Mérida, November 19th 2010 (Venezuelanalysis.com) - Venezuela’s one and a half year economic recession slowed for the third consecutive quarter, and the economy is poised for GDP growth and a lower inflation rate in 2011, according to a recent report by the Venezuelan Central Bank (BCV).
The OPEC nation’s GDP was 0.4% smaller in the third quarter of this year than it was in the third quarter of last year. This is a slower rate of decline than in the first and second quarters of this year, during which the GDP declined by 5.2% and 1.9%, respectively.
The total decrease in GDP over the first nine months of this year was 2.4% compared to the first nine months of last year. Overall demand grew by 4.1%, while overall supply grew by 1.5%, according to the BCV report.
Among the sectors that grew during the third quarter were communications (9.4%) and government services including education, health care, administration, and defense (3.2%).
In contrast to previous quarters, private manufacturing grew by 1.9% and overall manufacturing grew by 0.1%. The food sector, which experienced shortages in some items in recent years, grew by 15.6%, with particularly high growth in the production of bread, oil, and dairy products.
The sectors that declined were mining (-10.6%), electricity, water (-7.8%), construction (-7.9%), financial intermediaries (-5.0%), commerce (-4.4%), and oil (-2.1%).
The BCV attributed the decline in the oil sector to an OPEC-mandated cut in exports in 2009 and an increase in the amount of gasoline produced for domestic consumption, particularly to fuel new thermoelectric power plants. Opposition critics pointed to a drop in investments by the state oil company, PDVSA, from US$ 7.63 billion in the first half of 2009 to US$ 5.23 billion in the first half of 2010 as the cause of the decline.
The Central Bank report attributed the third quarter improvement partially to the government’s System of Foreign Currency Transactions (SITME), which was established this year to control inflation in the foreign currency bond market. The report also cited the resolution of problems in the supply of government-issued foreign currency to importers, which fueled an increase in the supply of imported goods by 6.3% in the third quarter; the establishment of special exchange rate of 2.6 bolivars to the dollar for essential imports for producers (compared to 4.3 bolivars to the dollar for non-essential items); and the maintenance of public spending on social programs and public investments throughout the recession.
Also, increased government investments in the state-owned electricity sector brought an increase in electricity production following a drought-induced shortage in late 2009, further contributing to the third quarter economic improvement, the BCV said.
This assessment contrasts with that of the International Monetary Fund, which in its World Economic Outlook report in October said bad fiscal policy by the government would cause Venezuela’s recession to continue in the second half of 2010, and constrain annual economic growth to less than 1.4% over the next five years.
The third quarter economic results are consistent with Venezuelan government predictions that the economy would emerge from the recession with diminishing rates of decline throughout 2010.
According to a report by the Center for Economic and Policy Research in Washington, D.C., when the quarterly data is seasonally adjusted, it shows the Venezuelan economy may already be in recovery, posting 5.2% economic growth in the second quarter of 2010.
Venezuela’s economy experienced a consecutive high growth rate between 2004 and 2008, but contracted by 3.3% in 2009 amidst the global financial crisis which caused global oil prices to plummet from $150 per barrel to around $30 per barrel. The price of oil, Venezuela’s principal export, has since recovered to around $70 per barrel.
Current government forecasts predict 2% economic growth next year and 2.4% economic growth in 2012. During a recent testimony to the Venezuelan National Assembly, Central Bank President Nelson Merentes said, “It is probable that we will begin to grow again in the fourth quarter [of 2010].”
Merentes also said controlling inflation will present a “complex and important challenge” to the government. He estimated that Venezuela can reduce its annual accumulated inflation to a single digit figure within three years.
“This country has not registered single-digit inflation since the year 1985, so we’re talking about an unresolved and old problem that we must resolve,” said Merentes. The government will “concentrate on the items that have contributed most to inflation, which we have detected,” he said, specifying food prices, which he asked ordinary citizens to help control by denouncing price speculators.
Current statistical trends indicate that Venezuela will finish this year with accumulated inflation of approximately 26%, similar to last year’s figure. Prior to the election of the left-leaning government led by President Hugo Chavez in 1998, the country’s former ruling elite implemented neo-liberal reforms that brought annual accumulated inflation rates of as much as 60% to 100%.
According to the National Statistics Institute (INE), Venezuela has not seen increased poverty during its now seven-quarter recession; the poverty rate has remained steady at 26%, and the extreme poverty rate has remained steady at 7%. In comparison, the poverty rate hit 70.8% and the extreme poverty rate hit 39.5% in 1996.
Venezuela’s poverty rates improve when measured by access to basic services rather than income. The INE reports that 11.6% of the population lives without basic services, while 6.5% live in substandard dwellings. Meanwhile, the unemployment rate has remained within the eight percentile so far this year, down from 16.1% in 1998.
In addition, Venezuela has the most equal distribution of wealth in Latin America, according to the Gini coefficient measurement used by the United Nations Economic Commission for Latin America (CEPAL). Venezuela’s Gini coefficient is .412, an improvement from 1998, when it was .498.
The 2011 budget proposal calls for 204.2 billion bolivars ($47.5 billion) of spending, a 28 percent increase from 2010. Consumer prices may rise 23 percent to 25 percent next year.
Venezuela’s total public debt is 18.4% of the GDP, and the Central Bank holds $28.3 billion in foreign currency reserves. The government also reported a current account surplus of US$ 2.6 billion in the third quarter.