Venezuelan Central Bank: Economy on Path Out of Recession
Mérida, August 23rd 2010 (Venezuelanalysis.com) – Venezuela’s economy contracted at a slower rate in the second quarter than in the first quarter of this year, suggesting the oil-exporting South American nation may be emerging from a one and a half year recession, the Venezuelan Central Bank (BCV) announced in a statement.
Venezuela’s gross domestic product was 1.9% smaller in the second quarter of 2010 than in the second quarter of 2009, the BCV stated. This was a lower rate of decline than in the first quarter of 2010, when the economy shrank by 5.8% relative to the same period in 2009.
“The economy experienced the smallest decrease in the last four quarters,” the BCV said. “The observed results ratify the tendency toward recuperation and the path to sustained growth,” the statement concluded.
The total decrease in the GDP over the first half of this year was 3.5%, milder than many economists’ stark predictions. BCV President Nelson Merentes told the press that economic growth should be close to zero by the end of this year, and positive in 2011.
The Venezuelan economy, which relies on oil for more than 90% of its revenue, experienced constant growth at an average rate of 10.2% between 2004 and 2008 as the global price of oil soared to $150 per barrel. The economy shrank by 3.3% in 2009, after the global financial crisis drove oil prices down to around $30 per barrel. So far this year, a drought-induced national electricity shortage, a bottleneck in government-issued dollars for importers, and high inflation caused the economy to continue to contract even as oil prices stabilized around $70 per barrel.
Throughout the recession, the government tapped into its foreign currency reserves, which were buffered by increased oil taxes, and nearly tripled its domestic debt to maintain its spending on social services such as public education, health care, poverty reduction, and food access. As a result, Venezuela has continued its progress toward the United Nations Millenium Development Goals.
The BCV’s second quarter report showed that public spending grew by 3.1%, public health services grew by 3.7%, and education services grew by 4.6%, while overall private consumption fell by 2.4% and investments fell by .8%.
Venezuela’s oil sector declined by 2%. The BCV attributed this to a 16% decrease in oil exports, which was partially the result of an OPEC-mandated supply cut of 360,000 barrels per day in 2009, and lower output by the state-owned oil company PDVSA. Also, a greater quantity of oil was sold on the domestic market, mainly to fuel new thermal electric plants built by the state-owned electricity company as part of its effort to offset the electricity shortage.
Meanwhile, a nation-wide electricity rationing plan that continued through June decreased production in Venezuela’s energy-intensive heavy industries, particularly basic metals and metal products, which declined by 46.8% and 19.7% in the second quarter, respectively.
The non-oil sector shrank by an overall 1.7% in the second quarter, including a decrease in mining (-19.6%), electricity and water services (-8.8%), financial intermediary services (-7.7%), construction (-6.4%), and manufacturing (-3.7%), the BCV reported.
The sectors that experienced growth in the second quarter were textiles (46%), clothing (20.5%), machinery (15.2%), chemicals (14%), non-metal minerals (13.7%), communications (6.5%), private food production (5.6%), government services (2.9%), and community and social services (.6%).
A major factor in lowering the rate of GDP decline in the second quarter was the government’s new Foreign Currency Transactions System (SITME), created in June to regulate foreign currency bond trading, the BCV said.
Trading foreign currency-denominated bonds is one of the key ways Venezuelan businesses acquire dollars for imports. The SITME system is designed to allow bond trading while controlling price speculation on the bonds, which causes inflation. The government issued $3 billion in dollar-denominated bonds two weeks ago, and recently announced it will issue another $2 billion in bonds soon.
The other way businesses acquire dollars is from the government at a rate of 4.3 bolivars to the US dollar for non-essential goods and 2.6 bolivars to the US dollar for essential goods. This two-tiered exchange rate system was implemented in January of 2010 with the goal of stimulating national production and decreasing dependence on oil exports, but it also marked a devaluation of the bolivar from its previous official rate of 2.15 to the dollar, causing inflation.
The inflation rate spiked at 5.2% in April, and then dropped to 2.6% in May, 1.8% in June, and 1.4% in July. Cumulative 12-month inflation as of July was 30.5%. The unemployment rate has remained relatively stable at around 8.5%, since reaching a low of 7.2% in July 2008.
In addition to these policies, the government has nationalized banks and pooled them together into the state-owned Bicentenary Bank to fund national production, passed laws to restrict financial speculation, and increased the state-owned share of the production, distribution, and commercialization of essential foods at controlled prices.
As the country heads into National Assembly elections scheduled for September 26th, the government argues that the six-quarter recession has been the result of the country’s historic dependence on oil, and that its current policies will help the country gradually shed its neo-liberal skin and become a “21st Century Socialist Economy” in the years to come.
The neo-liberal opposition, which spearheaded a wave of privatizations and deregulations that brought yearly inflation rates of 60%-100% during the 1990s, says the government’s policies have caused the economic problems and must be reversed.