A Venezuelan Miracle?

Venezuela's economy has recovered better than expected, despite the crippling oil industry sabotage of last year. A review of some of the latest economic indicators.

For those who like numbers and data, it is worth reminding them that five years after he became president, Hugo Chavez maintains a level of popularity that has never been reached by any president, not even in their second year in office. This is particularly unusual, given that he defeated a fascist coup attempt, which attempted to eliminate all democratic freedoms, and he defeated the strike-sabotage of December 2002 and January 2003, which cost the country billions of dollars.

Without a doubt, this Venezuela of today has little in common with the one of five years ago. The new constitution has deepened democracy, guaranteed the defense of civil rights, (of government supporters and opponents alike) and enabled citizen participation and the full and free exercise of national sovereignty and independence.

Today Petroleos de Venezuela (PDVSA – the state oil company) is a Venezuelan company for all Venezuelans, even while the debate about the type of country we all want is still being discussed.

In these five years, this government has re-started the national railroad network, advanced the construction of four subway systems, and made progress in the construction of bridges, dams, highways, and many other infrastructure projects. And these projects were not interrupted due to a decrease in funds.

Sometimes it is difficult to explain the Venezuelan situation to foreigners. A country that lost billions of dollars and had its economy paralyzed for a trimester and passed through its worst economic crisis (nine months after it enjoyed its most flattering predictions). No one now doubts that its economic take-off has begun.

The predictions of international organizations and of national analysts are for a sustained economic growth of over 6% per year for the next three years, thanks to an investment that is estimated to be  around 20 billion dollars per year (20% of GNP) in oil, infrastructure, agriculture, and industries (both private and public).

Everything indicates that for 2004 the currency control will be maintained (the official budget is based on an average exchange rate of 1,920 bolivars per dollar, closing at 2,016 at the end of the year). There will be large international reserves, a reduction of interest rates, and a strengthening of national investment in PDVSA and other institutions.

This does not have to do only with an economic recovery, but has been accompanied by undeniable advances in the social realm—one million people who learned to read and write, a public health campaign, about 3,000 Bolivarian schools, over two hundred popular markets (Mercal), the missions Robinson, Sucre, Ribas, Miranda, and Zamora,[1] laws governing land reform (over two million hectares of land redistributed to peasants), and fishing—in order to reverse the policies that the opposition has tried to impose since late 2002.

This past year was, without a doubt, a difficult year to chew on. This year that is beginning now promises to be much more promising and much more constructive.

The losses of the oil industry sabotage were enormous and are calculated in billions of dollars (it is estimated at seven billion), in wasted human resources, but above all in the anguish which we all lived through during those two months. But, surprisingly for most, this situation was left behind to the extent that the “miracle” of the oil recovery was achieved, which allowed us to get out of the abyss.

During the first trimester of 2003, GNP dropped 27.6%, with a contribution of 12.9% from the private non-oil sector and 10.3% from the public oil sector, which means that 84% of the drop was attributable to the oil industry sabotage. This impact was lessened throughout the year: -9.4% during the second trimester, with a contribution of 76.7% from the private non-oil sector and 17.5% from the public oil sector, and -7.1% during the third trimester.

Annual inflation, which had been controlled during 1999 and 2001, reached 38.7% in February 2003 and 26.1% in November, with an average 1.56% increase during the last nine months of 2003. If this tendency is maintained we can speak of an annual inflation of about 20% for 2004.

Between 1999 and 2001 unemployment continued the same pattern as in the previous years: around 16% in the beginning of the year and 10% at the end. This pattern changed substantially in 2002 when the figure remained at 16% during the entire year. In February of 2003, unemployment reached 20.7% of the economically active population: 2,406,251 persons—553,515 more than in November 2002, before the oil industry sabotage. From the end of the sabotage in February until November 2003, the economically active population increased by 1,129,509 persons (85.3% in the private sector and 14.7% in the public sector). Unemployment dropped to 15.4% in November. The employment that was destroyed during the oil industry sabotage in less than one trimester was recuperated and doubled during the following ten months.

The “miraculous” recuperation of the foreign currency reserves has much to do with the adoption of the currency control in February 2003, right after it had bottomed out: 13.9 billion dollars, including the 1.98 billion in the FIEM.[2] By December 29, 2003, the reserves reached 20.7 billion dollars, a recuperation of 6.7 billion dollars in this period and above the previous high point of 20.5 billion dollars in 2000, which had included 4.6 billion dollars of the FIEM.

It is worth pointing out that this international currency reserve figure is similar to the total external debt of the country, something that would be unimaginable for any other Latin American country, and which shows an undeniable solidity in terms of the country’s guarantee with regard to its financial commitments.

Another index which is in free-fall is the so-called country-risk. The indicator EMBI+[3], which in February 2003 reached 1406 base points, lowered continuously, so as to reach 596 on December 22, 2003. This drop of 812 points also means a reduction of 8.1% in the interest rate which the country has to pay, if it is looking for credit in the international markets.

Another parameter that indicates an improvement of the conditions of internal financing is the true market rate at which 91-day treasury bonds are issued, which has dropped from 43.9% to 15.2% – practically a third of its old value.

There are 10 trillion bolivars of liquidity in the savings accounts, thanks to the currency control, which reduced capital flight. Compare this to a national government budget of 40 trillion bolivars.

The recuperation of oil production at the end of the first trimester of the year (which went from merely 25,000 barrels per day on December 25, 2002 to normal levels of 3 million bpd), following the dismissal of 17,000 employees who did not show up for work, has benefited from the Venezuelan oil price of around $25.5 per barrel.

This has been, without a doubt, the principal motor of the productive apparatus, which has allowed the economy to stabilize, with its injection of 13 billion dollars during 2003 and by contributing 25% to GNP and 50% to state income.

It is a shame that the national economic “experts” cannot even read the indexes and despite the undeniable figures they declare that “no aspect of the economy will be healthy.”

U.S. newspapers speak of an economic growth for Venezuela of 7% for 2004. The news agency Reuters conducted a poll among banking experts from JP Morgan, Idea-Global, as well as among analysts based in Venezuela, in order to make a prediction about the behavior of Venezuela’s economy during 2004. The result was that there would be an economic growth of 6.7% and that the oil sector would shoot up by 15.5% and the non-oil sector increase by 4.6%, in addition to a strong increase in public expenditures. According to the poll, Venezuela would thus exit the hole into which it had been plunged. This prediction is congruent with the official growth goal of 6.5% set by the national state budget.

Will there be people who will once again attempt to sabotage the country’s economy and to mortgage the future of all? Hopefully not. May the rules of the game be accepted and may the prediction of sustained economic growth for the next three years be consolidated.

Translated by Gregory Wilpert

[1] Robinson: literacy campaign; Sucre: scholarships for college education; Ribas: high school equivalency education; Miranda: support for military reservists; Zamora: land reform

[2] FIEM is the macro-economic investment fund.

[3] The EMBI+ is an indicator from JP Morgan, which refers to the interest rate which is to be paid above the rate of 30-year US treasury bonds, which are assumed to have a risk-rating of zero.