Venezuela - iuj.ac.jpThe government of Hugo Chávez Frías is likely to face mounting social pro-tests about the lack of progress on crime reduction and employment gener-ation—important

COUNTRY REPORT

Venezuela

March 2001

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2001-02OVERVIEWThe government of Hugo Chávez Frías is likely to face mounting social pro-tests about the lack of progress on crime reduction and employment gener-ation—important issues to the electorate—as well as greater resistance to itsreforms. As the legislative opposition remains weak, protests are increasinglyspilling out onto the streets. The Movimiento a Socialismo (MAS), a partnerin the ruling Polo Patriótico (PP) alliance, has distanced itself from the gov-ernment, potentially depriving Mr Chávez’s Movimiento Quinta República(MVR), also a member of the PP, of its legislative majority. Developments inColombia are a cause of growing concern in Caracas. The economy willexpand by 4% on average per year in 2001-02, driven by fixed investmentand private consumption, both powered by public spending. Oil productionwill remain stable, given weaker global growth, indicating deceleratingexport growth in 2001. However, provided that oil prices do not fall belowUS$20/barrel, the budget assumptions on which the government is basingits domestic expansion plans remain credible. Based on these assumptions,the exchange rate will once again appreciate in real terms and inflation willbe restrained below 15%. External surpluses are expected to halve owing tosoftening oil prices and rising import spending.

Key changes from last monthPolitical outlook• A second teachers’ strike in 2001 is indicative of the growing impatience

with the government’s reform programme.

Economic policy outlook• The government’s intention to use Bs1.9trn (US$2.7bn) of FIEM funds in a

year of relatively firm oil prices will undermine the credibility of the stab-ilisation fund to act as a countercyclical mechanism in the event of asharp downturn in oil prices.

Economic forecast• Although Venezuela managed to issue a €300m (US$279m) bond recently,

access to international capital markets is likely to remain restricted until amore consistent economic policy is developed.

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Venezuela 1

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2001-027 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

19 Economic policy

21 The domestic economy21 Economic trends24 Oil and gas25 Industry25 Agriculture26 Infrastructure26 Financial and other services

27 Foreign trade and payments

List of tables

10 International assumptions summary11 Forecast summary19 Central government balance21 Demand growth, 200022 Gross domestic product growth by sector, 200023 Consumer price inflation28 Non-traditional exports, Jan-Nov28 Current-account balance, 2000

List of figures

12 Gross domestic product12 Bolívar real exchange rates21 Gross domestic product and fixed investment

2 Venezuela


23 Cost of living index24 Oil prices26 International tourism

Venezuela 3


Summary

March 2001

The government of Hugo Chávez Frías is likely to face mounting social protestsas resistance to government reforms builds. The Movimiento al Socialismo(MAS), a partner in the ruling Polo Patriótico (PP) alliance, has distanced itselffrom the administration, which could potentially deprive the president’sMovimiento Quinta República (MVR), also a member of the PP, of its legislativemajority. Divisions between military and civilian sections within the MVR havebecome increasingly pronounced. In 2001 public spending will be the maindriver of the economy, but such spending will only be sustainable if oil pricesremain above US$20/barrel. Based on this assumption, inflation will come inbelow 15% and the exchange rate will once again appreciate in real terms.

There is mounting frustration about the lack of progress on crime reductionand employment generation—important issues to the electorate—and the gov-ernment’s reform programme. As the political opposition remains weak, pro-tests are increasingly spilling out on to the streets. Protests are rising over re-forms affecting education, the unions and land tenure. The appointment ofthe foreign minister, José Vicente Rangel, to the position of defence minister,the first time a civilian has held the post since the 1929, was particularlystriking. His appointment followed the so-called panty affair, which embar-rassed the outgoing defence minister, General Eliécer Hurtado Sucre, and re-opened existing divisions within the armed forces. Developments in Colombiaare of growing concern.

Tax collection disappointed in 2000, despite stronger than expected economicgrowth. However, efforts to improve tax collection levels will not succeed untilthe root causes are tackled. The Banco Central de Venezuela (the Central Bank)again threatened to regulate interest-rate spreads.

GDP growth reached 3.2% in 2000, led by oil, gas and telecommunications. In-vestment growth was surprisingly weak. Although inflation appeared subduedin 2000, at 13.4%, in the context of depressed domestic demand and the over-valued bolívar it was not low. Unemployment is slowly declining. Telecoms areset to be the main target for foreign investment. Although agricultural outputrose, important obstacles to growth remain. Post-mudslide reconstruction needsfurther boosting as little was done in 2000. Banking consolidation continues.

The trade surplus reached US$18bn in 2000, supporting a surge in the current-account surplus to US$12.9bn. Despite a recent Eurobond issue, access to newexternal credit is likely to remain limited. Foreign reserves are rising steadily.

Editors: Ondine Smulders (editor); Justine Thody (consulting editor)Editorial closing date: February 26th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Economic policy

Outlook for 2001-02

The domestic economy

The political scene

Foreign trade andpayments

4 Venezuela


Political structure

The Bolivarian Republic of Venezuela

Federal republic comprising 72 federal dependencies, 23 states, two federal territories andone federal district

The president is elected for a renewable six-year term and appoints a Council ofMinisters; Hugo Chávez Frías began a fresh six-year term following elections in July 2000to relegitimise public posts under the new 1999 constitution

165-member unicameral National Assembly, headed by the president, which replacedthe bicameral Congress abolished by the new constitution in December 1999

Supreme Court at the apex of the court system; appoints judges and magistrates

Presidential, legislative and state government were held in July 2000 and municipalauthorities on December 3rd; next presidential election likely in 2005; , legislativeelections due in 2005

Government: the president’s party, the Movimiento Quinta República (MVR), forms partof the ruling Polo Patriótico (PP) alliance, which also includes the Movimiento alSocialismo (MAS); Proyecto Venezuela (PV) also currently supports the PPOpposition parties: Acción Democrática (AD); the Comité de Organización PolíticaElectoral Independiente (COPEI); Primer Justicia (PJ); La Causa Radical (LCR);Convergencia Nacional (CN); Nueva Alianza Democrática (NAD); Integración,Renovación y Nueva Esperanza (Irene)

President Hugo Chávez FríasVice-president Adina Bastidas

Presidential secretary Francisco Rangel Gómez

Defence José Vicente RangelEducation, culture & sport Héctor Navarro DíazEnergy & mines Alvaro Silva CalderónEnvironment & natural resources Ana Lisa OsorioFinance José RojasForeign affairs Luís Alfonso DávilaHealth & social development vacantInfrastructure (transport, communications & urban development) General Eliécer Hurtado SucreInterior & justice Luís MiquelinaLabour Blancanieves PortocarreroPlanning & development Jorge GiordaniProduction & trade Luisa RomeroPrivatisation Antonio GinerScience & technology Carlos Genatio

Diego Luís Castellanos Escalona

Official name

Form of government

The executive

National legislature

Legal system

National elections

Main political organisations

Key ministers

Central Bank governor

Venezuela 5


Economic structure

Annual indicators

1996a 1997a 1998a 1999a 2000b

GDP at market prices (Bs bn) 29.4 43.3 52.3 61.9 70.6

GDP (US$ bn) 0.1 0.1 0.1 0.1 0.1

Real GDP growth (%) –0.2 6.4 0.2 –6.1 3.2a

Consumer price inflation (av; %) 99.9 50.0 35.7 23.6 16.2a

Population (m) 22.3 22.8 23.4 23.7 24.2

Exports of goods fob (US$ m) 23,707.0 23,703.0 17,576.0 20,819.0 34,038.0a

Imports of goods fob (US$ m) 9,937.0 13,678.0 15,105.0 13,213.0 16,073.0a

Current-account balance (US$ m) 8,914.0 3,467.0 –3,253.0 3,689.0 12,930.4

Foreign-exchange reserves excl gold (US$ m) 11,788.0 14,378.0 11,920.0 12,277.0 13,089.0

Total external debt (US$ bn) 35.4 35.6 37.0 35.7b 34.1

Debt-service ratio, paid (%) 16.8 31.6 27.6 25.1b 17.4

Exchange rate (av; Bs:US$) 417.3 488.6 547.6 605.7 680.0a

February 23rd 2001 Bs704.00:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total

Petroleum 16.5 Private consumption 70.2

Manufacturing 10.0 Government consumption 7.6

Construction 5.3 Investment incl change in stocks 15.6

Agriculture 4.8 Exports of goods & services 22.0

Services 57.7 Imports of goods & services –15.4

GDP at factor cost incl others 100.0 GDP at market prices 100.0

Principal exports 1999c US$ m Principal imports cif 1999 US$ m

Oil 17,055 Goods purchased by private sector 10,966

Base metals 1,471 Goods purchased by public sector 1,908

Chemicals 550 Services purchased by private householders 1,819

Plastics & manufactures 349 Total incl others 15,706

Agricultural produce 305

Minerals 257

Food, beverages & tobacco 232

Total incl others 21,058

Main origins of exports 1999 % of total Main origins of imports 1999 % of total

US 50.4 US 42.0

Colombia 7.3 Colombia 6.7

Brazil 3.7 Italy 5.5

Germany 1.4 Germany 4.8

Japan 1.4 Brazil 3.9

a Actual. b EIU estimates c Customs basis.

6 Venezuela


Quarterly indicators1999 20001 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Central government finance (Bs bn)Ordinary revenue 1,760.1 2,064.0 2,888.2 3,183.3 3,212.2 3,199.5 3,332.2 n/aOrdinary expenditure 2,253.9 2,248.9 2,958.0 3,760.7 4,137.7 3,563.6 4,118.4 n/aBalance –493.8 –184.9 –69.8 –577.4 –925.5 –364.1 –786.2 n/aNet extraordinary revenue 453.0 84.1 314.9 547.9 1,606.4 1.2 353.7 n/a

OutputGDP (Bs m, constant 1984 market prices) 137,627 142,187 141,564 144,510 139,196 146,030 146,309 152,539 % change, year on year –8.5 –7.4 –4.3 –4.1 1.1 2.7 3.4 5.6

Employment & pricesUnemployment rate (% of labour force) 15.3 15.3 14.5 14.5 14.6 14.6 n/a n/aConsumer prices (1997=100) 157.0 163.9 171.5 178.7 185.7 191.9 198.1 204.1 % change, year on year 29.1 23.9 22.2 20.1 18.3 17.1 15.5 14.2Wholesale prices (1997=100) 134.5 137.5 140.3 143.1 147.2 151.5 154.8 158.4 % change, year on year 19.3 15.4 12.5 10.1 9.4 10.2 10.3 10.7Venezuelan crude basket (US$/barrel; spot) 9.55 13.88 18.31 21.84 25.30 25.09 27.92 27.58 % change, year on year –25.8 24.6 72.9 128.7 164.9 80.8 52.5 26.3

Financial indicatorsExchange rate Bs:US$ (av) 575.11 595.10 616.75 635.90 659.04 677.36 688.06 695.37 Bs:US$ (end-period) 583.50 606.00 628.00 648.25 669.50 682.00 690.75 699.75Interest rates (av; %) Deposit 31.80 21.99 14.65 16.67 16.97 19.22 13.16 n/a Lending 39.63 32.41 30.08 26.39 26.20 23.75 24.91 n/a Money market 11.70 5.80 5.10 7.30 6.57 10.40 6.90 8.70M1 (end-period; Bs bn) 4,254 4,445 4,628 6,096 5,644 5,772 6,037 n/a % change, year on year –1.6 3.1 10.4 23.4 32.7 29.9 30.4 n/aM2 (end-period; Bs bn) 10,110 10,426 10,606 12,741 12,524 12,926 13,410 n/a % change, year on year 16.0 15.8 17.9 19.9 23.9 24.0 26.4 n/aBVCa Caracas stockmarket index (end-period; Dec 1993=1,000) 4,134 5,367 5,818 5,418 5,496 7,033 6,864 6,825 % change, year on year –46.2 11.8 49.4 13.1 32.9 31.0 18.0 26.0

Sectoral trendsProduction Crude oil (m barrels/day) 2.93 2.74 2.73 2.75 2.80 2.87 2.92 2.99 % change, year on year –12.8 –13.8 –8.1 –7.7 –4.4 4.7 7.0 8.7 Aluminium (‘ 000 tonnes) 138,950 144,918 145,004 141,334 138,480 143,406 144,076 144,654 % change, year on year –9.9 –0.6 0.8 –0.8 –0.3 –1.0 –0.6 2.3 Iron ore (m tonnes) 3,635 3,847 3,620 5,000 5,466 5,662 4,610 4,312 % change, year on year –35.0 –32.6 –25.4 35.5 50.4 47.2 27.3 –13.8

Foreign tradeb & payments (US$ m)Exports fobc 3,525 4,751 5,991 6,552 7,733 8,182 8,544 9,583 Petroleum & products 2,596 3,789 4,919 5,393 6,500 6,864 7,276 8,076Imports fobc –2,647 –3,142 –3,741 –3,683 –3,346 –4,182 –4,234 –4,297Merchandise trade balancec 878 1,609 2,250 2,869 4,387 4,000 4,310 5,286Servicesc –760 –539 –649 –521 –688 –756 –834 –953Income balancec –392 –456 –269 –401 –236 –327 –252 –350Current-account balancec –274 638 1,334 1,991 3,481 2,862 3,206 3,946Reserves excl gold (end-period) 10,526 11,456 11,135 12,277 11,412 12,153 13,686 13,089

a Bolsa de Valores de Caracas (Caracas Stock Exchange). b Balance-of-payments basis. c Banco Central de Venezuela data.Sources: International Energy Agency, Monthly Oil Market Report; IMF, International Financial Statistics; Banco Central de Venezuela, Indicadores Econúmicos; VenEconomía Group.

Venezuela 7


Outlook for 2001-02

Political outlook

Signs of waning support for the president, Hugo Chávez Frías, heighten the riskof an increase in political conflict at a time when the government needs toconcentrate on economic policymaking in order to consolidate the recoverybegun in 2000. Although Mr Chávez remains popular with an overwhelmingmajority of the population, a recent opinion poll rating of 60% represents amarked decline from his earlier popularity levels of 80%. Moreover, accordingto the polls, popular confidence in his administration has fallen from 66% in1999 to 40% in early 2001. Lacklustre turnout in early December 2000 for a ref-erendum on the president’s proposal to replace the country’s largest tradeunion confederation, the Confederación de Trabajadores Venezolanos (CTV,the Venezuelan Workers’ Confederation), with an alternative union organis-ation, the Fuerza Bolivariana de Trabajadores (FBT, the Bolivarian Worker’sFront), and a backlash from teachers against education reforms decreed at theend of 2000 are further indications that policymakers lack an effective grasp ofpopular sentiment. Although the Movimiento al Socialismo (MAS) had alwaysbeen regarded as the least reliable party in the ruling Polo Patriótico (PP)coalition, having demonstrated a tendency towards constructive oppositionduring its alliance with Mr Chávez’s predecessor, Rafael Caldera, the party’sdecision in January 2001 to distance itself from the president’s MovimientoQuinta República (MVR) is also indicative of Mr Chávez’s waning popularity.

The president’s refusal to accept the legitimacy of his critics in effect rules outconsultation on policy with all but a small group of close advisers. Equipped withwide-ranging discretionary powers granted by the November 2000 LeyHabilitante (Enabling Law), Mr Chávez is able to rule by decree on a wide rangeof economic and social issues. His unwillingness to delegate and the inexper-ience of many of the deputies in his party magnify his personal influence onpolicy. The uncertainty created by the lack of debate is compounded by the ab-sence of clarity in his policy announcements. Mr Chávez’s characteristic rabble-rousing rhetoric has raised a great deal of concern about a land reform proposalrecently submitted to the National Assembly. Although the bill enshrines respectfor private property, the president has hinted that he could use his enablingpowers to redistribute land by force. Mr Chávez’s confrontational approachtowards his critics, combined with the ineffectiveness of most of the par-liamentary opposition, which has proved incapable of exerting any influenceover policy in the National Assembly, will force opponents of his government tocontinue to take to the streets to demonstrate their discontent, fomenting a risein potentially heated and disruptive social mobilisation. Many groups, from theRoman Catholic Church to the labour movement, have demonstrated in recentweeks to express their discontent with government policy.

Industrial relations, in particular with the trade unions and the educationsector, will remain fractious. Although the unions are protesting against gov-ernment plans to democratise the labour movement, action by teachers wasprovoked in late 2000 by the issue of a decree on education reform, at the heart

Domestic politics

8 Venezuela


of which is the creation of a team of inspectors opposed both by publicteaching unions and supporters of private education on grounds that the in-spectors, hand-picked by the administration, would not be required to possessteaching experience.

The Chávez government’s foreign policy has been geared towards the develop-ment of closer relations with other oil-producing nations, the creation a bloc ofallied states in Latin America to counterbalance the power of the US and anemphasis on the sovereign autonomy of nations. The appointment in earlyFebruary 2001 of Luís Alfonso Dávila as foreign minister appears to presage thetransition to a less ideological and more pragmatic foreign policy centred ondeveloping warmer relations with Venezuela’s two main trading partners, theUS and Colombia.

Economic policy outlook

Mr Chávez’s declared economic objectives are the diversification of the eco-nomy away from oil, the promotion of rural repopulation through the dev-elopment of agriculture and an increase in skills standards through improve-ments to the education system.

The government must also carry out a major programme of infrastructurereconstruction following the devastating floods of December 1999. Issuesconsidered critical by the electorate are the reduction both of crime and un-employment. Having achieved limited advances on these fronts since it tookoffice in February 1999 and more particularly following its re-election in mid-2000, the Chávez government will face high expectations that it can delivertangible progress in 2001. But the government’s provocative approach to landand education reform has reinforced fears that the president’s policy prioritieswill remain biased towards political objectives and more worrying in themedium term, the administration has as yet given no indication that it plans toundertake the difficult structural reforms needed to reduce macroeconomic vol-atility and to promote more sustainable growth. In addition, although the gov-ernment continues to state its openness to foreign investors, a lack of policycoherence and poor public relations remain evident.

Little has been achieved so far on the flood reconstruction programme init-iated over a year ago. In addition, a 100-day so-called economic overdrive pro-gramme of intensive social investment launched in September 2000 and fin-anced by over US$1bn in foreign-exchange gains accumulated by the BancoCentral de Venezuela (the Central Bank) is by official admission well behindschedule. Part of the problem is administrative inefficiency, which has ham-pered the implementation of initiatives promoted by successive governments,but the delay is in part also attributable—as evident in the delays to the floodreconstruction programmes—to the unwillingness of the Chávez governmentto devolve spending responsibilities to decentralised authorities such as reg-ional governments where these are opposition-controlled.

Policy trendsPolicy trends

International relations

Venezuela 9


The 2001 budget envisages total income of Bs23.2trn (US$32bn), which rests ona relatively realistic oil price assumption of US$20/barrel for Brent oil. The EIUforecasts that Brent will fetch an average of US$23/b in 2001-02, implying anaverage price for Venezuelan crude of just over US$20/b for the period. However,the tax income assumptions in the budget are less credible as they imply anominal increase of more than 50% in non-oil income tax and an increase ofmore than 40% in value-added tax (VAT). A further Bs8.3trn is budgeted to comefrom extraordinary revenue, including Bs1.9trn in planned withdrawals fromthe Fondo de Inversión para la Estabilización Macroeconomica (FIEM, theMacroeconomic Stabilisation Investment Fund) and Bs508bn in fresh debt.However, the intention to use FIEM funds in a year of relatively firm oil pricesundermines the credibility of the stabilisation fund, which is supposed to act asa countercyclical mechanism in the event of a sharp downturn in fiscal oilrevenue. Unwarranted withdrawals would deplete the resources available to bedrawn down in years when oil prices fall below budget.

Despite new rules introduced in the 1999 constitution in an effort to enforcemedium-term planning, budget projections suffer from a persistent lack ofcredibility owing to the practice—entrenched under previous governments andcontinued by Mr Chávez in 2000—of requesting additional credits from thelegislature throughout the year. Provided these credits can be financed,approval is rarely denied. As a result, the expenditure outturn is generally wellabove the budget projection. In 2000, above-budget oil earnings and a rapidaccumulation of domestic debt financed a 45% nominal expansion of expend-iture. With economic recovery likely to stimulate greater credit demand fromthe private sector, the potential for the further issue of public domestic debtwill be constrained by the limitations of the shallow local capital markets. Asthe conditions for issuing external bond are likely to remain difficult forVenezuela in 2001, further withdrawals from the FIEM may be made if thegovernment requires additional funds.

Economic forecast

Venezuela’s economic fortunes are tightly linked to developments in the US,which purchases more than one-half of Venezuela’s exports, as well as to trendsin oil prices. It has become clear since the start of 2001 that the US economywill be close to recession in the first half of the year. We have cut our USgrowth forecast for 2001 accordingly, but on the assumption of a second-halfrecovery as we expect US growth to pick up to 2.9% in 2002.

In the emerging world the most direct impact of the US slowdown will be feltin Asia. A drop in Asian demand will compound the negative impact on pricesfor oil and other commodities. We have cut our forecast for oil prices in 2001,but our estimate for 2002 remains broadly unchanged. Although we expectmonetary easing in the US to allow growth there to accelerate again in late2001 and into 2002, the risk that the US will enter a prolonged and deepdownturn has now increased. The outcome hinges on the ability of the USFederal Reserve Board (the Fed, the US central bank) to support private con-sumption through lower interest rates. If household confidence continues to

Fiscal policy

International assumptions

10 Venezuela


decline and falling asset prices further weaken household balance sheets, wecould easily see a sharp fall in spending as consumers begin to save again afteryears of profligacy.

International assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growtha

World 3.5 4.8 3.3 3.9OECD 3.0 4.0 1.9 2.7EU 2.4 3.3 2.6 2.6

Exchange rates (av)¥:US$ 113.9 107.8 119.5 120.0US$:€ 1.07 0.92 1.00 1.09SDR:US$ 0.731 0.758 0.755 0.731

Financial indicators¥ 2-month private bill rate 0.27 0.24 0.50 0.50US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39

Commodity pricesOil (Brent; US$/barrel) 17.9 28.4 23.9 23.0Gold (US$/troy oz) 278.8 279.3 258.8 255.0Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 9.0 16.1Industrial raw materials (% change in US$ terms) –4.2 14.6 0.7 12.6

a Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

The economy will expand by an average of 4% per year in 2001-02, driven byfixed investment and private consumption, both of which are powered bypublic spending. Provided oil prices do not fall below the levels we arecurrently forecasting, the budget assumptions on which the government isbasing its expansion plans remain credible (see Fiscal policy). The pace of in-vestment growth in the forecast period will depend on the government’scapacity to drive forward both the reconstruction programme required torepair flood-damaged infrastructure and the so-called economic overdrive pro-gramme, which had been due to take place in September-December 2000.Private consumption, which represents over 70% of aggregate demand, shouldalso stimulate GDP growth as new jobs are created, albeit mostly in cyclicalindustries such as construction, with publicly financed investment. However,the stimulus to growth from private consumption will be reduced by a double-digit rise in imports. Export volume growth will be marginal in 2001, beforepicking up in 2002. The slowdown in global growth will severely limit oil prod-uction and export increases in 2001. In addition, slower demand growth in theregion’s other economies will compound the problems of non-oil exporters,who are uncompetitive on account of the overvaluation of the bolívar andwho face the likelihood of increased import competition in the US as thateconomy slows.

With a further real appreciation of the exchange rate expected in 2001-02, thegovernment should be able to restrain average inflation to below 15% per year,a rate that is nevertheless above government expectations of 10-12%. The

Economic growth

Inflation

Venezuela 11


acceleration in the rate of growth of narrow monetary aggregates evident inthe third and fourth quarters of 2000, rising public spending and thecontinuing economic recovery in 2001 are likely to increase price pressures incoming months. The comparatively low rate—0.9%—of monthly inflationposted in January 2001 indicates that the strength of the bolívar is helping tooffset these pressures. Above-budget expenditure could also generate additionalinflationary pressures in 2001. The government’s stand-off with the unions,particularly with the CTV, which is demanding a 39% rise in the minimumwage, will test the government’s resolution in respect of its goal of holdingdown public-sector wage increases to 10%.

Forecast summary(% unless otherwise indicated)

1999a 2000a 2001b 2002b

Real GDP growth –6.1 3.2 3.9 4.1

Gross agricultural growth –2.1 1.4 2.5 3.0

Unemployment rate (av) 14.9 12.2 10.6 9.8

Consumer price inflation Average 23.6 16.2 13.3 14.8 Year-end 20.0 13.4 13.8 15.4

Short-term interbank rate 32.1 25.0c 23.5 23.0

Central government balance (% of GDP) –2.3 –2.2c –2.4 –1.1

Exports of goods fob (US$ bn) 20.8 34.0 27.7 28.5

Imports of goods fob (US$ bn) 13.2 16.1 18.0 19.6

Current-account balance (US$ bn) 3.7 12.9c 3.5 2.5 % of GDP 3.6 12.5c 3.0 2.0

External debt (year-end; US$ bn) 35.7c 34.1c 36.3 38.8

Exchange rates Bs:US$ (av) 605.7 680.0 726.9 791.6 Bs:¥100 (av) 531.8 631.0 608.2 659.7 Bs:€ (year-end) 651.2 657.0 788.9 935.0 Bs:SDR (year-end) 889.7 911.7 1,012.7 1,149.1

a Actual. b EIU forecasts. c EIU estimate.

In December 2000 the Central Bank decided to adjust downwards the plannedrate of nominal depreciation of the bolívar to 7% in 2001, but to maintain thelimits of the band at 7.5% on either side of this figure. This change implies afurther real appreciation of the exchange rate in the context of an officialinflation target of 10-12%. A strong bolívar has been a cornerstone of policy asit is the only way to control inflation in the absence of structural public-sectorreform or the political will to hold down labour costs. However, without largeproductivity gains or fiscal reform, more appreciation in real terms in theforecast period will entail the risk of a sharper correction in future. At somepoint the government will also have to respond to demands for relief from thenon-oil productive sector with increased trade protectionism or a devaluation.

Having posted a large surplus in both 1999 and 2000 on the back of the hugeoil windfall, the current-account surplus will narrow from 2001 as softening oilprices and rising imports associated with a strengthening of the economic

External sector

Exchange rates

12 Venezuela


recovery cause the trade surplus to shrink. From 2002 the impact on thecurrent account will be exacerbated by a growing invisibles deficit, driven byrising interest payments on the external debt, most of which is contracted atvariable rate and which will therefore be sensitive to the forecast rise in USinterest rates from 2002.

The political scene

Despite opposition from a range of actors, including the domestic media, theRoman Catholic Church and the private sector, Hugo Chávez Frías has untilrecently faced little organised or party opposition to the radical programme ofinstitutional and constitutional reform he has pursued since assuming powerin early 1999. The president’s unprecedented power is attributable both to hissuccess at the ballot box, which has enabled his ruling Polo Patriótico (PP)alliance to assume majority control of the National Assembly, the state govern-orships and 40% of municipal councils, and to his willingness to resort to actsconsidered unconstitutional by his opponents. Although not always inaccordance with his new constitution, Mr Chávez has nevertheless ensuredthat his political allies occupy senior positions in the state administration,including posts in the Supreme Court and in the offices of the attorney-generaland ombudsman. The government’s critics and the international communityhave repeatedly raised concerns about the limited checks and balances on theexecutive. But Mr Chávez’s continued popularity amongst the poorest sectorsof society and the legitimacy he acquired following his majority victory in the2000 presidential election have allowed him to brush off any criticism of hisdemocratic credentials. His commanding political position, his populist appeal,his authoritarian role within the Movimiento Quinta República (MVR) and thedisarray of the opposition have accorded the president an extendedhoneymoon period.

However, although Mr Chávez appears outwardly unassailable, the politicalenvironment is undergoing significant transformation. It was hoped that thegovernment would adopt a more consensual approach to policymaking after

The honeymoon period iswaning

Centralised policymaking

Venezuela 13


the introduction of a new constitution in 1999 and elections in July 2000, butthe administration’s inflammatory rhetoric has not moderated. Mr Chávez’s re-course to enabling legislation, approved in November 2000, has allowed him tointroduce policies by decree without consulting with interest groups and theaffected sectors. The policymaking capacity of the government remainsquestionable and the selection of initiatives is largely determined by the relativeinfluence of two competing factions around the president, one headed by theplanning and development minister, Jorge Giordani, the other led by LuísMiquilena, a close adviser to Mr Chávez who was promoted to the position ofinterior minister in February 2001. As the highly centralised governmentgrapples with the intricacies of policymaking in the absence of technicallycompetent advisors and broad debate, policy has been characterised byreversals, as in the case of decentralisation, delay, including that affecting newsocial security legislation, which will not now be introduced until July 2001,and ad hoc responses.

The lack of a well-defined policy programme and little progress on criticalissues such as crime reduction and unemployment have led to a falling off ofsupport for the government. Recent opinion polls conducted by Datos demon-strate that although Mr Chávez remains popular with 60% of those surveyed,his rating has slipped from the 80% recorded in 1999. More importantly,popular confidence in the administration has begun to deteriorate, decliningfrom 66% in 1999 to 40%. A year-end poll by a business lobby group, theVenezuelan-American Chamber, underlined heightened concern in the privatesector. In a survey of 400 businessmen, 91% expressed fears that democracy wasunder threat, 90% felt that the government’s economic policies needed urgentmodification and 52% were of the opinion that the judicial reform process hadnot resulted in any significant improvements to the legal environment.

The centralisation of power around the executive is increasingly constrainingqualitative improvements in policy output. The reluctance of the governmentto consult with groups outside the MVR has further increased the isolation ofthe administration and undermined its ability to anticipate popular responsesto its legislative initiatives at a time when opposition forces are becomingincreasingly mobilised. The rise in antigovernment mobilisation is runningparallel with evidence of mounting political fatigue among the president’ssupporters and the emergence of divisions within the MVR.

A low turnout in the December 2000 municipal elections, partly attributable toelection fatigue following two years of almost continuous electoral mobilis-ation, was an important turning point for the government. The elections wereheld in conjunction with a referendum on trade union reform. Democratis-ation and unification of the trade union movement has been a priority forMr Chávez since a crippling four-day strike was held by oil workers in October2000. The strike by members of the Federacíon de Empleados Petroleros(Fedepetrol, the oil workers’ union) was supported by the country’s mainunion confederation, the Confederacíon de Trabajadores de Venezuela (CTV,the Venezuelan Workers’ Confederation). Mr Chávez has been deeply hostiletowards the CTV on account of its close links with the formerly dominant

Weakening popularsupport

The government’s firstmajor setback

14 Venezuela


political party, Acción Democratica (AD). The CTV has long been viewed as acorrupt and unrepresentative organisation, but following the October strike theconfederation has become an important forum for resistance to the govern-ment in the absence of significant legislative opposition. The surprise resur-rection of the CTV has prompted Mr Chávez to devote considerable attentionto the creation of an alternative union organisation affiliated to the govern-ment, the Frente Bolivariana de Trabajadores (FBT, the Bolivarian Workers’Front). As a means of undercutting the influence of the CTV and promotingthe FBT, a bill on trade union liberties was introduced by the government andapproved by the MVR-dominated National Assembly in November 2000. Thelegislation called for a popular referendum in December to allow voters todecide if a system of democratic elections should be introduced in a newunified union movement, the FBT. The measure was condemned by the CTVand the International Labour Organisation (ILO) as unconstitutional state in-terference in the internal affairs of a private body.

The majority of the electorate—78%—abstained from the referendum. Themeasure was approved by 13.9% of the total electorate, that is by 63% of the22% of the electorate that voted. Even so, the government was quick to rejectopposition claims that the low turnout undermined the legitimacy of theunion reform programme. The government proceeded to establish a forum fordialogue, bringing together the CTV, the FBT and a range of smaller inde-pendent union organisations to prepare for internal democratic elections.Although no date has been set for the elections, they must take place within180 days of the referendum and will be overseen by the Consejo NacionalElectoral (CNE, the National Electoral Council). In accordance with ILOrecommendations, voting will be limited to union members only. Collatingunion membership information from the 2,740 trade unions, 25 nationalunions, 24 regional federations and four confederations has proved a complextask for the CNE, but more worrying for the government is the lack of supportamong workers for the FBT, which has yet to develop a grassroots movement.

The government’s attempts to eliminate the CTV as the main representative oforganised labour has backfired and industrial relations are set to remain frac-tious in the medium term. Workers have become more politicised as a result ofthe referendum and there is no guarantee that the FBT will perform well in theinternal elections. Concern remains that the government will attempt to buildsupport for the FBT through populist spending and that attempts to pursuestructural reform will be impeded as the administration will be reluctant tointroduce any measures likely to increase unemployment. A strong showing inthe elections by opposition unions cannot be discounted and the NuevoSindicalismo (NS, New Unionism) movement, which was originally formed toprotest against the corruption in the CTV, may be the main beneficiary of theFBT’s weakness.

The government’s failure to anticipate a potentially hostile response to itsunion reform proposals underlines its limited ability to gauge popular reactionto its initiatives. Its majority in the National Assembly and the use of executivedecrees to drive its policy programme forward has limited the opportunities

Unions may unite againstthe government

Few voters turn up at theballot box

Problems of centraliseddecision-making

Venezuela 15


available for groups to lobby and to advise the government. This weakness hasundermined the quality and legitimacy of legislation, while increasing frus-tration at the government’s inability to tackle acknowledged deep-seated in-equalities and institutionalised corruption. Relations between the adminis-tration and its opponents remain characterised by mutual suspicion, boding illfor political stability. Debate in Venezuela has been supplanted by the intro-duction of executive decrees or legislation, which are then followed by strikesand demonstrations by the government’s opponents.

The education sector, which is in dire need of reform, has suffered a similar fateto that of the unions. Education spending is below average for South America,having fallen from 7.4% of GDP in 1983 to 3.8% in 1998. Dropout rates arehigh and absenteeism is widespread, with 75% of children at secondary-schoollevel failing to attend school. Public education is in crisis owing to severefinancial constraints and 8,000 teaching posts in classes for children of be-tween five and 13 years remain unfilled. The private school sector is bur-geoning as parents who can afford it prefer to pay for better-quality education.

In an attempt to improve the quality of education, the government introduceda presidential decree at the end of 2000 amending the existing Education Act.The amendment ends the traditional practice of state payment for teachers ofreligious education and creates school inspectors empowered to visit educ-ational institutions both in the public and private sectors. The decree has beencriticised by the Roman Catholic Church as an attempt to import Cuba’satheistic education model, while teachers’ unions have condemned thecreation of the inspectorate, members of which will not be required to hold ateaching qualification. The appointment of inspectors will be controlled by theMinistry of Education, raising concerns that the government will politiciseschool inspections and reduce the role of the local community in the super-vision of education. The decree has also been condemned by the CámaraVenezolana de la Educación Privada (CVEP, the Venezuelan Chamber of PrivateEducation), which argued that it will be used by the government to close downprivate schools out of ideological hostility towards private provision. The mainteaching unions have drawn up an alternative education bill and an appeallodged against the decree will be heard by the Supreme Court in February2001. The six main teaching unions led a 24-hour strike at the end of Januaryin protest against the decree. An estimated 140,000 public school teachers tookpart in the industrial action, which led to the closure of 15,000 schools andaffected 6m pupils. A further 48-hour stoppage took place in late February. Thestrikes were also called in support of new labour contracts and demands for theback payment of wages agreed in negotiations with the government in 2000.The education minister condemned the strikes as illegal and a politically mot-ivated defence of teaching union privileges. Teachers have so far received 56%of the staggered increase negotiated in 2000.

Particular concern surrounds both the government’s approach and the likelypopular response to its next major initiative, land reform. The NationalAssembly is considering the first draft of changes to existing land reform law.The bill aims to reverse the decline of agricultural production and the excessive

Proposed land reformworries investors

Education system is aquagmire

Reform attempts triggerteachers’ strike

16 Venezuela


concentration of land ownership. Venezuela has the second highest rate ofconcentrated land ownership in Latin America, with 70% of agricultural landin the hands of 3% of agricultural proprietors. Although respect for privateproperty has been emphasised in the bill, Mr Chávez has caused controversyby claiming that he may use enabling powers to redistribute land to the poor,while property owners who do not make sufficient use of their land must placeit at the disposal of the nation.

Despite an increase in social protest, there has not been a general strengtheningof the opposition parties, which remain weak and incapable either of capturingsupporters lost by the government or winning the backing of voters who havebecome disaffected with Mr Chávez since he assumed power. AD, the country’slargest opposition group and historically its most dominant political party,holds 33 of 165 seats in the National Assembly and has been undergoing aprocess of internal reform in an attempt to revive its fortunes. But therestructuring has generated conflict within the party and seven of AD’sNational Assembly members have split to form the Nueva Alianza Democrática(NAD). As the presidencies of the National Assembly’s permanent commissionsare distributed in proportion to the number of seats held by different politicalgroups, AD will now lose control of three such commissions.

Debate about the future direction and electoral positioning of political partieshas also affected the Movimiento al Socialismo (MAS), a partner with the MVRin the ruling PP coalition. The MAS, which has a strong presence in regionalgovernment, has become increasingly critical of government policy. It objectedto proposals put forward in October 2000 to alter funding mechanisms fordecentralised services, plans which the government subsequently withdrew.The MAS was also concerned by the government’s decision to appoint MVRsympathisers to the posts of attorney-general and ombudsman and in additionhas voiced criticism of the administration’s handling of the trade union reformprocess. The MVR relies on the MAS for its majority in the National Assembly,but despite the MAS’s important role in the coalition, the party has not beenrewarded with cabinet positions. This outcome has generated frustration in theMAS, especially as it disputed the promotion of military figures to the cabinet,echoing similar complaints that led a former PP member, Patria Para Todos(PPT), to withdraw from the coalition.

At the MAS’s anniversary convention in January 2001, which was attendedneither by any senior MVR figures nor by Mr Chávez, activists raised concernsabout the limited influence the party has had on government policy and crit-icised the administration for failing to build dialogue with the middle class andthe private sector. Under the direction of the MAS secretary-general and firstvice-president of the National Assembly, Leopoldo Puchi, the party has adopteda position of autonomy within the PP, implying a more assertive relationshipwith the MVR and the government. Luís Miquilena, the interior minister andhead of the MVR, characterised the MAS’s position as incoherent and in a movethat exacerbated the strain between the two parties, called on grassrootsmembers of the MAS to oppose the decision taken by its leadership. The re-definition of the MAS’s role within the PP reflects growing tension between the

The MAS becomes moreassertive within the PP

Party political oppositionremains weak

Venezuela 17


MAS and the MVR, which may lead to the break-up of the coalition. Any break-up would compound delays in the packed legislative timetable as 83 pieces oflegislation are currently under scrutiny in the 15 permanent commissions.

The increasing fragmentation of the ruling coalition underlines a growing ideo-logical division amongst Mr Chávez’s formerly unified political bloc. Pressure ismounting on the government from the left of the MVR to press ahead withreform and to close itself off from influences that may dilute its radical pro-gramme. Mr Miquilena and civilian activists who joined the MVR from a rangeof minor left-wing parties and guerrilla groups have articulated this position. Amore moderate stand, similar to the position of the MAS, has been adopted byan emerging right-wing faction around the foreign minister, Luís AlfonsoDávila, which incorporates the military section of the MVR. The success ofeither group and the future direction of the government will be determined byMr Chávez at the cost of alienating one of the competing factions and under-mining the unity of the MVR.

Leaving office on January 1st 2001 to take up his position as the secretary-general of OPEC, Alí Rodríguez Araque was replaced by Alvaro Silva Calderónas minister for energy and mines. The selection of Mr Silva was not unexpectedas media reports in late 2000 had already suggested that he was a possible can-didate. There are early signs that his appointment will bring no major shifts inpolicy. Mr Silva is committed to Venezuela’s position in OPEC, which is likelyto be strengthened by Mr Rodríguez’s position as secretary-general. Mr Silva hasexpressed support for the latest round of OPEC production cuts, stating thatthe 173,000 barrels/day cut handed down at the OPEC meeting in Vienna haveneither a negative impact on oil revenue nor on the investment programme ofthe state oil company, Petróleos de Venezuela (PDVSA).

A cabinet reshuffle in February 2001 heightened speculation that Mr Chávez isleaning increasingly towards the civilian faction within the MVR. Mr Divila,an ex-general who had been criticised for the lack of progress on crime re-duction, was moved from the Ministry of the Interior to the Ministry ofForeign Affairs, while Mr Miquilena was brought back into the cabinet to takeover at the home affairs. It had been widely expected that Mr Miquelina wouldbe brought back into the cabinet after his guiding role in the constituentassembly and the Congresillo in 2000.

The most controversial appointment was that of José Vicente Rangel as defenceminister. Mr Rangel, the first civilian to hold the post since the 1920s, replacedGeneral Eliécer Hurtado Sucre in a move that caused speculation that relationsbetween Mr Chávez and the military had reached a low point and that thepresident lacked confidence in the military hierarchy. Mr Rangel, who has beena journalist for 25 years, is not a popular figure with the military establishmentowing to a number of investigations he led into corruption in the armedforces. Mr Chávez cited Mr Rangel’s promotion as a step forward for democracyand claimed that the Ministry of Defence should be viewed as political ratherthan military in nature.

Ideological divisionsemerge within the MVR

Cabinet reshuffle

New minister for energyand mines appointed

18 Venezuela


Under the new National Armed Forces Law, a new military post of chief of thearmed forces will be created, with a mandate to ensure their unity. Mr Chávezis considering an army commander or an admiral for the position.

Mr Chávez made the first high profile cabinet appointment of a woman whenhe named Adina Bastidas, a former Venezuelan representative to the Inter-American Development Bank, as vice-president. Ms Bastidas replaces IsaíasRodríguez, following his controversial appointment to the position of attorney-general. The health and social development minister, Gilberto RodríguezOchoa, announced that he would resign from his post at the end of Februaryon personal grounds, but no replacement has yet been found.

General Hurtado’s demotion to the position of infrastructure minister, thethird military officer to hold the post in the current administration, followedan embarrassing scandal that refocused attention on the military. There havebeen a number of provocative attempts to encourage the armed forces to over-throw Mr Chávez. In January 2001 a university professor arrested on the ordersof General Hurtado was tried for instigating sedition among the military auth-orities, having alledgedly sent high ranking officials a video tape calling for acoup, along with 140 packs of women’s underwear as a symbol of their coward-ice. The so-called panty affair has been linked to a campaign by the Comité deResistencia Civil (CRC, the Committee for Civilian Resistance), which has alsoincluded leaving chicken feed outside the houses of military figures. GeneralHurtado came under fire from human rights organisations for trying the pro-fessor in a military court and was ridiculed in the domestic media for holdingup the underwear on live national television.

Mr Chávez has had a divisive influence on the military and conservativeelements within the armed forces remain deeply opposed to his presidency, buttheir hostility has remained covert. There is mounting evidence that militaryinvolvement in areas considered to be civilian matters, including the appoint-ment of cabinet members and the development of infrastructure schemesunder the auspices of Plan Bolívar, has had a damaging effect on morale withinthe armed forces and has led to corruption, specifically in the uncheckeddistribution of Plan Bolívar funds.

The National Guard opened an investigation into allegations of arms-trafficking following the seizure of 25 semiautomatic rifles and the arrest ofthree Colombian and three Venezuelan nationals at the border between thetwo countries in mid-January 2001. It is believed that the rifles, which arestandard issue in the Venezuelan army, were to be distributed to a Colombianguerrilla group, the Fuerzas Armadas Revolucionaria de Colombia (FARC).Venezuela has repeatedly refuted allegations that it has financed and suppliedweapons to either the FARC or the Ejercito de Liberación Nacional (ELN),Colombia’s other main guerrilla organisation.

Relations between Mr Chávez and his Colombian counterpart, AndrésPastrana, have been strained in recent months, with Mr Pastrana calling onMr Chávez to desist from perceived interference in the peace negotiations be-tween the Colombian government and the left-wing guerrillas opposed to it.

Growing concern aboutdevelopments in Colombia

Unfavourable attention forthe military

Venezuela 19


Mr Chávez has followed a policy of drawing closer to both the FARC and theELN in an attempt to facilitate the peace process and has offered to mediatefuture talks between the Colombian government and the rebels. Venezuelaremains deeply concerned about the involvement of the US with and itsfunding of Colombia’s antidrug policy, Plan Colombia. Venezuela’s oppositionto the plan has focused on the potential displacement both of refugees anddrug production into Venezuela, and the military imbalance that will resultfrom US aid totalling the US$800m for the Colombian military. After a souringof diplomatic relations between Venezuela and the US administration underBill Clinton, Mr Chávez has adopted a more constructive approach to the newUS government led by George W Bush, emphasising the importance ofstrengthening bilateral links. This more conciliatory and pragmatic foreignpolicy tone contrasts with the Venezuelan president’s earlier controversial pro-nouncements. Mr Chávez’s Bolivarian foreign policy vision—building a bloc ofstates in Latin America to counterbalance the US—has been coolly received byhis continental neighbours, while the deepening of links with Cuba and Iraqhas proved extremely contentious both in the domestic media and within theinternational community.

Economic policy

Tax collection fell short of expectations in 2000, despite higher than predictedGDP growth. Although overall tax revenue rose by 35% in 2000, about 85% ofthe rise came from the oil sector, where higher oil prices ensured that 2000 wasan excellent year. A sharp increase in expenditure (up by 46%) was financed byabove-budget oil earnings and a rapid accumulation of domestic debt, thestock of which rose from Bs4.2trn (US$6.5bn) at the end of 1999 to someBs7trn at the end of 2000.

Central government balance(Bs bn)

1999 2000a % change

Total revenue 10,213 15,522 52.0 of which: tax revenue 7,151 9,624 34.6 oil sector 1,736 3,827 120.5 non-oil sector 5,415 5,797 7.1

Total spending 11,624 16,984 46.1 of which: operational costs 9,574 13,926 45.5 transfers to FIEMb 0 1,414 n/a

Central government balance –1,411 –1,461 3.5 % of GDP 2.3c 2.1c n/a

a Preliminary figures. b Fondo de Inversión para la Estabilización Macroeconómica (MacroeconomicStabilisation Investment Fund). c EIU estimate.Source: Ministerio de Finanzas.

Tax collection againdisappoints in 2000

20 Venezuela


Subdued growth in investment spending demonstrates that most of the ex-pansion in outgoings was accounted for by a sharp rise in current spending.The fact that the central government accounts recorded a deficit despiterevenue growth of 52%, only one-quarter of which was absorbed by transfersto the Fondo de Inversión para la Estabilización Macroeconómica (FIEM, theMacroeconomic Stabilisation Investment Fund), indicates the deep imbalancesin the public finances.

Tax evasion remains a major problem. In December 2000 the Servicio NacionalIntegrado de Administración Aduanera y Tributaria (Seniat, the internalrevenue service) and the Ministry of Finance announced plans to audit shopsand restaurants to ensure that they comply with legislation on both value-added tax (VAT) and income tax. Establishments that are not adequately com-pliant will be fined up to Bs2.3m (US$3,200). Seniat has also been negotiatingwith companies that run storage facilities at the port of La Guaira, whichallegedly owe the government Bs.2.2bn (US$3.1m) in back payments for theuse of their premises. In addition, Seniat’s director, Trino Alcaides Díaz, whowas appointed in late 2000, announced plans to launch a campaign to collectVAT from buhoneros (informal street sellers), although this move seems likely toprove impractical. Although high profile announcements and attempts to im-prove tax collection, including the personal participation of the president,Hugo Chávez Frías, in some raids, are made recurrently, there is unlikely to beany fundamental improvement in compliance until the government carriesout in-depth reform of the tax department. Seniat’s lack of autonomy andprimary corruption at all levels of collection and distribution will continue tohinder the pace of improvement in tax administration.

The Banco Central de Venezuela (BCV, the Central Bank) has again been con-sidering measures to limit the spread between lending and deposit rates.Currently the BCV can regulate ceilings and floors, but cannot fix margins. TheBCV argues that banks have not done enough either to reduce lending rates inline with falling inflation or to raise deposit rates. But banks contest that thewide spread is necessary to cover their operating costs. In January 2001 aCentral Bank director, Domingo Maza Zavala, informed reporters that themonetary authority is considering moving ahead with the proposed measure.He reassured the financial community that any regulation would be carried outwith negotiation and that the BCV would prefer to regulate the spread ratherthan the absolute value of interest rates. But should negotiations with banksfail to yield a compromise spread, the BCV appears ready to impose one. If thispolicy were to be implemented, it is likely that consolidation in the financialsector would proceed more rapidly, as banks would be forced to seek economiesof scale in order to cut costs. Although consolidation should help to improveefficiency, it is likely that government intervention in the banking sector woulddamage investor confidence and could well deter more foreign entrants. Butsome improvement was seen in 2000 as average spreads narrowed to 8.2 pointsin December 2000, from 10.9 points in the year-earlier period. The averagelending rate of the six major banks stood at 21.98% in December 2000, a 6.2-percentage-point fall on the average rate for December 1999, while the averagesavings rate stood at 13.74 points, a 3.5-percentage-point fall on the year-earlier

Improved tax collectionremains idealistic

The Central Bank targetsinterest-rate spreads

Venezuela 21


period. However, the low deposit rate, negative in real terms, does little todiscourage capital flight. Consumer lending rates remain close to 40%.

The government has continued its restructuring of state-owned financial instit-utions. An Enabling Law passed in late 2000 allows Mr Chávez to mergeexisting institutions and to create new ones. The creation of the Banco de laMujer in January 2001 represents another move to provide the populationwith access to cheap credit. The bank will offer cheap loans to women runningsmall businesses. However, the experience of similar popular banks, namely theBanco del Pueblo, suggests that the new bank will have only a limited impacton its target audience or on the economy as a whole. In a televised speech inJanuary Mr Chávez admitted that the government has fallen short on pro-viding sufficient support for small businesses as since its inception the Bancodel Pueblo has lent out only 2.9% of its capital, investing the remainder inbonos de deuda pública (DPNs, Treasury-issued public debt bonds).

In January 2001 the planning minister, Jorge Giordani, was named the newpresident of the Fondo de Inversiones de Venezuela (FIV, the state investmentfund), indicating that Mr Chávez is unlikely to make substantial changes to hiseconomic team any time soon.

The domestic economy

Economic trends

One of the most striking features of the GDP figures for 2000 published by theBanco Central de Venezuela (BCV, the Central Bank) is the weakness of thelevel of fixed investment growth, which rose by a mere 2% during the year as awhole, despite the oil bonanza, following an accumulated contraction of18.5% in 1998-99. Inflows of foreign direct investment held up relatively wellin 2000, reflecting ongoing investment in telecommunications and oil, partic-ularly in the Orinoco belt. Most of the growth in oil is likely to have beenaccounted for by private investment in the hydrocarbons industry. The bulk ofthe huge oil-backed increase in public spending thus appears to have beenchannelled into current expenditure (see Economic policy), a trend reflected ina rebound of private consumption (up by 4.6% in 2000), a surge in govern-ment consumption (up by 5.6%) and strong imports growth (up by 19.5%).

Demand growth, 2000% change,

year on year

GDP 3.2

Private consumption 4.6

Government consumption 5.6

Gross fixed investment 2.0

Changes in stocks 1.4

Exports of goods & services 5.8

Imports of goods & services 19.5

Source: Banco Central de Venezuela.

Disappointing take-up ofnew credit

Investment growthsurprisingly weak in 2000

22 Venezuela


On the supply side, growth was led by a 3.4% expansion in oil, which wasmostly attributable to higher fixed investment as a result of improved con-ditions and a 2.7% expansion in the non-oil sector. In the non-oil economy,output was driven by communications, which expanded by almost 15%, andby mining, which grew by 8%, recovering well from a 10% contraction in1999. Construction, an important source of employment, shrank for the thirdconsecutive year as output fell by nearly 5%, despite expectations in early 2000that the damage from the devastating mudslides in Vargas state in December1999 would provide ample reconstruction work. However, the sector appears tohave bottomed out and there were signs of recovery towards the end of 2000,with fourth-quarter construction output expanding by 6.9% year on year.

Gross domestic product growth by sector, 2000% change,

year on year

Total 3.2

Oil sector 3.4

Non-oil sector 2.7 of which: mining 8.4 manufacturing 3.6 electricity & water 2.1 construction –4.9 commerce 5.1 transport & storage 4.9 communications 14.7 finance 1.6


Vehicle sales increased by 39% in 2000. In December, traditionally a goodmonth as workers receive their Christmas bonuses, sales reached 16,457, repre-senting a 51% increase on the year-earlier period. Vehicle sales have beenhelped to a large extent by the government’s family car programme, whichprovides cheap credit on certain vehicles. But housing sales fared badly in2000. According to the Real Estate Chamber, sales of new homes fell by 48%.Part of the reason seems to lie in the fact that credit for home buyers remainscentred on the política habitacional (home policy) programme, which targetslow-income groups. But there is a shortage of homes available under the homepolicy scheme. In addition, those people who might have been able to acquirehousing through it are those who have been hardest hit by the recession andunemployment in the past two years.

The rate of inflation fell to 13.4% in 2000, the lowest level recorded since 1986.However, in the context of the overvaluation of the exchange rate and de-pressed domestic demand for much of the year, it was not especially low. Theconsumer price index rose by 0.9% in January 2001, marginally down from the1% registered in December 2000, yielding a 12-month inflation rate of 12.6%.The comparatively low monthly inflation rate for January 2001, the lowestJanuary rate since 1988, indicates that the strength of the bolívar is helping tooffset any budding price pressures. In January home services costs, which rose

Subdued inflation

Recovery continues, drivenby oil and telecoms

Vehicle sales soar sharply,but home sales plunge

Venezuela 23


by 5.3% during the month, recorded the largest increase of any sector, mainlyowing to increases in electricity, gas, water and sanitation tariffs. Prices forhealthcare, food and non-alcoholic drinks also rose by more than the generalconsumer price index. However, prices for home rental (up by 0.6%) and homeequipment (up by 0.7%) rose at below average rates.

Consumer price inflation(% change; Caracas metropolitan area price index)

1999 2000 Monthly Year on year Cumulative Monthly Year on year Cumulative

Jan 2.2 30.2 2.2 1.7 19.4 1.5

Feb 1.7 29.5 3.9 0.4 17.9 1.9

Mar 1.3 27.6 5.2 0.9 17.5 2.9

Apr 1.2 24.9 6.4 1.5 17.9 4.4

May 2.0 23.4 8.5 1.0 16.8 5.4

Jun 1.5 23.7 10.1 1.1 16.3 6.6

Jul 1.6 23.0 11.9 1.0 15.6 7.7

Aug 1.5 22.3 13.6 0.8 14.8 8.5

Sep 0.9 21.2 14.6 1.7 15.8 10.4

Oct 1.6 20.2 16.4 0.8 14.8 12.5

Nov 1.5 20.2 18.2 0.6 14.2 12.3

Dec 1.7 20.2 20.2 1.0 13.4 13.4


A study by the Union of Swiss Banks published in February 2001 showed thatCaracas is the most expensive city in Latin America and the eighth most ex-pensive city in the world. Since the previous report, issued in 1998, prices haveincreased by 60% in US dollar terms. These findings are partially borne out bya separate study, the EIU’s Worldwide Cost of Living Survey. Our study shows thatalthough Caracas is the eighth most expensive city in the world, on a regionalbasis it comes third after Buenos Aires and Mexico City, which are respectivelyin third and fourth place globally.

Cost of living estimates

24 Venezuela


According to the Oficina Central de Estadística e Informática (OCEI, the CentralOffice of Statistics and Informatics), the economic recovery started to generate afall in unemployment in 2000. The year-end national unemployment ratedropped to 10.2% in 2000, 2.8 percentage points less than at the end of thethird quarter and 4.6 percentage points less than at the end of the second. How-ever, it is only marginally below the 10.6% registered in the year-earlier period.The level of unemployment remains high in construction (21.4%) and manu-facturing (10.5%), although both sectors registered a decline in unemploymentin 2000. The slow fall in unemployment is partly the result of the slower pace ofeconomic recovery in 2000 and partly attributable to less progress being madeon reconstruction than expected in the wake of the December 1999 mudslides.These unemployment figures only refer to the formal sector. According to OCEI,at the end of 2000 53.2% of the workforce was employed in the informal sector,up from 52% at the end of the third quarter, but down from the 55% recordedat the end of 1999. This distribution is unlikely to change in the medium termas an overvalued exchange rate, a general lack of competitiveness and a rigidlabour market continue to constrain manufacturing growth. The most pro-mising prospect for employment creation in the short term is construction, butsuch employment is cyclical and will struggle to provide 100,000 new jobs, lessthan 10% of open unemployment.

Oil and gas

According to the budget approved by shareholders in December 2000, thestate-owned oil monopoly, Petróleos de Venezuela (PDVSA), is scheduled toinvest a total of US$5.8bn in 2001, representing an increase of 22.2% on theyear-earlier budget. This sum includes investment in fields governed by oper-ating agreements between PDVSA and other oil companies. Investment will beconcentrated in exploration, production and upgrading. The target forproduction capacity in 2001 is 4.2m barrels/day. According to the budget,operational costs will remain at 2000 levels, at US$7.1bn.

PDVSA to invest US$5.8bn

Unemployment dropsslowly

Venezuela 25


Industry

The telecommunications sector was opened up on November 27th 2000 andrapidly became a primary destination for foreign investment. Competition forlicences has been strong and the Comisión Nacional de Telecomunicaciones(Conatel, the National Telecommunications Commission), has been praised forits handling of the bidding process. Only one company, Netsat, which beatTelcel-BellSouth to the band A licence for region three, was unsuccessful withits financing. Netsat failed to raise the US$10.5m bid for the licence and wasconsequently banned from doing business in Venezuela for five years. Animportant issue still to be resolved is how Conatel will oversee any inter-connection disputes. The first such potential dispute could arise between theCompañía Autónoma Nacional Teléfonos de Venezuela (CANTV, the state-runtelecoms company) and Telcel-BellSouth. In accordance with existing inter-connection regulation, Conatel has given the two sides 60 days to reachagreement, after which time Conatel will impose a settlement.

Venezuela’s biggest beer producer and manufacturer of cornflour, rice and otherfood products, Empresas Polar, has reached agreement with a listed company,Mavesa, for a friendly tender offer. Mavesa owns a broad range of 60 brandedproducts, including margarine, mayonnaise and cleaning products. Under theterm of the deal, Empresas Polar will try to buy 65-100% of Mavesa’s shares for14 US cents per share, valuing the total deal at US$510m. Although mostshareholders are expected to take up the offer, rival bids cannot be excluded.

The privatised steel manufacturer, Sidor, reported strong year-end results for2000. At US$400m, the company’s exports reached their highest ever level,helped by a strong recovery in world prices. However, fellow steel producerSivensa registered a US$97.7m loss in 2000.

Agriculture

The production of a number of staple crops increased in 2000. According tofigures released by the Ministry of Agriculture, the output of several productsimproved, including corn (up by 35.7%), coffee (up by 5.1%) and sugar cane(up by 3.6%), but rice production fell by 2%. Despite the positive productionfigures, many local producers have complained that the government has notkept its promise to help to secure new markets, which has resulted, forexample, in 300,000 quintals (one quintal=46 kg). of coffee being left unsold.The ministry defended its performance by stating that its aim for the year wasto create a solid platform for the future growth of the sector, rather than toincrease agricultural production per se.

However, agriculture does face a number of barriers to growth. The overvaluedbolívar and the scarcity of state-of-the-art technology undermine the competit-iveness of Venezuela’s agricultural exports. The use of credit remains limited,despite the implementation of targeted programmes, and few producers aretaking advantage of the credit available, owing to the cumbersome procedures

Telecoms main target forforeign private investment

Mixed reports from thesteel sector

Important obstacles togrowth remain

Improved harvest in 2000

Two food giants setto merge

26 Venezuela


involved. In addition, uncertainty about land ownership, given continued landinvasions and the perceived threat of expropriation associated with the govern-ment’s land reform proposals, remains an obstacle that prevents landownersturning their property to productive use.

Infrastructure

The replacement of Alberto Esqueda as infrastructure minister with the formerdefence minister, General Eliécer Hurtado Sucre, is a tacit acknowledgement bythe president, Hugo Chávez Frías, that the reconstruction process in the wakeof the December 1999 landslides has not proceeded as fast as anticipated.Mr Esqueda claimed early on in his tenure that he would step down if hisministry did not meet its homebuilding targets. Although a number of rudi-mentary projects have been carried out in Vargas state, including clearingdebris and replacing damaged water and sanitation services, the expected con-struction boom has failed to materialise. Political infighting and an inability onthe part of local and national government to implement development planshave stalled the rebuilding process.

The vice-minister for tourism has also been replaced in the wake of criticismthat the much-heralded opening of the sector had yet to take place. Thenumber of overseas visitors to Margarita Island, Venezuela’s major tourist des-tination, declined by 31% in 2000 according to the group that manages theisland’s international airport. The decline appears to be related both to the un-certainty generated by the international press coverage of the 1999 landslidesand to fear of the growing crime rate.

The Ministry of Production and Trade has drawn up a plan for 2001 pledgingthe sale of a number of state-owned tourism assets. The ministry hopes toattract national and international investors through the sale of hotels and landfor development. However, a lack of infrastructure in many areas identified asprime tourism locations could prove an inhibiting factor for investment.Venezuelan companies have also increased their presence at a number ofinternational trade and tourism fairs.

Financial and other services

The wave of banking mergers continued in the fourth quarter of 2000, duringwhich Fondo Común merged with Banco República to form Fondo ComúnBanco Universal, while Banco Noroco and Valencia EAP joined Norval Bank.Mi Casa EAP took over La Primogénita.

In another attempt to cut costs, the banking sector reached an agreement withthe Consejo Nacional del Comercio y los Servicios (Consecomercio, a tradegroup representing private-sector companies) to restrict authorisation ofcheques to those above Bs20,000 (US$28). Initially, the banking sector had in-sisted that it would only authorise cheques above Bs50,000, but this amountwas reduced after pressure from retailers. The new measure came into effect onFebruary 15th 2001.

Reconstructionpost-mudslides needs boost

Tourism gets anothermakeover

Wave of banking mergersin full swing

Venezuela 27


Further pressure for banking consolidation came in December 2000, when theMinistry of Finance forced universal and commercial banks to increase their min-imum paid-in capital. Under the terms of ministry’s decree, the minimum paid-in capital for commercial banks rises from US$1.7m to US$19.9m and that foruniversal banks from US$4.3m to US$49.7m. Banks have been given 18 monthsto comply with the ruling. As of November 2000, only 23.8% of banking instit-utions and ten of the top 15 banks had fulfilled these capital requirements.Those banks needing to increase their paid-in capital represent 55.9% of totalassets and 66.6% of the sector’s total capital. The immediate result of thismeasure will be that larger banks will be obliged to offer stock dividends or totake over smaller institutions, while smaller institutions will be forced to enterinto mergers with each other or to be absorbed by larger banks. Although thesechanges will cause short-term uncertainty, they will ultimately hasten much-needed consolidation of the overpopulated and undercapitalised banking sector.

The acquisition of Electricidad de Caracas (EDC) by the US giant, AES, and thepossibility that the Polar-Mavesa bid will go ahead (see Industry), have fuelledrumours about the future of other major companies listed on the Caracas StockExchange. Such rumours are particularly significant given that each delistingsqueezes locally traded volumes, further diminishing the attractiveness of themarket to international investors. Trading volumes on the local stock exchangehave fallen since 1997’s peak owing to a variety of factors. The Caracas StockExchange was never a wide and deep market and the choice of some ofVenezuela’s largest companies to expand their access to international investorsvia the listing of US-traded American depository receipts has allowed foreigninvestors to buy Venezuelan stock abroad as they are no longer forced to deallocally. The government’s financial transaction tax, temporarily imposed for ashort time in early 1999, also deterred international investors from tradinglocal stocks. In addition, an unfavourable environment for emerging marketsand the less pro-market stance of the Chávez government are compoundingVenezuela’s equity market troubles.

Two of the country’s major paper producers, Venepal and Manpa, may also bethe subject of takeover bids. Venepal, which has been struggling for the pasttwo years, had been negotiating a deal with the Mexican giant, Copamex,which had been managing the company for the past 12 months. Copamex hasnow pulled out the negotiations and talks with Smurfit-Stone Container aretaking place. Manpa is currently negotiating the sale of 80% of its stock to anoutside buyer. In January 2001 Tabacalera Nacional withdrew from the CaracasStock Exchange in a move that will have only a limited effect on tradingvolumes because the company’s shares were already illiquid as Phillip Morris.owned a 90% stake in it. CANTV remains a target for takeover speculation.

Foreign trade and payments

According to the Banco Central de Venezuela (the Central Bank), non-traditional exports grew by 29% in 2000, despite a strong exchange rate and alack of competitiveness caused by low productivity and high labour costs. A

Both exports and importsgrew in 2000

Stockmarket consolidationcontinues

28 Venezuela


breakdown of non-traditional exports for the year to November 2000 revealsearnings growth of 27%. Part of the increase appears to reflect higher exportsto the region, in particular to Colombia, as a recovery in the Andean marketgot under way. Almost one-half of the increase is attributable to the inclusionof private-sector oil output in the mineral products category, which increasedby 200%. Other categories performing well included chemicals and vehicles.

Non-traditional exports, Jan-Nov(US$ m)

1999 2000 % change

Crops 285 250 –12.3

Food industry 218 185 –15.1

Mineral products 230 691a 200.4

Chemical products 513 646 25.9

Plastics & manufacturing 319 340 6.6

Base metals 1,370 1,693 23.6

Electrical products 112 116 3.6

Vehicles 167 206 23.4

Others 273 314 15.0

Total 3,487 4,441 27.4

a Includes private-sector oil exports.Source: Oficina Central de Estadística e Informática.

Current-account balance(US$ m)

1999 2000 % change

Current-account balance 3,689 13,365 262

Exports fob 20,819 34,038 63 Oil 16,697 28,716 72 Non-oil 4,122 5,322 29

Imports fob –13,213 –16,073 22 Oil –1,648 –2,036 24 Non-oil –11,565 –14,037 21

Trade balance 7,606 17,965 136

Services balance –2,469 –3,309 34 Transport –1,049 –1,413 35 Travel –932 –1,206 29 Communications –30 –70 133 Insurance –57 –77 35 Government –24 –6 –94 Other –377 –549 46

Income balance –1,518 –1,152 –24

Goods, services & income balance 3,619 13,504 273

Current transfers 70 –139 n/a


According to Central Bank figures, import spending grew by 21.7% in 2000, re-flecting increased domestic demand. Private-sector spending on imports repre-sented 82.3% of total import spending. Significantly, non-oil related public-sector import spending rose by 39.5% year on year. Imports also received a

Venezuela 29


boost from rising demand for capital and intermediate goods in the private oiland telecommunications sectors. Preliminary balance-of-payments figures pub-lished by the Central Bank suggest that the current account registered a surplusof US$13.4bn in 2000, the highest surplus since 1980, up from US$3.7bn in1999. The increase is almost entirely the result of the extraordinary oil windfallgain, which totalled US$34bn, an increase of 63% on the year-earlier period. Awidening of the services deficit was driven by increased outgoings on thetransport account, which is largely a function of rising imports. Rising travelexpenditure added to the expansion of the services deficit.

In February 2001 Venezuela made its first foray into the international capitalmarkets since the sale at a significant premium of a five-year €500m(US$475m) global bond in March 2000. The issue, which raised €300m, has aseven-year maturity and was sold at a stiff premium. The proceeds will be usedto pay off and to roll over external debt. Although Venezuela announced thatit was planning to make further ventures into the capital markets to raise morefunds, the lack of economic policy coherence signals that access will remainlimited in the medium term. A threat by the president, Hugo Chávez Frías, tosue ratings agencies for defamation owing to their alleged portrayal ofVenezuela in an unfavourable light will not advance his cause.

According to the Central Bank, international reserves rose by US$700m at end-2000, reaching almost US$15.9bn. But foreign reserves for 2000 as a whole roseby US$5.1bn, taking into account funds allocated to the Fondo de Inversiónpara la Estabilización Macroeconómica (FIEM, the Macroeconomic StabilisationInvestment Fund). As of mid-February 2001, international reserves stood atUS$16.4bn, with FIEM funds at US$4.6bn, making a total of US$21bn.

Access to external creditlikely to remain limited

Foreign reserves risesteadily

Documents

Venezuela - iuj.ac.jpThe government of Hugo Chávez Frías is likely to face mounting social pro-tests about the lack of progress on crime reduction and employment gener-ation—important