Global IssuesVENEZUELA: Alarm over First Contraction of GDP in Five Years
The Venezuelan economy, which has grown steadily for more than five years, contracted by 2.4 percent in the second quarter of this year, heightening fears of stagflation, an unwelcome combination of recession and high inflation.
The rise in the cost of living in this country was, for five years, the highest in Latin America: 27 percent in 2003, 19.2 percent in 2004, 14.4 percent in 2005, 17 percent in 2006, 22.5 percent in 2007 and 30.9 percent in 2008, while it already reached 13.1 percent between January and July this year.
A third factor is that oil, the source of 93 percent of state revenue and hard currency, is losing impetus as the driving force of economic growth.
Announcing the economic results for the second quarter, the Central Bank pointed out that it has been 'over a year since the global financial crisis began to have an impact, which has negatively affected the performance of the vast majority of countries.' Venezuelan President Hugo Chávez compared the retraction with the dry season on the country's plains. 'The dry season has arrived for the world economy; it's a crisis of the capitalist model. Growth, measured by capitalist standards, has come to an abrupt stop,' he said.
'We are selling less oil at lower prices, less gasoline, petrochemicals, steel and aluminium (the main export products), although agriculture, telecommunications and the construction industry are still growing,' the president said.
Oil brought in 90 billion dollars of revenue for Venezuela in 2008, 52 billion of which was earned in the first half of the year, when prices were soaring. But in the first half of this year, oil income was barely 22.8 billion dollars.
Chávez boasted in January that Venezuela was 'armoured against the crisis.' 'Even if the price of our oil plunges to zero dollars, this revolution will not stop,' he said. In March, Energy Minister Rafael Ramírez said that 'we can carry on working, even with zero oil income, because we have saved 57 billion dollars in reserves.'
'We have been warning that Venezuela is going into stagflation, something that has not occurred since the presidency of Luis Herrera Campins (1979-1984),' José Guerra, head of the School of Economics at the Central University, told IPS.
In addition to the 4.2 percent fall in oil sector production, 'iron, steel and aluminium production are in a critical situation, which will cause a reduction in manufacturing activity and the loss of thousands of quality jobs,' Guerra predicted.
Supermarket sales have dropped by between 25 and 40 percent, and the automobile manufacturers' association announced sales of 90,000 new cars between January and July this year, 45 percent less than in the same period last year — after several years of record sales.
U.S. car-maker General Motors closed its assembly plant for three months, and Japan's Mitsubishi plant, which supplies 10 percent of the Venezuelan market, announced Aug. 24 it was closing down its local operations indefinitely.
Mitsubishi issued a communiqué saying that it was closing the factory because it was not possible to resolve a labour crisis sparked early this year when, after the murders of two union leaders, workers occupied the plant for several months. As a result, only half of the agreed quota of 60 vehicles a day were assembled.
The Labour Ministry responded Aug. 25 by calling the closure an illegal 'lockout' and a violation of the workers' collective contract, and ordered the company to reopen the plant.
The government has also announced that it will 'mediate' in the conflict in order to secure a peaceful resolution that would keep the factory open, according to international news reports. Company managers said they were 'open' to this mediation.
If it goes ahead, the closure would directly affect 1,400 workers. But Víctor Maldonado, head of the Caracas Chamber of Commerce, told IPS that another 1,500 workers employed by dozens of Mitsubishi distributors and concessionaires all over the country would also find their jobs threatened.
Industrialists and traders have complained since 2008 about steep reductions in the flow of government-supplied dollars at the preferential exchange rate to pay for imports. Exchange controls in Venezuela have become very tight since 2003.
The official exchange rate is fixed at 2.14 and 2.15 bolivars per dollar, for purchase and sale of the local currency, respectively. This clearly overvalues the bolivar and there is intense competition to gain access to dollars at the official rate, leading to rationing.
As an escape valve, therefore, the government permits a secondary currency exchange method, known as the 'permuta,' that uses offshore corporations to swap debt bonds denominated in bolívars and dollars. The exchange rate on this parallel market, which by law cannot be published in Venezuela, is several times higher than the official rate.
'We always said the situation was only tenable for the government if oil prices not only remained high, but also rose constantly,' Orlando Ochoa, professor of economics at the Andrés Bello Catholic University, told IPS. 'But that has not happened, and the fall in oil income is now clearly in evidence.'
'That's the first factor contributing to stagflation,' said Ochoa, 'to which are added price and exchange controls and restrictions on hard currency availability, which harm supply and investment, and thirdly, the policy of nationalisation.'
Since 2007 the state has taken over telecommunications, electricity and cement companies, steel factories, contractors for the state oil giant Petróleos de Venezuela (PDVSA), agribusiness establishments and related industries, and various services. Their capitalisation sometimes consumes enormous resources, while the state is in acute conflict with workers at many of these companies.
'Public spending keeps rising and is financed by more public debt, which increases spending in a vicious circle, while the government defers or postpones workers' demands, which is itself another sign of the approaching recession, although the government seeks to deny it,' said economist Domingo Maza Zavala, a former head of the Central Bank.
But Economy and Finance Minister Alí Rodríguez disagrees with this view. 'One cannot talk of stagflation after 22 quarters of growth, followed by a contraction from which recovery is perfectly feasible.' With a mere modest increase in GDP over the coming quarters, 'the year's results would be balanced out,' he said.
Rodríguez announced that the government will soon adopt economic adjustment measures, perhaps including some liberalisation of the private sector's access to hard currency. At a meeting with governors and mayors belonging to the ruling coalition in parliament, headed by the United Socialist Party of Venezuela (PSUV), he said he would propose an increase in the local price of gasoline.
Venezuelan gasoline is the cheapest in the world, at four cents of a dollar per litre (and even cheaper at the 'permuta' exchange rate). The gap between the domestic sale price and international prices means the state loses income of between eight billion and 12 billion dollars a year.
If stagflation takes root in the Venezuelan economy, it will be an indication that the power of oil prices to drive the economy is declining, according to economist Reinier Schliesser.
The 2002-2003 political crisis in Venezuela, sparked by a failed coup d'état that attempted to oust President Chávez, was accompanied by a sharp 18 percent fall in GDP, which recovered driven by soaring oil prices that in July 2008 reached 147 dollars a barrel for West Texas Intermediate, a benchmark crude oil for the United States.
Public spending, according to Schliesser, boosted purchase orders and increased the supply of money by a number of mechanisms to ordinary Venezuelans, who went on a consumer spending spree during a wave of ebullient growth.
Paradoxically, the contraction in production and consumption is occurring just as crude prices are starting to rally. A barrel of Venezuelan oil traded at an average of 40 dollars in the first quarter of 2009, at 53 dollars in the second quarter, and this month at up to 67 dollars.
Guerra and Ochoa stressed that, in spite of the gradual recovery of oil prices, there are a number of factors discouraging the private sector from making new investments, so that it is not doing anything more than restocking inventories and replacing equipment.
Government controls, nationalisations, lack of suppliers, rationing of hard currency, price controls and harsher measures against companies that infringe various sets of regulations are some of these factors, the experts say.
© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service