary(% unless otherwise indicated)
2001a 2002b 2003c 2004c
Real GDP growth 2.7 -6.4 2.6 3.7
Gross agricultural production growth 2.6 2.0 2.5 2.5
Unemployment rate (av) 13.3 18.1 17.8 17.6
Consumer price inflation (av) 12.5 22.5a 29.9 26.8
Consumer price inflation (year-end) 12.3 32.5a 26.8 26.8
Short-term interbank rate 22.5 38.0 45.0 42.0
Central government balance (% of GDP) -4.2 -1.5 -4.0 -3.7
Exports of goods fob (US$ bn) 26.7 26.6 27.2 23.3
Imports of goods fob (US$ bn) 17.4 12.8 13.4 14.0
Current-account balance (US$ bn) 3.9 8.0 8.4 3.5
Current-account balance (% of GDP) 3.1 8.7 9.5 3.8
External debt (year-end; US$ bn) 37.4b 35.4 35.7 36.4
Exchange rate Bs:US$ (year-end) 763.0 1,431.4a 1,751.0 2,071.1
Exchange rate Bs:¥100 (av) 595.5 946.3 1,254.6 1,444.2
Exchange rate Bs:€ (year-end) 672.4 1,474.4 1,864.8 2,164.3
Exchange rate Bs:SDR (year-end) 958.9 1,921.0 2,365.2 2,776.8
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
The political scene
Political tension in Venezuela has continued to deepen in recent months as the
conflict between the president, Hugo Chávez, and opposition groups has
intensified. A heterogeneous array of opposition organisations, loosely grouped
under the Coordinadora Democrática umbrella (CD, Democratic Co-ordinator)
OAS-brokered talks seek to
arrest spiralling tensions
Venezuela 13
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
has mounted several campaigns to force Mr Chávez to stand down. In recent
weeks, opposition groups have drawn encouragement both from opinion
surveys suggesting a steep reduction in Mr Chávez’s popular support and from
evidence of mounting divisions within the ruling Movimiento Quinta República
(MVR) party. The intensification of the standoff between the government and its
opponents has fuelled mounting political violence despite mediation efforts by
the Organisation of American States (OAS). During November there were a
number of explosions in Caracas, with the headquarters of several CD groups,
private media organisations and the archbishop of Caracas targeted in a
bombing campaign which the opposition claims was instigated by the
government. Two people were also killed in street violence on November 4th
during the presentation by the opposition of a petition for a consultative
referendum at the headquarters of the national electoral authorities. This
violence has fuelled political hostilities and compounded a pervasive sense of
lawlessness.
Mr Chávez invited the OAS to act as a ‘dialogue facilitator’ in September, joining
similar efforts spearheaded by the Carter Centre and the UN Development
Programme (UNDP). The secretary-general of the OAS, César Gaviria, chairs the
negotiating committee. A Declaration of Principles signed in October as a
prelude to the OAS-sponsored talks committed both government and opposition
to act within the bounds of the 1999 constitution and to calm tensions by
scaling down street mobilisations. The government also pledged to tackle the
disarmament of the Círculos Bolivarianos (CBs, Bolivarian Circles), neighbour-
hood groups of pro-Chávez activists which the opposition allege have been
armed by the MVR. Yet the depth of mutual suspicion means that it is difficult to
envisage any substantive progress being made towards a negotiated settlement
of the political conflict. Irreconcilable differences exist even over the most
appropriate route to resolve the impasse. Although the government maintains
that a revocatory referendum on the president’s term is the only democratic and
constitutional mechanism that could be used to remove him, since October the
CD has been focusing its energies on a consultative referendum, with a view to
forcing early elections.
A consultative referendum is permissible under Article 65 of the constitution. It
can be called by the executive, the legislature or the “sovereign people” on issues
of “national transcendence”. For the populace to call a referendum, the
signatures of 10% of registered voters (approximately 1.2m people) are required.
The consultative referendum proposal was initially championed by two minor
opposition parties, Unión and Primero Justicia. Unión is the party of Francisco
Arias Cárdenas, a former army colleague of Mr Chávez who stood against him
in the 2000 presidential elections. Primero Justicia, dubbed the “yuppie party”
by its detractors, is led by Julio Borges, a 35-year-old lawyer who was elected to
the National Assembly in 2000. At first, other opposition organisations distanced
themselves from the consultative referendum proposal, which was deemed a
slow and uncertain route to secure Mr Chávez’s removal. Not only does this
route require intensive activist work in order to collect the requisite number of
signatures, but this kind of referendum is also non-binding. However, since
embarking on the OAS-brokered negotiations, the CD has united behind the
Anti-Chávez campaign shifts to
consultative referendum
14 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
consultative referendum option, which is now seen to offer three strategic
advantages. First, although not binding, the opposition is hoping that a large vote
against Mr Chávez would seriously undermine his legitimacy and credibility,
forcing him to step down and concede new elections. Second, the consultative
referendum can be held much earlier than the revocatory referendum, with
February 2nd 2003 suggested by the Consejo Nacional Electoral, (CNE, National
Electoral Council) as a viable option. The third strategic benefit of the
consultative referendum is that it is in keeping with the spirit of the Declaration
of Principles, in that it is permissible within the constitution.
The government has refused to accept the legitimacy of a consultative
referendum on the executive’s tenure. Accordingly, it insists that a negative vote
against Mr Chávez would not result in him stepping down. During his weekly
radio programme ‘Aló Presidente’ at the end of November, Mr Chávez argued
that, given the referendum’s non-binding character, even if 90% of the electorate
voted against him, he would not step down. The government insists that the
revocatory referendum permissible in August 2003 is the only legitimate means
of securing an early end to Mr Chávez’s elected term. The CNE has, however,
ruled that the consultative referendum is legitimate and can proceed, and its
decision has been broadly upheld by Tribunal Supremo de Justicia (TSJ, the
supreme court) rulings. These decisions underscore the extent to which
Mr Chávez’s project has unravelled and highlight his government’s loss of
control over key state institutions, which until mid-2002 had been regarded as
supine tools of the executive. The opposition argues that the rulings demonstrate
that state institutions have regained greater autonomy. However, it would be
more accurate to say that of late the opposition has itself become more
successful at colonising state institutions. This is particularly evident with regard
to the CNE, within which the CD now has control of five of the nine seats. To
increase pressure on the executive to consent to�and abide by the results of�a
consultative referendum, the CD launched a general strike on December 2nd, the
fourth such strike in 12 months.
The campaign for a consultative referendum is the latest in a series of campaigns
mounted by the CD in its efforts to secure Mr Chávez’s removal. In the months
following the failed coup in April, the primary strategy was to bring about the
president’s impeachment. The opposition’s enthusiasm for this route was lifted
by a TSJ ruling in August which demonstrated the judiciary’s increasingly
independent stance in relation to the executive (September 2002, pages 13-14).
Several proposed grounds were envisaged, ranging from corruption in election
campaign financing to economic mismanagement and human rights violations
in connection with the deaths of protestors in the anti-government
demonstrations which preceded the April coup. However, the impeachment
suits have been repeatedly blocked in the courts, on the basis that their
petitioners were unable to demonstrate, as legally required, that they were
personally affected.
The opposition’s other two principal strategies to force Mr Chávez to stand
down have been a campaign of civil demonstrations and the mobilisation of a
‘no’ vote with a view to a revocatory referendum in August 2003. In contrast to
the consultative referendum, a revocatory referendum is constitutionally
Altamira rebellion underscores
fragility of constitutional order
Venezuela 15
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
binding. Extremist groups within the CD, while publicly supporting the
referendum campaigns, have continued to press covertly for a military
intervention against the government. Concerns over a possible coup d’état have
risen since October, when a group of senior officers broadcast a televised call to
fellow servicemen to rebel against Mr Chávez. The rebel officers were led by an
army general, Enrique Medina Gómez, who played a central role in the April
military intervention; General Medina was one of the four senior officers who
was acquitted of charges of military rebellion by the TSJ in August, triggering
vehement protests from government supporters. In an attempt to win the
support of the ‘institutionalist’ majority within the military, the rebel officers
invoked the so-called ‘Article 350 argument’, under which constitutional
provision rebellion is permitted against “arbitrary and illegitimate government”.
The rebel officers were allowed free passage to Altamira, a wealthy district of
Caracas, where they and their civilian supporters have since continued their
occupation of the Plaza Francia. In November, one of the rebel officers, General
Pedro Sánchez Bolívar, broke with the rebellion. He claimed that the rebels were
stockpiling weapons and planning civil violence in order to provoke a military
intervention, although this was refuted by General Medina. There was no
response from the military hierarchy to the call for insurrection from the rebel
officers.
The popularity of the Article 35o argument means that a clause which was
inserted into the 1999 constitution at the behest of Mr Chávez’s supporters has
now become a central tool in the campaign to oust his government. Article 350’s
inclusion in the 1999 constitution was widely interpreted as an ex post facto
justification of Mr Chávez’s own attempt to overthrow the government of the
then president, Carlos Andrés Pérez, in a failed coup in 1992.
In the event that Mr Chávez is forcibly removed or voluntarily steps down, a
general election would exacerbate rather than ease political tensions. A power
struggle between members of the opposition is inevitable. Internal CD rivalries
remain acute, with member groups suspicious of each others’ long term
intentions. The only factor keeping the CD loosely together is opposition to
Mr Chávez. Besides lacking coherent leadership, the CD also lacks grassroots
popular support, particularly outside Caracas. The CD would therefore struggle
to agree on a unity candidate should elections be called. The main contenders
for the presidency from within the CD include Enrique Mendoza of the Comité
de Organización Política Electoral Independiente (COPEI) party, Julio Borges of
Primero Justicia, Henrique Salas Romer of Proyecto Venezuela and Antonio
Ledezma of Alianza Bravo Pueblo. None of these figures stand to attract more
than 15% of vote. Should Mr Chávez be prepared (and permitted) to participate
in new presidential elections�which will depend on the manner in which he is
removed from office�he would be likely to win if the opposition fails to unite
behind a single candidate.
Although Mr Chávez seems likely to be the strongest contender in the event of a
new general election, the latest opinion polls suggest that his support levels have
undergone a sharp decline. When Mr Chávez took office in 1999 he enjoyed
confidence ratings of 80%, an unprecedented high that allowed for a long
honeymoon period. Surveys by Datos and Datanálisis in October and
Elections seem unlikely to
resolve political tensions
16 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
November indicate that 67% of Venezuelans have little or no confidence in the
administration. Of those surveyed, 77% believed that the government had failed
to deliver on its pre-election promises, specifically to tackle corruption (in the
view of 71%), reduce personal insecurity (73%) and the cost of living (70%).
Mr Chávez has also experienced a haemorrhage of support from the poorest
sectors of Venezuelan society, which had previously been strongly loyal to the
government. Within the D and E social groupings, which represent these sectors
and constitute 80% of the population, 68% and 63% respectively have no
confidence in the administration. These polls need to be treated with a certain
amount of caution�sharp fluctuations have been common in the past�but the
message of growing frustration with lack of progress on tackling crime and
creating employment is nonetheless clear. One of the most striking factors to
have been confirmed by the poll results is that the opposition has failed to
capitalise on the decline in support for Mr Chávez. The CD continues to be
perceived as an aloof, middle-class organisation. The decline in support for
Mr Chavez has thus resulted in a wider sense of political disillusionment on the
part of the populace.
The political conflict, which forces the administration to focus primarily on
countermobilisation to the detriment of policy, leaves little room for Mr Chávez
to implement policies to help his government recuperate the support of the
poorest. The administration’s loss of its majority in the legislature is another
hindrance to policy effectiveness. The balance of forces in the chamber is highly
unstable, but the latest estimate suggests that the government may be able to
count on the support of 85 seats (51%), down from 103 (62%) in August 2000.
This slight majority is precarious, not least because of imperfect attendance and
party indiscipline, as well as the behaviour of several major swing votes. Four
years into his term, Mr Chávez has found it increasingly difficult to apportion
blame for economic recession and policy immobility to the legacy of previous
governments. Laying the blame on the disruptive activities of the opposition has
also become increasingly unconvincing. Instead, by drawing attention to the
administration’s impotence, this strategy has probably contributed to the fall in
support for Mr Chávez’s government.
The latest attempt to recover the political initiative was a cabinet re-organisation
announced in November. The presidential secretariat was abolished and
replaced by a new Office of the Presidency, headed by Brigadier General Carlos
Eduardo Martínez and subdivided into the Presidential Affairs Office and
Internal Administration Control Office. A new ministry, the Ministry for the
Development of Social Economy, has also been created. It is to be headed by
Nelson Merentes, the former finance minister. The reorganisation has been
presented as a streamlining initiative, with a view to stepping up delivery of
policies to reduce unemployment and generate economic growth.
With the political conflict likely to intensify in the closing weeks of 2002, the
military will again become a decisive political player. The high command’s
reluctance to become directly involved in mediating the conflict has been
repeatedly emphasised in recent months by official statements in which the
armed forces have reiterated their loyalty to constitutional procedures.
Cabinet re-organisation in
attempt to recover initiative
Military moves centre-stage
Venezuela 17
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Nevertheless, the impasse over the consultative referendum will force the
military to act as final arbiter on the issue. The general strike launched by the
opposition on December 2nd highlighted the OAS’s inability to broker a
consensus on the matter. It is unclear how the military will act. ‘Bolivarian’
sections personally loyal to Mr Chávez may prevail, in which case the military
would insist that a revocatory referendum in August 2003 is the only legitimate
step for the opposition to take. However, should a consultative referendum be
prohibited, a wave of protests could be expected. If the military hierarchy were
to pronounce the consultative referendum legitimate, we expect that Mr Chávez
would allow the process to go ahead rather than risk a confrontation with the
armed forces. A solid defeat for Mr Chávez in the event of a consultative
referendum would also probably require heavy military involvement in order to
contain violence.
In a highly controversial move, in November the Ministry of Interior and Justice
decreed the takeover of the Policia Metropolitana (PM, Metropolitan Police). The
8,000-strong PM falls under the authority of the mayor of the metropolitan
authority. The current mayor, Alfredo Pena, is a prominent figure within the CD
and a staunch critic of Mr Chávez. The government justified the takeover as an
attempt to restore law and order in the capital, following a series of violent
attacks on pro-government supporters, which, Mr Chávez claims, were
perpetrated by the PM under orders from Mr Pena. The PM has long had a
reputation for brutality towards residents of the slums which surround the
capital. Over the past decade, it has also frequently been implicated in
corruption and arms-trafficking scandals. Mr Pena has sought to raise the PM’s
prestige by mounting a major public relations campaign. However, government
supporters contend that Mr Pena has transformed the PM into his own private
army. By ordering the armed forces and national guard to disarm anti-
government elements within the PM and by imposing a new executive board,
Mr Chávez has exposed his government to accusations of militarising the capital
in violation of the constitution. The intervention of the PM also triggered
speculation that the government was planning to impose a state of emergency.
The opposition claims that the government may be considering taking such a
step�under which all constitutional rights would be suspended�as a stratagem
to stymie the proposed consultative referendum and to create the conditions for
the arrest of opposition leaders. Imposing a state of emergency would only be
possible with the support of the military, and would deepen rather than resolve
the political conflict.
Mr Chávez’s authority has become increasingly circumscribed by contending
forces within the ruling MVR. Moderate factions favour negotiations with the
opposition while more radical elements are committed to pushing ahead with
the government’s agenda of ‘revolutionary’ change. Should Mr Chávez side with
the hardline sections, dubbed the Talibanistas, moderates will continue to defect
from the MVR, both in the legislature and at the grass-roots level. A decision to
side with the hardliners would also exacerbate Mr Chávez’s international
isolation, while further polarising the domestic political situation. The
Talibanistas are themselves internally divided, largely by conflicts of personality.
Against this backdrop, the pro-government Patria Para Todos (PPT, Homeland for
Intervention of Caracas police
highlights depth of hostilities
Divisions deepen within
the MVR
18 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
All) party will continue to play a critical balancing role. Figures from the PPT
also occupy a number of key cabinet and ambassadorial positions, in addition
to the presidency of Petróleos de Venezuela (PDVSA, the state-owned oil
company). The PPT would be alienated if Mr Chávez were to adopt a more
hardline position. Indeed, the PPT may yet capitalise on Mr Chávez’s decline
and emerge as a leading left-of-centre option for a highly disaffected and
frustrated electorate.
The handover to the Colombian military in November of eight members of the
Fuerzas Armadas Revolucionarias de Colombia (FARC, Colombia’s largest
guerrilla group) captured in Venezuela has been interpreted as a sign of
improved political co-operation between the two countries. Mr Chávez has long
been regarded with suspicion by key groups in the US and Colombia for his
perceived sympathies to the FARC. He has been accused of permitting the FARC
to launch terrorist attacks in Colombia from within Venezuela. The handover of
the eight FARC captives may be a small step towards dispelling these suspicions.
Relations between Mr Chávez’s government and the administration of the
Colombian president, Alvaro Uribe, have been cordial since Mr Uribe took office
in August.
Nevertheless, underlying tensions over security and trade issues remain
significant. Incursions by left- and right-wing Colombian paramilitary groups
have exacerbated instability and political violence on the border between
Venezuelan and Colombian. The UN refugee agency, the UNHCR, has voiced
concerns over the growing number of refugees forced into Venezuela as a result
of Colombia’s escalating conflict. Friction over trade has been stoked by
Venezuela’s introduction of protectionist import measures in September
(September 2002, page 24), in violation of bilateral free-trade agreements.
Progress has nonetheless been made on several bilateral projects. In a meeting
held in November, Mr Chávez and Mr Uribe discussed plans for a bridge
between the northern Santander Department in Colombia and Zulia state in
Venezuela. This would reduce travelling times and increase the speed of
Colombian coal exports. Joint ventures between Ecopetrol, the Colombian state-
owned oil company, and its Venezuelan counterpart, PDVSA, were also
discussed. It was announced that construction of a 500-km, US$50m-70m gas
pipeline to export gas from Colombia to Venezuela will start in January. PDVSA
will undertake construction, while Ecopetrol, in partnership with Chevron-
Texaco, is to provide about 200m cu ft/day of gas from their platforms in the
Caribbean in 2005-12.
Relations between Venezuela and the US have remained strained. The US
government failed to condemn the attempt to remove Mr Chávez from power
in April 2002, leading to suspicions that the US covertly abetted the abortive
coup. The government’s suspicion of US activity in Venezuela has been
compounded by Washington’s financial assistance to Venezuelan opposition
groups, channelled through the National Endowment for Democracy and the
Office for Transition Initiatives (September 2002, pages 16-17). Since September,
the US administration has assumed an increasingly critical position towards
the Venezuelan opposition and has sought to make clear, via a series of official
US-Venezuelan relations
remain strained
Practical co-operation with
Colombia but tensions persist
Venezuela 19
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
communiqués from its embassy in Caracas, that it would not support any
extra-constitutional attempts to bring down Mr Chávez’s government. At the
same time, the US embassy has sought to emphasise the importance of
negotiations between government and opposition to resolve the political
crisis.
However, the re-emergence of a more ‘hawkish’ line on Venezuela remains a
possibility. Some of the more outlandish claims to have been made recently
appear to enjoy credibility among influential quarters of the Republican Party.
The Hudson Institute’s claim, put forward in August by one of the institute’s
spokesmen, Constantine Menges, that Venezuela formed part of a new “Axis of
Evil” along with Brazil and Cuba, was reiterated in October, just days before the
second-round Brazilian elections, by Henry Hyde, the chair of the House
International Relations Committee. Mr Hyde called on the US president, George
W Bush, to take assertive action to defend the “southern flank” of the US from
this perceived terrorist threat. Mr Chávez has also come under strong attack from
Otto Reich, until recently the US’s undersecretary of state for Latin America and
a former ambassador to Venezuela. Although Mr Reich was removed from his
post as undersecretary in late November after the Senate failed to confirm his
appointment, this situation could be reversed when the new Republican-
dominated Senate takes over in January. Either way, Mr Reich is likely to remain
an influential figure in US policy towards Latin America. Mutual political
suspicions will not, however, interfere with practical co-operation. Mr Chávez
has emphasised his government’s commitment to maintaining oil supplies to
the US in the event of war against Iraq.
Economic policy
The latest available figures for the consolidated public sector financial accounts
are for the first half of 2002. They confirm that the authorities were reasonably
successful in containing the fiscal imbalance during the opening months of the
year. During this period, public-sector revenues largely matched expenditure,
resulting in a virtually balanced budget. This was a big improvement on the
second half of 2001, when spending far outstripped income, resulting in a large
fiscal deficit for the whole year. In relation to GDP, revenues were down
significantly in the first half of 2002 compared with the first six months of 2001.
This was primarily the consequence of a decline in the operating surplus of
Petróleos de Venezuela (PDVSA, the state oil company) owing to lower world
prices. Expenditure was held down to practically the same extent primarily
through cuts to non-interest current outlays.
There was an acute lack of financing to cover maturing debt obligations. The
repayment of domestic debt was equivalent to 1.5% of GDP in net terms, and net
payments to external creditors caused a further drain equal to 0.4% of GDP. Both
had to be financed by drawing down deposits built up earlier in the Fondo de
Inversión para la Estabilización Macroeconómica (FIEM, Macroeconomic
Stabilisation Investment Fund).
Budget deficit widens
20 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Operations of consolidated public sector(% of GDP)
Year Year Jan-Jun Jan-Jun
2000 2001 2001 2002
Total income 31.8 26.9 13.1 11.5
Current income 31.8 26.8 13.1 11.5
Tax revenues 9.1 9.4 4.5 4.5
Operating surplus of PDVSA 18.2 12.3 6.7 4.6
Operating surplus non-oil
state cost 1.4 0.5 0.5 0.6
Other 3.2 4.6 1.4 1.8
Capital income 0.0 0.1 0.0 0.0
Total expenditure 27.5 31.4 12.8 11.6
Current spending 19.1 20.6 8.7 7.8
Primary 16.1 17.3 7.1 5.6
Interest payments 3.0 3.3 1.6 2.2
Capital spending 7.3 9.4 3.5 3.1
Concessions (net) & off-budget 1.1 1.4 0.6 0.6
Primary balance 7.3 -1.2 1.9 2.2
Financial balance 4.3 -4.5 0.3 0.0
Financing
Internal 1.3 5.3 1.3 -1.5
External -5.6 -0.8 -1.7 1.6
FIEM -3.6 -1.2 -1.5 1.9
Source: Ministerio de Finanzas.
Information on the financial position of the central government is produced
on a more timely basis. Preliminary figures had shown that that there was a
small budget surplus in the first half, although these were subsequently
revised to a position of virtual balance. Provisional numbers for the third
quarter indicate that there was a marked worsening in the central government
fiscal balance in July-September. Consequently, the outturn for the first nine
months was little better than the same period of 2001, which ended with a
sizeable deficit. The deterioration in the third quarter was due to a sharp
upturn in government outlays, indicating that the earlier improvement had
been achieved through a postponement of spending rather than a
restructuring of government finances.
Central government finances(% of GDP)
Year Jan-Sep
2000 2001 2001 2002
Total income 19.6 20.4 15.5 14.7
Current income 19.6 20.4 15.5 14.7
Tax revenues 12.5 11.2 8.4 7.8
Oil related 4.1 2.5 2.1 0.9
Non-oil related 8.4 8.7 6.3 6.9
Non-tax revenues 7.1 9.2 7.1 6.9
Oil related 5.7 6.8 5.4 6.1
Non-oil related 1.4 2.4 1.7 0.8
Capital income 0.0 0.0 0.0 0.0
Venezuela 21
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Central government finances(% of GDP)
Year Jan-Sep
2000 2001 2001 2002
Total expenditure 21.2 24.7 17.3 16.2
Current spending 17.1 19.0 12.7 12.6
Wages & salaries 3.6 4.3 2.9 2.8
Purchase of goods & services 0.7 1.2 0.8 1.2
Interest payments 2.5 2.9 2.0 3.5
Transfers & other 10.3 10.6 6.9 5.0
Capital spending 3.2 4.3 2.7 2.3
Concessions (net) & off-budget 1.0 1.4 1.1 1.3
Primary balance 0.9 -1.4 0.2 2.0
Financial balance -1.6 -4.3 -1.8 -1.5
Financing
Internal 3.9 3.9 2.3 1.2
External -2.3 0.3 -0.5 0.3
FIEM -1.8 0.1 -0.6 0.8
Source: Ministerio de Finanzas.
As part of a number of desperate efforts to cover public financing needs, in
September the authorities decided to accelerate the payment of dividends by the
Banco Central de Venezuela (the Central Bank) to the national Treasury. This
required a modification of the Central Bank Law, which was approved by
Congress in mid-October. The change establishes that from now on the
payments will be made on a semi-annual rather than an annual basis. In
addition, as a transitory measure, it was established that the first semester of
2002 should have a duration of nine months and the second semester three
months. This was to allow for the immediate payment of accumulated year-to-
date profits, amounting to around Bs1,135bn (US$1bn). Most of these revenues
derived from the foreign-exchange gains made by the Central Bank buying
dollars at a certain rate then selling them at a higher one as the bolívar
depreciated. This represents a monetisation of the deficit, as the Central Bank
must print bolívars in order to effect the transfer. This helps explain why
inflation has continued to rise steadily despite the fact that the economy is deep
in recession.
The draft 2003 budget was presented to Congress in mid-October. The oil sector
assumptions seem to be reasonably conservative. The average oil price is put at
US$18/barrel, considerably below the US$22/b achieved in the first eleven
months of 2002. Oil production is projected to rise to 3.14m barrels/day from
2.73m b/d in 2002, with exports up to 2.63m b/d from 2.44m b/d in 2002. The
latter compares with the country’s present OPEC quota of 2.5m b/d, which most
probably is being exceeded by up to 300,000 b/d. Consequently, the estimate of
oil revenues in the budget would appear to be feasible. However, the projections
for non-oil revenues appear to be founded on unrealistic assumptions. Most
importantly, real GDP growth is assumed to be 3.7%. Oil-sector growth is
projected at 2% and non-oil-sector growth at a stellar 8.7%, well above our
forecast. An increase in the elasticity of non-oil taxes to GDP would seem to be
factored into the calculations, as non-oil revenues are projected to rise from 10%
Central Bank hands over
profits
2003 budget considered
unrealistic
22 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
of GDP in 2002 to 11.9% in 2003. Total revenues are put at 21.2% of GDP, up from
20.1% a year earlier.
On the expenditure side, an increase from 21.8% of GDP to 23.2% of GDP is
envisaged, although this may not fully reflect the government’s liabilities: the
Economic Advisory Office of the National Assembly (OAEF) has suggested that
large pending payments from 2002 are not properly accounted for in the budget.
Other assumptions contained in the draft budget include inflation of 20% in
2003 and an average exchange rate of Bs1,602:US$1.
The official projections assume that the central government deficit will widen to
2% of GDP, from 1.6% in 2002. The most recent modification of the
macroeconomic stabilisation fund (FIEM) legislation in October will provide
some flexibility on the financing side. The suspension of contributions to the
FIEM has been extended until the end of 2003 (previously end-2002). In
addition, until June 2003, 20% of FIEM transfers to states and municipalities can
be used to cover current rather than investment spending. However, even taking
into account the successful debt swap subsequently carried out in November,
gross financing needs for 2003 are still officially estimated at 4.9% of GDP.
As the government has struggled to cover its financing needs in recent years
because of limited access to external markets, its domestic debt burden has risen
markedly. The problem is not so much the size of the domestic debt. Although
this almost tripled as a proportion of GDP between 1998 and 2001, the starting
point was so low that even at the end of 2001 the ratio was still a relatively
comfortable 11.5% of GDP. But there was a severe bunching of scheduled
amortisation payments in 2002-04. Of the debt outstanding at the end of
June 2002, 28% fell due for repayment in the second half of the year, a further
28% in 2003 and 24% in 2004. As the political and economic situation has
deteriorated, the authorities have found it ever more difficult to roll over these
obligations. This has been at the heart of the fiscal problem of late. After
attempts to seek fresh financing in the international markets failed in September
and October, the government became reliant on drawing down funds from the
FIEM as a stop-gap measure. The urgency of the change to the Central Bank Law
to access the Central Bank’s foreign-exchange profits was due to the growing
Domestic debt swap alleviates
financing burden
Venezuela 23
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
cash-flow crisis. The domestic debt swap was conceived as a means to achieve
more lasting relief by stretching out payments on domestic obligations.
The exchange was voluntary in nature, although given that most of the domestic
debt is held by local financial institutions, the government would have been in a
position to exert some pressure. The operation was largely successful. Two
auctions were held towards the end of November, the first covering bonds
maturing in 2004 and the first half of 2005, and the second those maturing in
December 2002 and throughout 2003. The total amount of eligible debt was
around Bs8,350bn (around US$6.3bn), and the government aimed at swapping
25-30% of this for longer-dated instruments. Each auction was divided into two
stages. In the first, bonds tendered were exchanged for new ‘ordinary’ bonds
with the maturity extended by one year and a premium paid over the previous
yield. In the second stage, those participants that exchanged bonds in the first
stage could then swap part of their new holdings for ‘extraordinary’ bonds
maturing in 2006-07. The attraction of these instruments for investors is that
they have a partial exchange-rate guarantee, under which holders will be
compensated if the depreciation of the bolívar exceeds the difference between
the yield on the bonds and a dollar reference rate of Libor plus 1%.
The result of the operation was that Bs2,630bn (US$1.97bn) of bids were
accepted, representing 31.5% of eligible debt. New bonds totalling Bs2,793bn were
issued, of which Bs1,813bn were ordinary bonds and Bs980bn extraordinary
bonds. The average maturity of the new instruments is three years, compared
with 1.3 years for the old ones. The net reduction in amortisation payments will
be Bs92bn (US$69m) for December 2002, Bs1,013bn (US$760m) for 2003 and
Bs594bn (US$445m) for 2004. The decrease represents 26% of originally
scheduled payments for 2003 and 19% for 2004. This will go some way towards
easing payments capacity over the next two years, although it by no means
addresses the causes of Venezuela’s fiscal difficulties. The reduction in financing
needs in 2003 is equivalent to around 0.7% of GDP, lowering official projections
of the gross borrowing requirement from 5.6% of GDP in the budget to 4.9%. The
cost to the state of the bond swap is an increase of three to five percentage
points (to 36-38% per year) in the annual yield on the new ordinary bonds
compared with the bonds retired, and the partial exchange-rate guarantee on the
extraordinary bonds, the cost of which will depend on developments in the
foreign-exchange market.
Domestic bond swap, Nov 2002(Bs bn by maturity)
2002 2003 2004 2005 2006 2007
Bonds withdrawn 92.9 1,013.4 1,184.4 343.5 – –
New bonds – – 590.7 892.4 755.8 554.5
Ordinary bonds – – 590.7 892.4 330.4 –
Extraordinary bonds – – – – 425.4 554.5
Reduction in amortisation
payments 92.9 1,013.4 593.7 – – –
Source: Ministerio de Finanzas.
Evidently concerned about the collapse of the currency, in late September the
Central Bank tightened monetary policy substantially. This came after several
Monetary policy tightening
stabilises exchange rate
24 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
months of vacillating policy, which had contributed to the weakness of the
bolívar. The exchange rate reached a low of Bs1,492:US$1 on September 11th, at
which point the price of the dollar was up by 97% from the end of 2001
(implying a nominal depreciation of 52%). The rapid depreciation in the currency
clearly threatened to cause a surge in inflation. The Central bank responded by
lifting its discount rate from 37% to 40%, its rate on short-term repos (an
instrument to absorb liquidity from the system) from 20.5-25.5% to 22-27% and its
rate on short-term reverse repos (an instrument to inject liquidity) from 30-31% to
33-34%. Somewhat surprisingly, this proved effective in stabilising the exchange
rate. Higher oil revenues deriving from stronger prices and increased export
volumes also played a role, although as oil prices were volatile during this
period, by themselves they do not fully explain the stabilisation of the bolívar.
Global oil prices peaked in late September and then underwent a sharp
downward correction before recovering partially in the latter part of November.
The Venezuelan average export price peaked at US$27.11/b in the week ending
October 4th and then fell to US$21.83/b in the week to November 15th before
moving back up to US$23.5/b in the last week of November. Although the fall in
prices would not have had an immediate impact on cash revenues owing to the
customary lag before payments are received, it might have been expected to
have fuelled pressures in the foreign-exchange market. Despite this, the exchange
rate appreciated to Bs1,427:US$1 at the end of October and Bs1,322:US$1 at the
end of November, compared with a peak of Bs1,491:US$1 in mid-September.
The domestic economy
Real GDP fell by 5.5% year on year in the third quarter of 2002. This was an
improvement on the second quarter, when output plunged by 9.7% (restated
from a preliminary estimate of 9.9%). However, for the first nine months of 2002
as a whole, real GDP was still down 6.4% year on year. Some encouragement
can be derived from signs of a rebound on a quarter-on-quarter basis. The
official seasonally adjusted numbers are not yet available for the July-September
period. Nonetheless, assuming the same kind of seasonal pattern in activity as
in previous years, it may be estimated that real GDP rose by just over 5% in
quarter-on-quarter terms. This is not as impressive as it sounds as it must be set
against the steep decrease of the first half. In fact, the seasonally adjusted series
shows that output was 9.5% lower in the April-June period than in the final
quarter of 2001. The quarter-on-quarter recovery in July-September was almost
entirely due to the rebound of the oil sector, which had been hard hit in the
second quarter by the partial strike in the industry in the run up to the April
coup. The recovery of oil activity in the third quarter was officially attributed to
an increase in production by the private companies operating in the Orinoco
heavy-oil belt as well has a higher through-put at the country’s refineries.
However, it also seems likely that PDVSA raised its production of crude;
company officials have tacitly admitted that violation of Venezuela’s OPEC
quota is now substantial.
Decline in output decelerates
Venezuela 25
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
Gross domestic product growth(% real change, year on year)
2001 2002
Year 2 Qtr 3 Qtr Jan-Sep
Oil -0.9 -15.9 -1.3 -8.2
Non-oil 4.0 -6.6 -5.5 -4.8
Mining 1.1 0.3 -0.2 -0.6
Manufacturing 2.9 -10.9 -5.4 -7.2
Construction 13.5 -27.6 -24.0 -20.5
Commerce 4.2 -11.8 -12.0 -10.0
Communications 13.0 4.7 2.7 4.5
Financial services 1.1 -9.2 -11.0 -9.0
Public services 1.4 -1.2 -1.8 -1.3
GDP 2.8 -9.7 -5.5 -6.4
Source: Banco Central de Venezuela.
Activity in the non-oil sector has remained deeply depressed. The drop in
aggregate output for the non-oil economy in the third quarter was almost as
sharp as in the second quarter. Some sectors�including transport,
communications and financial services�put in a worse performance than in the
second quarter. Construction remained deep in depression, although the 24%
year-on-year slide in activity represented a slowdown in the rate of contraction
compared to the second quarter. There were some muted signs of improvement
in manufacturing, in that output fell by substantially less than in the April-June
period. This was probably linked to the improvement in competitiveness
brought about by the real depreciation of the bolívar. All the same,
manufacturing GDP was still 5.4% lower year on year. The weaker currency is
advantageous for producers of tradeables, but is far from sufficient to stimulate
non-oil activity. The forces depressing activity, in particular the lack of
confidence related to political uncertainty, are more powerful.
Annual consumer price inflation has continued to rise steadily, reaching 30.7% in
November compared with only 12.3% at the beginning of the year. In September,
the index jumped by 4.5%, the biggest monthly increase of the year. This was the
result of a combination of factors, including the sharp depreciation of the
Non-oil activity remains in
doldrums
Inflation eases off
26 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
currency over previous months and the one-off impact of the hike in the rate of
value-added tax (VAT) from 14.5% to 16%. Adjustments to some utility tariffs,
such as telephones, were also made in September. On top of this there was the
seasonal hike in school fees that happens at the start of the academic year.
However, the monthly rate slowed down in both October and November,
helped by the stabilisation of the bolívar and the relative stability of the prices
of basic services. Given the depressed state of the economy, monthly inflation
of 1-2% is still substantial. Moreover, underlying inflationary pressures remain
strong, as indicated by the widening divergence between the wholesale and
consumer price indexes. The wholesale price index rose by 51.4% in the 12
months to October. Inflationary financing such as the monetisation of Central
Bank exchange rate profits will compound pressure on prices.
Consumer price inflation(% change; Caracas metropolitan area price index)
2001 2002
Monthly Cumulative Year on year Monthly Cumulative Year on year
Jan 0.9 0.9 12.6 0.9 0.9 12.3
Feb 0.5 1.4 12.7 1.8 2.7 13.7
Mar 0.8 2.2 12.5 4.2 7.0 17.6
Apr 1.1 3.3 12.1 2.1 9.3 18.7
May 1.5 4.9 12.6 1.1 10.5 18.3
Jun 1.0 5.9 12.5 2.0 12.8 19.6
Jul 1.5 7.5 13.0 3.6 16.9 22.0
Aug 0.6 8.2 12.9 2.4 19.7 24.2
Sep 1.2 9.5 12.3 4.5 25.0 28.2
Oct 0.9 10.5 12.3 2.2 27.8 29.9
Nov 1.0 11.6 12.7 1.6 29.9 30.7
Dec 0.7 12.3 12.3 – – –
Source: Banco Central de Venezuela.
Oil and gas
Bidding for three of the five natural gas blocks on offer in the Deltana Platform
closes on December 16th. Block 1 has already been allocated to British Petroleum
(BP). At the start of November, the Ministry of Energy and Mines distributed the
Bidding for Deltana gas project
advances
Venezuela 27
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
terms and conditions for the rights to explore and develop Blocks 2, 3 and 4.
British Gas and Chevron-Texaco are competing for Block 2, while Statoil and
TotalFinaElf are participating in the tender for Blocks 3 and 4. The winners are
due to be announced on December 20th so that work can get underway in
2003. The Deltana Platform covers some 6,500 sq km and the first stage is
projected to result in the production of 1bn cubic feet of natural gas per day,
with an estimated total investment of US$4bn. The projects will be joint
ventures with PDVSA, whose equity participation will be between 1% and 35%.
The joint-venture partners will be allowed to hold no more than an 80% interest
in each project, with the remaining 20% reserved for minority shareholders.
Figures on the number of exploration rigs in operation suggest that the country’s
future crude oil production potential is in decline. It is reported that that there
were just 37 rigs active in September, down from 65 a year earlier and 121 five
years ago when activity was at its peak following the opening of the sector to
private involvement. The president of PDVSA, Ali Rodríguez, has admitted that
the country is currently producing in excess of its OPEC quota, as had been
widely assumed. He put production at around 3m barrels/day, which, after
excluding some 140,000 b/d of condensates and 60,000 b/d of extra-heavy
crude that does not form part of OPEC quotas, means that production is some
300,000 b/d in excess of the country’s current quota of 2.5m b/d. However, if
exploration activity as gauged by the rig count continues on a downward trend,
the country may soon lose the ability to exceed its quotas.
After being suspended for almost five months following the failed coup against
Mr Chávez in April, crude oil began to be exported to Cuba again in early
September. This followed the reported repayment of around US$29m of the
US$142m arrears that Cuba had accumulated on previous shipments. The sales
are made under preferential terms, with Cuba allowed to defer payments for
25% of the 53,000 b/d of crude it receives. The government has rejected repeated
allegations by the opposition that it is squandering national resources to help
prop up the regime of Fidel Castro in Cuba.
Betapetrol, a locally owned oil distribution company, has submitted a proposal
to the Corporación Venezolana de Guayana (CVG, the Guayana state
development corporation) to construct the country’s first privately owned oil
refinery. The facility would have a capacity of 400,000 b/d and would cost
about US$2bn. It would be located on the Orinoco river in the south-eastern
state of Bolívar and would process extra-heavy crude from the region. The
output of gasoline and other products would be exported mainly to markets
such as Brazil, Colombia and the Caribbean. Betapetrol operates a chain of
petrol stations and is majority owned by Nelson Mezerhane, a Venezuelan
banker. The company’s proposal seeks to take advantage of the 2001
hydrocarbons law, which, although it insists on the state taking a controlling
stake in new oil exploration and production projects, opened the way for greater
private-sector participation in downstream activities such as refining. Under the
new hydrocarbons law, refineries are granted a 40-year lease before the facilities
revert to state ownership. Betapetrol’s proposal envisages that construction of
the new refinery would take place in three stages over nine years. Investment
Rig count down
Shipments to Cuba resumed
First privately owned oil
refinery is proposed
28 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
costs would be kept down by making use of existing idle installations such as
a dock, oil tanks and pipelines. However, the project would require foreign
financing, which could prove difficult to secure given the current political
climate.
Mining and industry
The Canadian-owned Crystallex International Corporation has been selected by
the CVG to operate the Las Cristinas gold mine in the south-eastern state of
Bolívar. This is the latest instalment in a long-running saga surrounding the
development of the deposits, estimated to rank among the top five undeveloped
gold resources in the world. Originally the CVG formed a partnership with
Canada’s Placer Dome, but this broke down in 1999 when investment was
frozen by Placer Dome on the grounds that low world prices rendered the
project unviable. Placer Dome then sold a controlling stake in the operation to
another Canadian concern, Vancouver-based Vannessa Ventures. This proved to
be highly controversial and the transaction was not recognised by the CVG,
which argued that it violated the terms of the original concession contract. Using
this as justification, the government took control of the mine in mid-2002.
Vannessa bitterly contested this decision and is still awaiting a final ruling on an
appeal it lodged with Tribunal Supremo de Justicia (TSJ, the supreme court). It
has also said that it will seek international arbitration for redress under an
investment protection agreement between Canada and Venezuela. Vannessa
estimates that it has spent around US$170m on exploration and preparatory
work at the site. Vanessa’s problems with the government did not deter several
other foreign companies from showing interest in taking over the concession.
Crystallex was selected because it already has other mining properties in the
country and offered the prospect of the quickest opening of the mine. Detailed
contract negotiations will now take place, with the project calculated to require a
total investment of around US$500m. Construction work will take
approximately 18 months to complete. The mine is forecast to process 40,000
tonnes of ore per day when it comes into production in 2004-05, with proven
and probable reserves put at 11.8m ounces of gold.
The Guayana state development corporation CVG has announced plans to
expand output capacity at the two primary aluminium smelters it controls at
Puerto Ordaz in the Guayana region by more than 400,000 tonnes to above 1m
tonnes a year by the end of the decade. A new production line (number five) at
the Alcasa facility will lift production potential by 200,000 tonnes to 410,000
tonnes per year, while the planned number six line at the Venalum facility will
add as much as 250,000 tonnes per year to existing capacity of 430,000 tonnes.
Investment costs are projected at US$500m and US$650m respectively. It is not
clear how such large amounts will be raised, although CVG president Francisco
Rangel has said that five foreign companies are interested in becoming joint-
venture partners for the Alcasa expansion. Meanwhile, the CVG also plans to
develop a new large bauxite deposit at El Palmar, in addition to the Pijiguaos
mine operated by its Bauxilum affiliate. The company says discussions have
been held with BHP-Billiton to develop the deposits, to build a new aluminium
Canadian company to
reactivate gold project
Ambitious plans for
aluminium sector
Venezuela 29
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
smelter and to invest in the downstream fabricating industry. Thus far, it seems
that talks are at a very preliminary stage.
Foreign trade and payments
Rising exports combined with falling imports resulted in a sharp year-on-year
increase in the trade surplus in July-September. The US$5.2bn trade surplus
recorded in the third quarter was not only well up on the previous three months
but also substantially greater than during the same quarter of 2001. It pushed
the year-to-date surplus up to US$10.4bn, comfortably exceeding the total for the
whole of 2001. Third-quarter export earnings were 17.5% higher than the year
before, boosted by a 21% year-on-year increase in oil earnings due to stronger
world prices. Non-oil export earnings, on the other hand, rose by only 2% year
on year. In an environment of difficult global market conditions and low
confidence at home, the maxi-depreciation of the bolívar has been insufficient
to boost non-oil exports. The best that can be said is that they are rising
modestly instead of falling as they did in the opening three months of the year.
The fall in value of the bolívar had a bigger impact on imports. With the
depressed state of domestic demand also acting as a dampening factor, imports
contracted even further in the third quarter. They were not just below the levels
of the previous two quarters, but 35.4% down on year-earlier levels.
Trade balance, 2002
(US$ m, unless otherwise indicated)
1 Qtr 2 Qtr 3 Qtr Jan-Sep
% change
year on year
Exports 5,479 6,473 8,238 20,190 -5.8
Oil 4,353 5,144 6,897 16,394 -6.6
Non-oil 1,126 1,329 1,341 3,796 -2.2
Imports 3,438 3,278 3,032 9,748 -25.6
Oil 331 419 280 1,030 -30.3
Non-oil 3,107 2,859 2,752 8,718 -25.0
Balance 2,041 3,195 5,206 10,442 25.5
Source: Banco Central de Venezuela.
In addition to the widening in the trade surplus, there was a moderate
narrowing of the services deficit in the third quarter. This resulted from a
reduction in freight and insurance charges (linked to the drop in imports) as well
as smaller tourism outgoings. As the income deficit narrowed slightly from the
huge imbalances recorded in the first and second quarters, the current-account
surplus soared to US$3.8bn in July-September, far exceeding what was seen in
the first two quarters combined. This pushed up the positive balance for the first
nine months to US$5.6bn, substantially larger than the US$3.9bn posted for the
whole of 2001.
The rise in the current-account surplus in the third quarter was outweighed by
the sharp deterioration in the capital and financing account during the same
period. As a result, there was a further loss of international reserves, albeit at a
much more modest rate than had occurred during the first quarter. The
worsening capital account deficit was the result of the same forces that have
Trade surplus soars
Current account surplus covers
capital outflows
30 Venezuela
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
been at work for some time now: the amortisation of external debt, the virtual
absence of new voluntary lending and, above all, unrelenting capital flight.
Foreign direct investment (FDI), which had held up quite well in 1998-2001, has
slowed to a trickle in 2002. Inward FDI totalled just US$321m in the third quarter
and US$995m in the first nine months, compared with US$2.3bn in the same
period of 2001. One of the main factors behind this decline has been the tailing
off of outlays by foreign-owned oil companies. (The national presentation of
Venezuela’s balance of payments presented below calculates ‘net FDI’ as the
sum of inward and outward flows.)
Balance of payments(US$m, unless otherwise stated)
2001 2002
Jan-Sep 1 Qtr 2 Qtr 3 Qtr Jan-Sep
Current account 4,607 204 1,588 3,817 5,609
Trade 8,322 2,041 3,195 5,206 10,442
Services -2,499 -711 -697 -651 -2,059
Income -771 -845 -825 -593 -2,263
Transfers -445 -281 -85 -145 -511
Capital & financing account -6,088 -3,905 -1,662 -4,150 -9,717
Net direct investment 2,137 124 147 22 293
Net portfolio investment 297 -626 -610 -259 -1,495
Net other investments -4,276 -1,841 -1,361 -2,585 -5,787
Errors and omissions -4,246 -1,562 162 -1,328 -2,728
Change in reserves -1,481 -3,701 -74 -333 -4,108
Source: Banco Central de Venezuela.
The sharp deterioration in sentiment towards Venezuela prompted two of the
major US credit rating agencies to cut Venezuela’s foreign-currency ratings
towards the end of September. Citing the deteriorating political situation,
Moody’s cut the country ceiling for foreign-currency bonds and notes to B3 from
B2. At the same time, the country ceiling for foreign-currency bank deposits was
lowered to Caa1 from B3. Moody’s downgrade takes Venezuela’s sovereign rating
to six notches below investment grade and its lowest level since Moody’s started
evaluating Venezuela in 1987 with a Ba3 classification. Shortly after Moody’s
downgrade, Standard and Poor’s lowered its long-term foreign currency issuer
rating from B to B- and the short-term foreign-currency rating from B to C and
confirmed its negative outlook for the ratings. The new rating is the lowest
classification that Standard and Poor’s has ever assigned to Venezuela since it
began rating the country in 1977. In the late 1970s and early 1980s Venezuela was
accorded an AAA rating. Venezuela’s score in the Economist Intelligence Unit’s
Country Risk Service was sharply downgraded in February 2002 to reflect our
revised outlook of the sovereign’s deteriorating creditworthiness in the
aftermath of the devaluation and in view of rising political tensions.
Subsequent to the sovereign downgrades Moody’s, and Standard and Poor’s,
lowered the ratings of some overseas affiliates of the state-owned oil company,
Petróleos de Venezuela (PDVSA), to below investment grade. Standard and
Poor’s reclassified around US$3.8bn of senior unsecured notes of PDVSA Finance
Ltd to BB+ from BBB-. It justified the change by saying that there is a heightened
risk of sovereign interference in the repayment of the notes because of the
Sovereign credit ratings
downgraded to record lows
Venezuela 31
Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002
political and economic crisis. Later, at the start of November, Moody’s
downgraded PDV America Inc. to Ba1 from Baa3 (which, similar to Standard and
Poor’s BBB- is the rung just above speculative or ‘junk’ status). PDV America is
the holding company for most of the US refining assets of PDVSA.
After falling persistently during the first nine months of the year, international
reserves�including deposits of the Fondo de Inversión para la Estabilización
Macroeconómica (FIEM, Macroeconomic Stabilisation Investment Fund)�
subsequently recovered somewhat in October and November. From their low
point of US$14.8bn at the end of September, they rose by US$1.1bn (7.1%) during
the next two months. However, this made up only part of the ground lost earlier
in the year and at the end of November reserves were still down US$2.6bn
(14.3%) since the start of the year. All the same, with holdings back up to almost
US$16bn, Venezuela’s reserves cushion has become more comfortable, although
it remains vulnerable to any future decline in world oil prices or a resurgence in
capital outflows provoked by political uncertainty. The partial recovery was
mainly the result of the upswing in oil export prices, which generally feeds
through with a lag of two months or so owing to the standard credit terms
provided to purchasers. At the same time, import demand remained low while
a renewed tightening in monetary policy, coupled with the earlier depreciation
of the exchange rate, may have averted an even higher rate of capital flight.
Foreign reserves(US$m; end-period)
Foreign
reserves FIEMa Total Change
1999 15,164 215 15,379 530
2000 15,883 4,588 20,471 5,092
2001 12,296 6,227 18,523 -1,948
2002
Aug 11,303 3,704 15,007 -246
Sep 11,482 3,344 14,826 -181
Oct 12,189 3,349 15,538 712
Nov 12,529 3,353 15,882 344
a Fondo de Inversión para la Estabilización Macroeconómica (Macroeconomic Stabilisation
Investment Fund) deposits.
Source: Banco Central de Venezuela.
The Corporación Andina de Fomento (CAF, Andean Development Corporation)
has approved a new US$200m loan to Venezuela, taking CAF’s total loan
approvals for 2002 to over US$700m. The new credit, which will help finance a
multi-sector public investment programme for 2002-03, has a ten-year maturity
with a two-year grace period. The investment programme covers four main
sectors: transport, education, health and the environment. The approval of the
loan shows that some multilateral financing is still available to the country,
although long-term finance from the private capital market is extremely scarce.
Reserves rebound
CAF approves new loan