Venezuela’s economy shows strong signs of recovery after lock-out/strike

Following two serious politico-economic blows to Venezuela’s economy in less than twelve months, the economy appears to be recovering steadily. The first blow was the coup d’ etat of April 11, 2002 and the second was the lock-out/strike and oil industry sabotage organized by opposition leaders from December 2002 until February of 2003. All economic indicators, before, between, and after these blows indicate that Venezuela’s economic situation would be fairly decent, were it not for these opposition-sponsored blows.

Slide 2: Drop of oil production during strike and oil industry sabotage, and subsequent recovery. Source: Ministry of Planning and Development.

Since Venezuela depends on oil for 80% of its export earnings, 50% of its government revenue, and 30% of GNP, any change in oil production or oil income will have a strong impact on the economy. This is exactly what happened during the two economic blows of the past year and a half. Oil production in the wake of the second opposition blow to the economy, the oil industry shutdown by management and administrative employees reduced oil production from a high of 3.2 million barrels per day in October and November 2002 (slide 2) to a low of 25 thousand barrels per day in late December 2002 and early January of 2003. Gradually the state oil company, PDVSA, was able to recover production and by May 2003 it was once again over 3 million b/d.

Unemployment down by 3% after lock-out / strike

Practically all economic consequences can be correlated with this decline in production. For example, unemployment (slide 4), which had reached a low of 11% in early December 2001, climbed as a result of, first, the December 10 employer-sponsored strike, the resulting capital flight, devaluation, and coup attempt, reaching the fairly high level of around 15% for the period of February to December 2002. Then, immediately following the oil industry shutdown, unemployment skyrocketed to over 20% by March 2003. Slowly, but steadily, the unemployment rate has been declining since then, down to 17.8% by August 2003, with an expected further decline to the pre-strike level of 15% by the end of the year.

Slide 4: Unemployment kept dropping until the first opposition-sponsored strike. It has started to drop after the defeat of the oil industry sabotage and strike/lock-out. Source: Ministry of Planning and Development.

Similarly, inflation had been held to a fairly stable 13% and 12% for the early years of the Chavez administration (2000 & 2001), compared to previous governments (when it averaged 50% per year for the entire previous Rafael Caldera administration). However, after the first employer strike in December 2001 and the ensuing capital flight, the currency had to be abruptly devalued and inflation shot up to 30% for 2002 (slide 7). Since then, the rise in the inflation rate has been halted as the monthly inflation rate has dropped from over 5% in February to 1.3% in August of this year.

Slide 7: Inflation was fairly stable at 13% until the first opposition-sponsored strike in December of 2001 when it started to grow steadily. After currency exchange controls were imposed, inflation has started to drop. Source: Ministry of Planning and Development.

GNP for the oil sector, the non-oil sector, and for all sectors together is also closely correlated with the oil industry strike. While GNP increased in the second year of the Chavez presidency by 3.2% and in the third year by 2.8% (having declined in the first, mostly due to the low price of oil the previous year), it declined dramatically due to the economic blows of the political destabilization in early 2002 and the oil industry shut-down in December 2002 (slide 12), dropping 8.2% for all of 2002. For 2003, the aftermath of these shocks is still being felt, but the economy is clearly recovering. That is, while GNP dropped by nearly 30% in the first quarter compared to the same quarter a year earlier, between the first and second quarter of 2003 it increased by 23.3% (slide 17). The ministry of planning and development expects the total decline in GNP to be around 10% by the end of the year. For 2004 the planning ministry is predicting an increase in GNP of 6%.

250 US$ million available for loans to small businesses

On September 26, the president of the industry federation Fedeindustria, Miguel Perez Abad, said that small and medium size businesses have at their disposal 400 billion bolivars (US$ 250 million) from government finance institutions, and that could be used to reactivate industrial production in the country. Perez Abad invited his colleagues to present viable projects to the government in order to start using that money as soon as possible.

In the middle of a world economic recesion, Venezuela’s economy continues to recover after the opposition-sponsored lock/out, strike and sabotage of the oil industry. It remains to be seen if the improvement of those macroeconomic variables will have a significant impact on people’s daily lives to help maintain President Chavez’s support high enough to allow him survive a possible recall referendum.

Click here to see a gallery of the Economic Indicators for the month of September 2003.

Sources: National Institude of Statistics, Central Bank, CADIVI, and Ministry of Planning and Development.

GW/MS