VENEZUELA: Alarm over First Contraction of
GDP in Five Years
By Humberto
Márquez
CARACAS (IPS) - 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. |
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