Venezuela - iuj.ac.jp€¦ · Venezuela’s president, Hugo Chávez, remains popular relative to his predecessors at similar stages of their terms, but recently he dropped to second

COUNTRY REPORT

Venezuela

December 2001

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

Venezuela at a glance: 2002-03OVERVIEWVenezuela’s president, Hugo Chávez, remains popular relative to hispredecessors at similar stages of their terms, but recently he dropped tosecond place in the polls behind the mayor of Caracas, Alfredo Peña. Despitethe heavy concentration of power in the executive and its recourse toextraordinary powers, effective policy formulation and execution willremain hampered by weak implementation capacity. Any public-sectormodernisation will become all the more difficult as oil prices decline.Savings from the 1999-2001 oil windfall should help to finance projectedshortfalls in 2002-03, but public debt will also need to increase further,crowding out the private sector. GDP growth will remain below potential,owing to OPEC production constraints, lack of public-sector reform andhigh unemployment. The overvalued currency will help to restrain pricepressures, but at the cost of lower growth and employment. Externalbalances will shrink as oil prices decline .

Key changes from last monthPolitical outlook• The controversial CTV union elections finally took place on October 25th,

but the full results will not be known until voting irregularities have beencleared up. Where voting proceeded without problems, the oppositionFUT won control of the largest unions, suggesting it may have takencontrol of the CTV itself.

Economic policy outlook• A controversial Hydrocarbons Law was approved by Congress. Although it

should not affect gas and petrochemicals projects, the new law willprobably lower international interest in any Venezuelan oil ventures.

Economic forecast• The risk that oil prices will drop further remains very strong. Lower prices

would undermine the fiscal position and shrink external surpluses.

The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis isupdated daily; through printed subscription products ranging from newsletters to annual referenceworks; through research reports; and by organising seminars and presentations. The firm is a member ofThe Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1007Fax: (44.20) 7830 1023E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 0248E-mail: [email protected]

Hong KongThe Economist Intelligence Unit60/F, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

Website: www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, onlinedatabases and as direct feeds to corporate intranets. For further information, please contact your nearestEconomist Intelligence Unit office

Copyright© 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author’s and the publisher’s ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 1350-7133

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Venezuela 1

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

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2002-037 Political outlook8 Economic policy outlook

10 Economic forecast

13 The political scene

18 Economic policy

22 The domestic economy22 Economic trends25 Oil and gas28 Industry29 Agriculture30 Infrastructure31 Financial and other services

33 Foreign trade and payment

List of tables

10 International assumptions summary11 Forecast summary19 Public finances, 200120 Tax revenue targets and results, 200121 Money supply and interest rates, 200123 Retail sales24 Consumer price inflation28 Production trends in main sectors, 200132 Bank deposits, 200133 Trade trends by sector, 200134 Trade trends by country, 200135 Foreign reserves

2 Venezuela


List of figures

13 Gross domestic product13 Bolivár real exchange rates19 Fiscal balance22 Economic growth26 Oil prices34 Current-account balance and trade balance

Venezuela 3


Summary

December 2001

The president, Hugo Chávez, will face a testing period in 2002 amid signs thathis honeymoon period with the public is coming to an end and that divisionsare appearing within the cabinet. Progress on legislative reforms will remainslow and the government’s capacity to implement projects will remain in-adequate. The fiscal position will probably be hurt by weakening oil prices.Although growth should outstrip the region in 2001-02, it will remain un-spectacular. Sustainable growth will continue to be elusive until the publicsector is reformed and investor confidence restored. Unemployment willremain high and inflation will stay above 10%. The external balances will fallsharply owing to weaker oil prices.

Most of the results of controversial union elections have not yet been pub-lished following irregularities, but opposition-backed candidates have scoredbetter than those supported by the government in the results that have beenproduced. Few policy advances have been made and the legislative agenda isprogressing only slowly. The Enabling Law providing Mr Chávez with decreepowers was not extended for another year by Congress in November, but thepresident used it anyway to pass several important pieces of legislationbelatedly, including the Hydrocarbons Law. The opposition and the privatesector have called for strikes in December.

Weakening public finances in the first half of 2001, the result of risingspending and lower tax revenue, reflected worsening fundamentals as oil pricesdeclined. Ambitious tax revenue targets have been missed as lower oil priceshave added to the fiscal strain.

Recovery slowed as retail sales started to falter. Industrial production datashowed an uneven performance across different sectors. Inflation provedstubbornly steady at over 10%. Despite weakening oil prices, PDVSA is stickingto its investment plans. The Land Law proposal continued to cause concern foragriculture. Rumours persist that energy rationing can be expected. Compet-ition in the telecoms industry intensified. Further financial-sector consolid-ation will probably take place as economic growth slows.

A new tax register should benefit exporters. Although the government re-mained silent on protectionist measures, these are still on the agenda. Importspending rose steadily, narrowing the trade surplus. Venezuela benefited fromreductions to interest rates in the US as these provided some relief on itsinternational debt-servicing.

Editors: Ondine Smulders (editor); Justine Thody (consulting editor)Editorial closing date: November 20th 2001

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

The political scene

The domestic economy

Economic policy

Foreign trade andpayments

Outlook for 2002-03

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 began a fresh six-year term following elections in July 2000 torelegitimise public posts under the 1999 constitution

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

Supreme Court at the apex of the court system; appoints judges and magistrates inconsultation with civil society groups.

July 2000 (presidential, legislative and state government); December 2000 (municipalauthorities); next elections due in 2005 (legislative) and 2006 (presidential)

Government: the president’s party, the Movimiento Quinta República (MVR), forms partof the ruling Polo Patriótico (PP) alliance; Proyecto Venezuela (PV) is allied in theNational Assembly with the PPOpposition parties: Acción Democrática (AD); the Comité de Organización PolíticaElectoral Independiente (COPEI); Movimiento al Socialismo (MAS); Patria Para Todos(PPT); Primero Justicia (PJ); La Causa Radical (LCR); Convergencia Nacional (CN)

President Hugo Chávez FríasVice-president Adina Bastidas

Presidential secretary Diosdado Cabello

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

Diego Luís Castellanos

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

1996 1997 1998 1999 2000a

GDP at market prices (Bs bn) 29.4 43.3 52.5 62.6 81.9

GDP (US$ bn) 70.5 88.7 95.8 103.3 120.5

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

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

Population (m) 22.3 22.8 23.4 23.7 24.2

Exports of goods fob (US$ m) 23,707 23,703 17,576 20,819 34,038

Imports of goods fob (US$ m) –9,937 –13,678 –15,105 –13,213 –16,073

Current-account balance (US$ m) 8,914.0 3,467.0 –3,253.0 3,689.0 13,350.0

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 35.9 34.5b

Debt-service ratio, paid (%) 16.8 31.6 27.6 23.2 19.1b

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

November 20th 2001

Bs744:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total

Petroleum 27.5 Private consumption 63.1

Manufacturing 14.1 Government consumption 7.0

Construction 5.0 Investment incl change in stocks 17.5

Agriculture 4.7 Exports of goods & services 29.4

Services 46.0 Imports of goods & services –17.0

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

Principal exports fob 2000 US$ m Principal imports fob 2000 US$ m

Oil 27,526 Consumer goods 2,406

Chemicals 1,064 Intermediate goods 11,178

Steel 1,027 Capital goods 2,489

Aluminium 771 Total 16,073

Plastics & manufactures 275

Total incl others 34,038

Main destination of exports 2000 % of total Main origins of imports 2000 % of total

US 60.0 US 35.8

Brazil 5.5 Colombia 6.8

Colombia 3.5 Brazil 4.5

Italy 3.5 Italy 3.9

Spain 3.4 Germany 3.9

a Actual. b EIU estimate.

6 Venezuela


Quarterly indicators

1999 2000 20014 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Central government finance (Bs bn)Ordinary revenue 3,183.3 3,212.2 3,199.4 3,329.5 4,915.4 3,652.2 4,864.6 n/aOrdinary expenditure 3,760.7 4,137.7 3,563.6 4,118.4 6,531.6 4,172.9 5,119.0 n/aBalance –577.4 –925.5 –364.2 –788.9 –1,616.2 –520.7 –254.3 n/aExtraordinary revenue (net) 547.9 1,606.4 1.2 353.7 1,727.7 410.5 249.7 n/a

GDP (constant 1984 market prices; Bs m) 144,510 139,196 146,015 145,731 153,312 144,367 150,281 n/a % change, year on year –4.1 1.1 2.7 2.9 6.1 3.8 2.9 n/a

Employment & pricesUnemployment rate (% of the labour force) 14.5 14.6 14.6 13.2 13.2 14.6 n/a n/aConsumer prices (1997=100) 178.7 185.7 191.9 198.1 204.1 209.1 215.7 223.3 % change, year on year 20.1 18.3 17.1 15.5 14.2 12.6 12.4 12.7Wholesale prices (1997=100) 143.1 147.2 151.5 154.8 158.4 160.1 162.8 165.8 % change, year on year 10.1 9.4 10.2 10.3 10.7 8.8 7.5 7.1Venezuelan crude basket (US$/barrel; spot) 21.84 25.30 25.09 27.92 27.58 21.96 22.50 21.33 % change, year on year 128.7 164.9 80.8 52.5 26.3 –13.2 –10.3 –23.6

Financial indicatorsExchange rate Bs:US$ (av) 635.90 659.04 677.36 688.06 695.37 702.60 713.57 731.92 Bs:US$ (end-period) 648.25 669.50 682.00 690.75 699.75 707.75 718.25 743.00Interest rates (av; %) Deposit 16.67 16.97 19.22 13.16 15.85 13.25 12.65 16.55 Lending 26.39 26.20 23.75 24.91 25.95 18.04 19.52 25.87 Money market 7.30 6.57 10.40 6.90 8.70 5.93 12.57 19.87M1 (end-period; Bs bn) 6,096 5,644 5,772 6,037 8,016 7,456 7,405 7,325 % change, year on year 23.4 32.7 29.9 30.4 31.5 32.1 28.3 21.3M2 (end-period; Bs bn) 12,741 12,524 12,926 13,410 16,285 15,278 14,834 14,799 % change, year on year 19.9 23.9 24.0 26.4 27.8 22.0 14.8 10.4BVCa index (end-period; Dec 1993=1,000) 5,418 5,496 7,033 6,864 6,825 7,357 7,560 7,043 % change, year on year 13.1 32.9 31.0 18.0 26.0 33.9 7.5 2.6

Production trends by sectorCrude oil (m barrels/day) 2.75 2.80 2.87 2.92 2.99 3.00 2.82 2.81 % change, year on year –7.7 –4.4 4.7 7.0 8.7 7.1 –1.7 –3.8Aluminium (‘000 tonnes) 141.3 139.3 143.0 144.0 144.4 141.7 143.9 137.2 % change, year on year –0.8 –0.3 –1.0 –0.6 2.2 1.7 0.6 –4.7Iron ore (‘000 tonnes) 5,000 5,466 5,662 4,610 4,312 5,062 5,269 5,124 % change, year on year 35.5 50.4 47.2 27.3 –13.8 –7.4 –6.9 11.1

Foreign tradeb & payments (US$ m)Exports fob 6,552 7,733 8,182 8,540 9,583 7,297 7,111 n/a of which: petroleum & products 5,393 6,500 6,864 7,276 8,076 6,028 5,805 n/aImports fob –3,683 –3,346 –4,181 –4,249 –4,297 –3,954 –4,470 n/aMerchandise trade balance 2,869 4,387 4,001 4,291 5,286 3,343 2,641 n/aServices –521 –682 –779 –895 –953 –799 –767 n/aIncome balance –401 –229 –309 –264 –361 –53 –78 n/aNet transfer payments 44 –6 –64 –36 –37 –75 –133 n/aCurrent-account balance 1,991 3,470 2,849 3,096 3,935 2,416 1,663 n/aReserves excl gold (end-period) 12,277 11,412 12,153 13,686 13,089 12,045 10,460 8,959

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

Venezuela 7


Outlook for 2002-03

Political outlook

The president, Hugo Chávez, will face a testing period in 2002 amid signs thathis honeymoon period with the public is coming to an end and that divisionsare appearing within his cabinet. Opinion poll surveys indicate that althoughpopular support for the president, at 51%, is still high, it is falling, particularlyamong the economically marginal groups considered to be his core supporters.Although lack of progress on job creation and economic reactivation are themain reasons for mounting popular frustration with the government, there isevidence that Mr Chávez’s confrontational style is adding to growing dis-content within his administration. The president’s approach has long beencriticised by the private sector, with leading industrial groups taking the viewthat his populist rhetoric is damaging private-sector confidence. That thisopinion is now feeding down to popular sectors will present Mr Chávez with adifficult challenge as he remains deeply hostile towards his political opp-onents, as well as to the media and civil society, which he considers to behostile to his revolution. A downturn in oil prices and in the economy in 2002would seriously undermine support for the government and concerns remainthat the president would step up his combative approach in an attempt tobolster his popularity amongst the poor.

Attempts by the government to build bridges with the opposition, althoughthis is unlikely to happen, would most probably be rebuffed. The oppositionhas shown signs of increasing coherence in recent months and is expected tocontinue to do so. Mr Chávez operated in a vacuum in the first two years of hisadministration and a firmer opposition would raise the possiblity of morepolitical confrontation in the medium term. These conflicts can be expectedboth within the legislature, where Mr Chávez’s party no longer commands amajority, and on the streets, where the opposition has proved skilful atmobilising the president’s diverse critics. The resurrection of the opposition,which numbers among its ranks historically dominant parties displaced in1998, along with new movements and factions formerly allied to Mr Chávez,owes much to the government’s excessive centralisation and its failure toincorporate a range of views into its legislative initiatives. United by a mutualhostility to the president, the opposition has been buoyed by the his slidingratings in opinion polls and is unlikely to reciprocate willingly any co-operative gestures by the government, even if these were to be forthcoming.

The government’s clumsy attempt to reform the trade union movement, whichis dominated by the opposition-controlled Confederación de TrabajadoresVenezolanos (CTV, the Venezuelan Workers’ Confederation) was a catalyst forthe renewal of the opposition. Mr Chávez had expected that the pro-government Frente Bolivariana de Trabajadores (FBT, the Bolivarian Workers’Front) would take control of the union movement. However, the FBT hasproved to be weak organisationally and despite the selection of an experiencedunion figure from outside Mr Chávez’s party organisation as its presidentialcandidate, victory in the elections held on October 25th is far from guaranteed.

Domestic politics

8 Venezuela


The results of the contested elections have yet to published in full, but avictory for the opposition Frente Unitario de Trabajadores’s (FUT) AlfredoOrtega would inaugurate another period of difficult relations between theadministration and the union movement as having a leader opposed toMr Chávez would give the CTV the needed credibility for it to become a moreeffective vehicle for antigovernment protest. Triumph for the pro-governmentFBT candidate, Aristóbulo Istúriz, would also prove equally fractious as thelabour movement would expect material rewards for backing a candidatewidely recognised as being close to Mr Chávez.

In the aftermath of the September 11th terrorist attacks on the US, cabinetdivisions emerged between civilian ministers and senior military figures whenthe commander-in-chief of the armed forces contradicted statements by theinterior and defence ministers that had appeared to qualify Venezuela’s supportfor the US-led “war on terrorism”. The dispute has refocused attention onschisms within the cabinet between civilian and military elements on widerissues, including budgetary allocations and economic policy. Mr Chávez em-barked on a diplomatic shuttle of European, Middle Eastern and Africancountries in October to boost support for cuts in oil production to stabiliseprices. Undertaken at an acutely sensitive time, the trip included visits to Libyaand Iran, raising questions about the government’s distinction between oilpolicy and foreign policy.

Economic policy outlook

Progress on major legislative reforms remains slow. New laws covering banking,land reform and hydrocarbons, all of which met with fierce criticism, wereeventually passed in mid-November. However, their passage has been con-troversial and a very small chance exists that they could be overturned as theywere passed just after the Enabling Law expired. A far-reaching reform ofpensions and social security legislation that has already split experts on the issueof private-sector involvement, is finally expected to be submitted to Congressbefore the end of 2001.

Entrenched administrative inefficiency has hindered the investment ambitionsof successive governments and has grown worse under Mr Chávez owing to thestand-off between his administration and the traditional elite that has starvedgovernment departments of much potential technical expertise.

As the economy decelerates it will be difficult to cut the unemployment rate.Open unemployment fell only slightly in the second quarter of 2001, to13.3%, down from 14.2% at the end of the first quarter, but up from 12.1% atthe end of 2000. At 52%, the proportion of the labour force employed in theinformal sector was little changed. Public-sector investment programmes haveprovided only partial and temporary solutions, and have been hampered byweak implementation capacity. Activity in the labour-intensive constructionsector will suffer from the severe restraints imposed on government spending.

International relations

Policy trends

Venezuela 9


Non-oil tax revenue needs to expand considerably if the economy’s veryvolatile cyclical pattern is to be reduced. Moreover, the private sector needs toreplace the public sector as the main engine of growth. Although in theorystructural reforms remain on the agenda given that the government is findingitself increasingly short of cash, it will more probably resort to distortive taxmeasures and intervention in the financial markets, at the same time asrunning down the Fondo de Inversión para la Estabilización Macroeconómica(FIEM, the Macroeconomic Stabilisation Investment Fund) and increasingborrowing. A heavy bureaucracy marred by corruption will continue to hamperinstitutional efficiency. In addition, adherence to OPEC quotas will remainstarkly incompatible with the official development programme of Petróleos deVenezuela (PDVSA, the state-owned oil monopoly) and the government’s bud-getary needs. The Economist Intelligence Unit expects oil production toexpand modestly, implying possible cheating on OPEC quotas in the early partof the forecast period.

The central government accounts posted a deficit of Bs2.3trn (US$3.1bn) in thefirst seven months of 2001, one-third higher in nominal terms than the deficitof Bs1.7trn recorded in the year-earlier period. But oil revenue was higher thanbudgeted, largely as a result of a dividend from PDVSA. Despite risingpetroleum-related revenue and surprisingly conservative levels of expenditure,the government accounts were in deficit, highlighting the deep underlying im-balances in the fiscal accounts. As in the 2001 budget, the 2002 pro formabudget forecasts a 7% fall in total spending, compared with expected finalspending for 2001, but this forecast implies a 14% rise compared withbudgeted spending in 2001. Thus the 2002 spending target is hardly a realisticone. Final spending rose by 43% in 2000 and will end 2001 roughly 14%higher, so that spending in 2001 will exceed the budget target by 23%. Inaddition, nearly one-third of budgeted spending will be financed by debtissuance. Such an approach will be difficult to continue in the forecast period.Growth estimates for GDP are also on the high side. The 2002 budget is basedon 4.5% GDP growth for the year, with the GDP growth outlook for comingyears forecast to average about 6% per year according to planning anddevelopment minister Jorge Giordani. As oil prices are extremely unlikely tomove back to the high levels seen in 2000, Venezuela will continue to sufferfiscal tension, its public deficit will not improve and debt issuance will con-tinue at a rapid pace.

Growing fiscal liabilities include wage and social security arrears inherited fromprevious administrations, officially estimated to total at least US$20bn, and amuch-needed increase in social investment. The structural reforms required toplace the fiscal accounts on a sustainable path in the longer term, includingsocial security reform and the rationalisation of bureaucracy, will also be costly.The government is struggling to raise non-oil tax collection both by improvingefficiency and by curbing evasion. However, the Servicio Nacional Integrado deAdministración Aduanera y Tributaria (Seniat, the tax authority) remains indisarray, lacking both qualified personnel and effective institutional autonomy.

Fiscal policy

10 Venezuela


Economic forecast

The September 11th terrorist attacks on New York and Washington have com-pounded existing uncertainty about the outlook for the global economy, whichwas already forecast to experience its sharpest slowdown since the 1974 oilprice shock. OECD growth will average just 0.8% in 2001, the worst growthrate since 1991, when the US economy was last in recession. In the finalmonths of 2001 many of the world’s largest economies will suffer a con-traction. Growth in the emerging world is also slackening as every emergingregion slows. The world economy will remain weak in 2002. Global growthwill average just 2.7%, compared with 4.7% in 2000, and OECD growth willslow to just 1.1%. By the second half of 2002 a stronger performance in OECDcountries will allow emerging markets to grow more robustly and from 2003onwards growth should be back to trend in most regions. This forecast impliesa recession in the US, with the economy contracting slightly in the thirdquarter of 2001 and more sharply in the fourth. This outcome will affectVenezuela negatively, not only as world demand falls, but because oversupplyin the oil market will sustain falls in commodity prices. We now forecastaverage oil prices for Brent blend of US$25.4/barrel in 2001 and US$21.5/b in2002 on the back of weakening global oil demand.

International assumptions summary(% unless otherwise indicated)

2000 2001 2002 2003

Real GDP growthWorld 4.7 2.2 2.7 4.2OECD 3.7 0.8 1.1 2.9EU 3.3 1.5 1.4 2.6

Exchange rates (av)¥:US$ 107.8 121.1 124.0 121.5US$:€ 0.92 0.90 0.96 1.02SDR:US$ 0.758 0.784 0.766 0.749

Financial indicators€ 3-month interbank rate 4.48 4.23 3.13 4.60US$ 3-month Libor 6.53 3.80 1.64 4.72

Commodity pricesOil (Brent; US$/b) 28.5 25.4 21.5 20.5Gold (US$/troy oz) 279.3 268.8 255.0 250.0Food, feedstuffs & beverages

(% change in US$ terms) –6.1 0.3 13.0 12.6

Industrial raw materials (% change in US$ terms) 13.4 –9.1 0.1 15.1

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Venezuela’s economy will grow faster than that of most other countries in theregion, but it will face strong deceleration pressure in 2001-02, before pickingup in 2003. Unemployment remains high, sliding oil prices are reducing fiscalrevenue and the global economy is slowing. Moreover, pressure on the bolívarhas triggered corrective measures that are squeezing liquidity, further limitingthe economy’s output potential. Public investment, the most likely source ofgrowth in 2001, is struggling with implementation delays. As government

International assumptions

Economic growth

Venezuela 11


consumption is reined in, investment, boosted by public projects, along withprivate consumption will be the main engines of growth, although neither willbe strong, and the outlook for private investment in particular is weak. Thedownside risks to our forecast, which were already significant beforeSeptember 11th, are now all the more serious. A prolonged US downturnwould cause oil prices to fall below the levels we are currently forecasting andbring a more rapid deterioration of Venezuela’s fiscal and external balances.This outcome would make exchange-rate policy increasingly unsustainable,intensifying the risks of the imposition of exchange controls or a recourse todevaluation in order to rebalance the fiscal accounts.

Forecast summary(% unless otherwise indicated)

2000a 2001b 2002c 2003c

Real GDP growth 3.2 2.9 3.0 3.9

Gross agricultural production growth 1.4 2.0 2.5 2.5

Unemployment rate (av) 13.9 14.1 14.1 14.0

Consumer price inflation Average 16.2 12.6 13.9 13.6 Year-end 13.4 13.0 14.0 13.3

Short-term inter-bank rate 25.2 23.9 26.4 26.0

Central government balance (% of GDP) –1.7 –3.2 –3.2 –3.2

Exports of goods fob (US$ bn) 34.0 29.6 26.8 27.3

Imports of goods fob (US$ bn) 16.1 17.4 18.0 18.9

Current-account balance (US$ bn) 13.4 6.9 3.3 2.6 % of GDP 11.1 5.4 2.5 1.9

External debt (year-end; US$ bn) 34.5b 34.8 35.5 35.7

Exchange rates Bs:US$ (year-end) 699.8 751.2 885.6 1,007.6 Bs:¥100 (av) 631.0 599.4 665.5 785.1 Bs:€ (year-end) 657.0 693.7 897.7 1,021.4 Bs:SDR (year-end) 911.7 968.9 1,181.5 1,348.4

a Actual. b EIU estimates. c EIU forecasts.

Monthly inflation averaged 1% in January-October 2001, the lowest rate forthese months since 1986 and slightly less than the 1.1% recorded in the year-earlier period. Consumer price inflation was 12.4%, down from 15.1% year onyear. It will be increasingly hard for the authorities to convince the populationof the benefits of its disinflation policy, which is anchored on currencystrength. But the policy carries many risks as domestic producers are beingpriced out of their markets by cheaper imports and are struggling to exporttheir goods abroad, provoking protests from local producers and triggering callsfor more subsidies, more protectionism and adjustments to the currencyregime, all of which would further raise fiscal spending and complicate theauthorities’ disinflation strategy. In these conditions we do not expect thegovernment to speed up its depreciation policy and do not forecast any furtherdecline in annual consumer price inflation in 2002.

Inflation

12 Venezuela


Despite a recent weakening of the bolívar to Bs745:US$1, the currency has con-tinued to appreciate in real terms against the US dollar, with the monthlynominal depreciation averaging 0.14% in January-October and monthly priceinflation averaging 1%. When the bolívar moved off its trend towards thelower edge of the trading band in September as capital outflows intensified,monetary policy measures, including the high interest rates currently affectinginvestment and consumption, managed to steer it back towards the centre ofthe band. However, the Banco Central de Venezuela (BCV, the Central Bank) isnow in awkward position as it must keep monetary policy tight to defend thecurrency band system, despite government calls for monetary policy to beeased in its eagerness to stimulate growth. With an adequate fiscal adjustmentsome way off, the authorities will attempt to persist with this policy mix formuch of the forecast period.

The government’s own heavy borrowing levels have added to the upwardpressure on interest rates, which has led to continued capital flight and asignificant risk of an exchange-rate correction in the medium term. Ultimatelysuch a correction will be necessary to readjust the economy, but we expectadequate reserve levels to keep the need for such a correction at bay in 2002,unless oil prices fall more sharply than predicted.

Plans to peg the bolívar to the US dollar if oil prices and economic conditionswere favourable, which were broached by the Central Bank’s director, DomingoMaza Zavala, earlier in 2001, seem highly unrealistic in the current climate.The authorities will more probably see themselves as having no option but toimplement rate hikes and to impose further liquidity constraints, along withtrade restrictions and possibly even capital controls in order to stem theoutflow of capital under the current sliding currency regime.

Although an official plan to cut imports by 20% in 2001 and by a greaterpercentage in 2002 was announced in August, it was shelved after strongdomestic and foreign opposition. But ministers have hinted that import re-strictions in the form of surcharges and quotas may still be introduced tosupport local production. Increased protectionism in the forecast period wouldmost probably be applied to the food industry and low value-added manu-facturing activities such as clothing and footwear. These sectors are in declineand have seen major job losses in the past years. Food production is regardedas a strategically central sector as the government wants the country to bemore self-reliant. The steel industry has also been pleading for assistance andprotection in response to deteriorating international demand and rising levelsof protection in the US and other countries. Given the sector’s importance asone of the country’s largest non-oil exporters, these pleas may be heeded.

Data for the second half of 2001 and 2002 are unlikely to show any improve-ment from trends in the first half of 2001. Central Bank figures showed anarrowing current-account surplus, which reached US$1.7bn in the secondquarter on the back of a contraction in the trade surplus of US$2.6bn followinglower oil revenue and rising import spending.

Exchange rates

External sector

Venezuela 13


High spending abroad by Venezuelans remains a problem and interest pay-ments on the country’s external debt will increase from 2002, resulting in agrowing invisibles deficit. Outright capital flows and negative portfolio flowswill further weigh on the balance of payments.

The political scene

Internal elections within the historically unpopular main union confederation,the Confederacíon de Trabajadores de Venezuela (CTV, the VenezuelanWorkers’ Confederation), were held finally on October 25th, the culminationof a two-month period of polls in which 320,033 members chose their repre-sentatives in 784 trade unions and 21 federations, as well as electing the CTVexecutive. The polls were dominated by the campaign for the CTV presidency,a two-horse race between Aristóbulo Istúriz of the pro-government FrenteBolivariana de Trabajadores (FBT, the Bolivarian Workers’ Front) and CarlosOrtega of the opposition Frente Unitario de Trabajadores (FUT, the UnitedWorkers’ Front).

The Consejo Nacional Electoral’s (CNE, the National Electoral Council) admin-istration of the elections demonstrated the weakness of Venezuela’s instit-utions. The presidential and executive elections were characterised by irreg-ularities and claims of fraud, including the suspension of the voting process infive important states. The problems are being investigated by the fiscal-generaland polls will have to be rerun in these states. The election of the president ofFederación de Trabajadores Petroleros y Químicos (Fedepetrol, the petroleumworkers’ union), a post also contested by Mr Ortega, was suspended for threeweeks owing to irregularities in voter registration. A judicial committee willinvestigate the results as Mr Ortega and another candidate were simultaneouslydeclared the winner.

Where the elections proceeded without problems, the FUT won control of thelargest unions in the health, construction and transport sectors, suggestingunofficially that the FUT may have taken control of the CTV. The flaws

Controversial unionelections finally take place

Results still pendingfollowing irregularities

14 Venezuela


surrounding the elections, in which abstention totalled 40%, led interiorminister Luís Miquilena to question the legitimacy of the pending results. Thisposition was rejected by the opposition, who interpreted Mr Miquilena’sremarks as a ploy to forestall the FUT’s projected success.

The polls were marked by problems from the start. The Supreme Court hadtwice ordered a postponement of the CTV’s presidential and executive elec-tions. The first ruling led to the rescheduling of the election from September25th to October 25th on the grounds that the CNE could not guarantee thetransparency of the process. But this move was condemned by the oppositionas an attempt to provide more time for the late entrance of the FBT candidateto mobilise support. The second postponement, ordered on October 24th toallow the court to examine an outdated petition submitted by the oppositionprotesting the election process, was rejected by the CNE.

The effectiveness of the opposition’s challenge in the CTV elections is stronglylinked to the mounting frustration of the labour force with the government.Opinion polls suggest that this discontent is spreading among Mr Chávez’score supporters in marginal sectors. In presidential elections in 1998 and 2000Mr Chávez made reductions in crime, job creation and economic reactivationthe main tenents of his manifestos. But progress in delivering on these pledgesremains limited. The administration has been characterised by anunprecedented centralisation of authority around the executive, with thepresident assuming decree powers after the passage of enabling legislation inNovember 2000 that allowed the government to decree policy in a broad rangeof areas.

Just after the Enabling Law expired in mid-November the government pushedthrough 49 laws under its banner, including the laws covering land reform,banking and hydrocarbons. The opposition has reacted angrily and is seekingto overturn them on the basis that they were not published in the GacetaOficial ten days before their passage. In addition, it claims that both the con-stitution and the Public Administration Law of October 2000 permit publicconsultation in policymaking. Strikes have been called for December in protest.The leading private-sector organisation, the Federación Venezolana de Cámarasy Asociaciones de Comercio y Producción (Fedecámaras, the federation of tradeand industry chambers) will join a strike on December 10th. The core concernof the opposition and the private sector is that the Enabling Law has allowedthe government to push through controversial policy changes without debateand with little input by technical specialists. Mr Chávez has denied that he willseek to renew the Enabling Law for another year.

The debate on social security reform, which is not covered by the EnablingLaw, will proceed in Congress during November. The government is also facingopposition to its planned reform of the Education Law, which is being revisedby the Education Ministry. However, the education lobby, led by LeonardCarvajal, opposes any reforms outright and wants its consensus educationproposal accepted.

Opposition will probablywin as discontent rises

Few policy advances, butEnabling Law not extended

Venezuela 15


Legislative progress in the unicameral National Assembly, which is chargedwith redrafting existing legislation in line with the constitution of 1999,remains slow. Obstructive tactics on part of the opposition in conjunction withdivisions within Mr Chávez’s now fractured ruling alliance has impeded theprocess. Bills relating to public administration, social security and the publicfinances have been delayed in congressional committees, thereby hamperingpolicy implementation. The slow passage of the Treasury bill in particular hasprevented the disbursement of an estimated US$94.2m in revenue to regionaladministrations. Although a measured deliberation of new legislation shouldbe welcomed, lobby groups and sectoral interests have been provided withlimited opportunities for input into the policymaking process. As a result, newlegislation, including the controversial laws on land and education, have beensubject to criticism expressed in the increasing number of opposition-led streetdemonstrations. As the government has failed to build a consensus around itslegislative agenda, there is also a strong possibility that a future opposition-ledgovernment will roll back these new pieces of legislation, adding to politicaluncertainty in the longer term.

Mounting frustration with the government has led to a change in the politicallandscape. In a recent survey, Mr Chávez dropped to second place behind themayor of the metropolitan authority of Caracas, Alfredo Peña. Since 1998Mr Chávez has dominated opinion polls and his displacement reflects the newopportunities presented to opposition politicians by mounting impatiencewith the government.

The rise of Mr Peña, formerly a close colleague of Mr Chávez, who appointedhim presidential secretary in 1999, is largely the result of his success in dealingwith escalating crime levels in Caracas. After his election as mayor in 2000,with Mr Chávez’s backing he recruited a former member of the New YorkPolice Department, William Bratton, to work on an anticrime strategy. Underthe Bratton plan, which increased police numbers in some of the most crime-ridden areas of the capital and curbed unsociable behaviour in public places,there has been a reduction in incidents of violent crime. In Catia, a notoriousdistrict of the capital, criminal acts are estimated to have fallen by 42% and themurder rate has dropped by 24%.

Although the zero tolerance strategy has been criticised by some civil groups,popular support for Mr Peña has been strong, whose success has contrastedwith the limited progress made by the government in reducing crimenationally. At the beginning of October the Law of Co-ordination of theOrgans of Citizens’ Security was decreed by the government. The measure,which provides for a national security council headed by the interior ministerand the creation of a national police force, complements reforms to theOrganic Penal Process Code approved in September. Although the centrepieceof the government’s strategy for reducing escalating crime levels, doubtsremain that the legislation will reverse the tide of crime. Disputes haveemerged between central and regional governments about the control of thesecurity apparatus, although the capacity of the administration to fund itsanticrime initiative beyond the US$50m loan provided by the Inter-American

Legislative agendaprogresses at a snail’s pace

Mr Chávez drops to secondplace in opinion polls

Caracas mayor AlfredoPeña takes the lead

Government lags Mr Peñain tackling crime

16 Venezuela


Development Bank has been questioned. Furthermore, public confidence inthe police has been undermined by revelations of serious irregularities in sixstate police forces, with the attorney-general and the public defenderinvestigating allegations that death squads are in operation.

Although Mr Peña’s growing popularity may prove to be a temporary phen-omenon, especially as his lack of support outside Caracas is a potential handi-cap if he harbours presidential ambitions, his rise demonstrates that alter-natives to Mr Chávez are possible. Once a presidential ally, Mr Peña hasbecome a vociferous critic of the government’s failure to build bridges to theprivate sector and of its limited progress on economic stimulation.

His position strongly echoes that of the Movimiento al Socialismo (MAS),which Mr Chávez formally expelled from his Polo Patriótico coalition (PP) inOctober after prolonged conflict between MAS and the president’s party, theMovimiento Quinta República (MVR). The disagreements between the MVRand MAS were initially based on policy differences. But recently these wereextended to internal party affairs, with MAS leadership accusing Mr Miquilena,a senior MVR figure, of seeking to influence the result of the party’s leadershipelection due at the end of November. Mr Miquilena has campaigned openly onbehalf of Ismael García, a candidate for MAS’s secretary-generalship, a close allyof the MVR. Mr García’s pro-government orientation, which he claims has thesupport of the party’s grassroots, contradicts that of the current MAS leader-ship, which is distancing itself from Mr Chávez and, according to Mr García, isseeking to build a new alliance with Mr Peña. The expulsion of MAS from thePP has left the government without a majority in the National Assembly. How-ever, the divisions within MAS will work to the benefit of the administration assections of the party will support MVR initiatives in the legislature.

The emergence of Mr Peña as a spokesperson for the increasingly coherentopposition forces comes at a difficult time for the administration, which facesproblems on several fronts. Not only does it appear that popular support forthe president is waning, his party, the MVR, remains weak and an inadequatevehicle for the consolidation of the government’s reform project. Allegations ofcorruption among MVR members, which are being investigated, have added toexisting internal problems, including the growing gap between the largelyideologically fanatic and pro-radical reform MVR members, dubbed “theTaliban”, and the party’s more moderate elements. A major restructuring of theorganisation is planned before year-end and the foreign minister, Luís AlfonzoDavila, has already been replaced as the party’s director of planning by theformer presidential secretary, Elias Jaua.

The internal crisis of the MVR contrasts with the increasing coherence of theopposition in organisational and mobilisation terms. The opposition hasstepped up action against the government in the National Assembly and onthe streets. At a party convention in September the historically dominantAcción Democrática (AD) adopted a policy of civil disobedience to demand thedemocratisation of public entities. It is also slowly working through the bitterpersonality clashes that contributed to its disastrous electoral performance inthe 1998 presidential election.

Mr Peña proves alternativesto Mr Chávez exist

MVR crisis and a morecoherent opposition

Venezuela 17


Mr Chávez has found even tougher opposition outside Venezuela. A full-pageadvert placed in a US newspaper, The Washington Times, in the aftermath of theSeptember 11th terrorist attack depicted him as an ally of terrorist states. Con-demned by the government as a smear campaign, Mr Chávez was furtherembarrassed by a video aired in Colombia that showed him escorted by aColombian guerrilla during a visit to a museum in Bogotá. The events ofSeptember 11th and the subsequent US-led “war on terrorism” have had adramatic impact on Venezuelan politics, revealing divisions between civilianand military elements within the cabinet, increasing pressure on the presidentto revise his foreign policy strategy and bolstering the opposition’s confidence.

Since coming to office in 1999 Mr Chávez has pursued a controverisal foreignpolicy strategy. Committed to a vision of a multipolar world in which the uni-polar dominance of the US is balanced by blocks of allied states, Mr Chávez hassought to advance regional integration and to construct alliances with other oilproducing nations. The government has further sought to diversify its traderelations away from the US, Venezuela’s leading trading partner, towards Europe,China, Russia and India. The president’s foreign policy also contains a strongideological element, with the administration seeking to build Bolivarian unitywith leftist groups in other countries that were liberated in the 19th century byMr Chávez’s hero, Símon Bolívar, such as Colombia, Ecuador and Bolivia.

It is in the practical application of this foreign policy vision that Venezuela hasencountered substantial controversy. Mr Chávez has brushed off criticism ofvisits to Iraq, Libya and Iran on the grounds that Venezuela has the sovereignright to determine its own foreign policy and to conduct its oil relationsautonomously. The emphasis on sovereignty was reiterated following criticismboth from the Colombian president, Andrés Pastrana, that Mr Chávez wasinterfering in peace negotiations between the Colombian government and left-wing rebels and also after the domestic opposition condemnation of thepresident’s close relations with his Cuban counterpart, Fidel Castro. However,the US government’s delineation of states opposed to terrorism and thosesponsoring terrorism in the wake of the September 11th attacks has putMr Chávez in a difficult position as many of the groups and countries he haslinks to or visited now on the US State Department’s terrorism list.

Although Venezuela immediately condemned the attacks on the US and wasparty to the decision taken by the Organisation of American States to invokethe Inter-American Reciprocal Assistance Treaty, comments by Mr Chávez, hisdefence minister, José Vicente Rangel, and Mr Miquilena relating to the defin-ition and classification of terrorists led the US ambassador to Venezuela, DonnaHrinak, to question the administration’s international credibility.

Mr Chávez’s judgement was further questioned when he extended a 16-daytour of seven European countries in October to a 20-day tour, incorporatingLibya, Saudi Arabia, Algeria, Iran and Russia. The president claimed that hisrevised schedule was essential for the stability of oil prices, with his detour tothe Middle East providing an opportunity for negotiations on oil productioncuts. But the alteration of his itinerary was condemned by opposition parties,which accused the government of having misled the legislature, the approval

Opposition to Mr Chávezabroad

A contentious foreignpolicy strategy

Mr Chávez claims right toself-determination

18 Venezuela


of which is required constitutionally for executive visits overseas. The extendedtrip was also viewed negatively by 68% of Venezuelans, who objected to thepresident’s absence.

A central problem for Mr Chávez is the overlap between oil policy and foreignpolicy. By using his overseas trip to pursue an oil-related agenda during aperiod of acute international uncertainty, Mr Chávez has fuelled suspicion thathe is not fully commited to the US-led “war on terrorism”. This view wasfurther articulated by Mr Peña, whose visit to Washington for meetings with arepresentative of the US State Department, John Maisto, coincided withMr Chávez’s oil diplomacy tour. In demanding a firmer show of solidarity withthe US, Mr Peña is in tune with Venezuelan domestic opinion, as 79% ofrespondents in a recent survey believe that Venezuela should give unqualifiedbacking to the US. Mr Chávez’s attempt to occupy a neutral position in the USantiterrorist campaign has also opened divisions between civilian and militaryelements within the cabinet, relations between which were already strained.The appointment of Mr Rangel, a civilian, to the position of defence minister,was deeply unpopular with the military and this antagonism has not abated,despite the appointment of General Lucas Rincón Romero to the newly createdpost of commander-in-chief of the armed forces, a position subordinate to thedefence minister.

The conduct of foreign policy has been a further point of departure betweenthe president, his civilian ministers and the armed forces. The military issuspicious of Venezuela’s involvement in the Colombian peace process andopposes the anti-US tone of leading civilian cabinet ministers. In a press con-ference that raised concerns about divisions within the cabinet and the pol-itical future of the defence minister, General Rincón contradicted Mr Rangel’sviews on terrorism and called on the government to provide unqualifiedsupport for the US. The civilian-military split extends to other policy areas,including reform of Petróleos de Venezuela (PDVSA, the state-owned oilmonopoly). Under the circumstances, it appears that Mr Chávez may struggleto maintain balance between these two increasingly distinct elements withinhis party.

Economic policy

Although Venezuela’s public-sector budget figures are arguably more inter-esting for what they do not report than for what they do, data published bythe Finance Ministry for the first half of 2001 nevertheless contain informationon some significant developments. Both the consolidated accounts and centralgovernment accounts showed substantial growth in current revenue in thesecond quarter, but these rises were almost entirely the result of increased pay-ments by Petróleos de Venezuela (PDVSA, the state-owned oil monopoly),which paid unusually high dividends to the state during the quarter. Bycontrast, second-quarter non-oil tax revenue declined slightly, a tentative signthat the economic slowdown has started to weigh on the state finances.

Public finances reflecteconomic headwinds

Overlap between policy onoil and foreign affairs

Foreign policy source ofconflict within the MVR

Venezuela 19


Between January and July PDVSA contributed a total of Bs5.6trn (US$7.9bn).Of this sum, Bs2.3trn was dividend payments, in contrast with the year-earlierperiod when no dividend payments were made.

The 2001 budget projected only Bs1.8trn in dividend income from PDVSA. Theoil giant also paid Bs1.6trn in income tax and Bs1.7trn in fuel exploration taxin the first seven months of 2001, respectively 6% and 13% less than in 2000.Other data from the Treasury shows that non-oil tax revenue to July 2001reached Bs4.6trn, equivalent to 45% of ordinary income, although debtissuance contributed Bs3.4trn, a worrying 29% higher than in 2000.

The rise in debt issue is largely attributable to Venezuela’s weak budgetingprocess, which consistently underestimates spending, requiring additionalborrowing, mostly in the domestic market. Moreover, extra spending projectsapproved during the year are financed by additional borrowing and officialbudget spending targets therefore consistently underestimate total annualspending by some margin.

Public financesa, 2001(Bs bn)

Consolidated public sector Central government1 Qtr 2 Qtr 1 Qtr 2 Qtr

Total revenue 5,593 6,021 3,518 4,750 Current revenue 5,592 6,014 3,518 4,750 Tax revenue 1,885 1,761 2,689 2,090 Income tax 489 404 n/a n/a Social security 165 174 n/a n/a Other 1,231 1,183 n/a n/a Non-tax revenue 3,707 4,253 830 2,661 of which: PDVSAb 2,823 3,271 n/a n/a Capital income 2 7 0 0

Total spending 4,790 6,781 3,829 5,404 Current spending 3,102 4,662 2,745 4,245 of which: remuneration 752 956 670 845 purchase of goods & services 282 389 193 294 interests & commissions 721 730 635 605 transfers 1,245 2,460 1,223 2,476 Capital spending 1,463 1,852 858 896 Off-budget spending 144 189 144 189 Concessions (net of loans) 80 78 77 73

Financial balance 803 –760 –311 –654

Current balance 2,489 1,352 773 505

Primary balance 1,524 –30 324 –49

a Preliminary data. b Petróleos de Venezuela.Sources: Oficina de Estadísticas de las Finanzas Publicas; Ministerio de Finanzas, Economist Intelligence Unit.

Furthermore, total spending jumped in the second quarter of 2001 following arise in current spending, most of which was related to fiscal transfer payments,although all other categories of spending, with the except of concession pay-ments in the consolidated accounts, also showed increases. As a result, thesecond-quarter official accounts showed a net financial deficit that will need to

Spending levels rise

20 Venezuela


be financed from elsewhere, mostly the debt markets. The second-quarterprimary balance (balance before interest payments) recorded a slight deficit,overturning the first-quarter surplus achieved through spending restraint andpossibly, as pointed out by some critics, delays in making payments, especiallytransfers to regional or local authorities and to investment projects such asthose for housing. This criticism may well be correct in the light of the second-quarter deficit.

The Servicio Nacional Integrado de Administración Aduanera y Tributaria(Seniat, the tax authority) is making some progress in strengthening the non-oil tax base. Its total revenue target for 2001 of Bs8.2trn was set at 22% over the2000 official target of Bs6.7trn, which was missed by 21%. Collection figuresfor January-September 2001 show some underperformance against these am-bitious targets. The collection performance will probably suffer further incoming quarters as the economy slows. In addition, the target for 2002 hasbeen set 28% higher than that for 2001, at Bs10.6trn. However, some relief willbe forthcoming from the new Income Tax Amnesty Law, which allows taxarrears to be paid over two years. Seniat expects that this measure will raise afurther Bs1bn in overdue payments, presumably mostly in 2002, with somepayments coming in in 2003. Although amnesty laws have a positive short-term impact on tax revenue, they often have a negative medium-term effect aspeople wait to pay their taxes until the next reprieve deal is announced.

Tax revenue targets and resultsa, 2001(Bs bn)

Targets Jan-Sep 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Target Realised % of target

Income tax 534 503 428 453 1,918 1,465 1,560 106

Value-added tax 1,062 1,004 1,151 1,171 4,389 3,217 2,960 92

Customs duties 283 330 308 339 1,261 921 n/a n/a

Excise & other taxes 117 152 164 199 631 433 n/a n/a

Total 1,996 1,989 2,051 2,163 8,198 6,036 5,810 96

a Payments exclude those made directly to the Treasury.Source: Servicio Nacional Integrado de Administración Aduanera y Tributaria.

For the first time in 2001 at the end of September the basket oil price forVenezuelan crude dropped below the budgeted US$20/barrel. The year-to-dateaverage up to the end of October was US$21.4/b, but the average for Octoberalone was US$3.4/b below budget. As crude prices soften in response toweakening global demand, concerns are growing that PDVSA might not meetits 2001 revenue targets, which would affect fiscal revenue. Oil productionaccounts for about one-third of GDP, one-half of government income andthree-quarters of exports. Efforts by the president to shore up support for oilproduction cuts to bolster prices would, if successful, only partly alleviate theproblem as both production and export volumes would decline if cuts wereimplemented. Earlier production cuts by OPEC had already left Venezuela’squota below the target estimated in the 2001 budget.

Low oil prices add to fiscalstrain

Ambitious tax revenuetargets missed

Venezuela 21


The authorities have admitted that the public finances are feeling the effects ofthe global economic slowdown and will suffer further, particularly if oil pricescontinue to fall. In response, a temporary freeze on payments to the Fondo deInversión para la Estabilización Macroeconómica (FIEM, the MacroeconomicStabilisation Investment Fund) has been announced, although payments arealready more than US$2.5bn behind the 2001 target. The additional savingsshould finance the budget shortfall in the remainder of 2001 and into 2002,but will not prove a lasting solution to budget pressure.

Volatility in the currency markets provoked some of the most threateningcomments yet from the president, Hugo Chávez, who has repeatedly accusedbankers of speculating against the bolívar. In September he announced that thegovernment would declare a state of emergency if the situation did not im-prove. Such an outcome would allow the authorities to move all state fundscurrently held with private banks to the Banco Central de Venezuela (theCentral Bank). Government deposits account for about 12% of all deposits andsuch drastic action would reduce liquidity and push up interest rates.

In September the Central Bank was forced to sell very short-term paper, seven-and 30-day bills, to tighten liquidity in the markets, simultaneously increasingthe discount rate from 32% to 37%. Earlier measures had already reduced theceiling on US dollar holdings for banks and had limited trading in US dollars.These measures seem to have been effective at least in the short term aspressure on the bolívar has faded. By late October the bolívar was trading atBs742:US$1, down by 6% on the start of 2001, but well within the set tradingband. This policy will allow the bolívar to depreciate by a total of 7-8% withinthe sliding trading band in 2001. Admitting that GDP growth couldundershoot the government’s 4.5% target by as much as 1 percentage point,the Central Bank has started to reduce interest rates gradually on the bills itplaces in the market. The discount rate has been reduced to 34%.

Money supply and interest rates, 2001(% change year on year unless otherwise indicated)

Jan Feb Mar Apr May Jun Jul Aug Sep

M1 29 33 32 25 26 28 30 31 23

M3 23 25 22 17 14 15 15 16 11

Reposa rate (av; %) n/a n/a n/a n/a 16 17 17 18 27

Lending rateb (av; %) 22 21 21 20 21 23 23 25 36

a Government repurchase agreements. bAverage lending rate on non-preferential loans given by six major banks.Source: Banco Central de Venezuela.

Despite reasonably strong growth in the narrow money supply, the CentralBank’s tight lid on liquidity has slowed broad money supply growth in 2001,particularly since May when currency pressure first became an issue. In realterms the broad money supply is now expanding at just over 3% comparedwith about 10% at the start of the year. But the most recent jump in repos(government repurchase agreements) and lending rates, which was recorded inSeptember and is reversing only slowly, has not yet been reflected in moneysupply data. The growth of the money supply will probably decelerate further

Monetary policy threats

FIEM contributions frozentemporarily

Liquidity squeeze continues

22 Venezuela


and reduce both consumer demand and investment plans. Consumer lendingrates topped 45% in early October and commercial loans reached similarheights, according to the banking association.

The Confederación Venezolana de Industriales (Conindustria, the industrialfederation) has complained that Venezuela would be better off if it followedColombia’s example in cutting taxes, lowering interest rates and boostingexports. Conindustria also claims that the government has a compromise withthe sector still pending to introduce a package of measures to reactivate theeconomy. But the authorities are not intent on increasing economic flexibility,having announced a temporary freeze on sackings in October to add to thealready costly redundancy regulations for business. The measure prohibits em-ployers from sacking workers until the end of November as the governmenthopes to protect workers during the extended period of union elections.Business representatives have pointed out that the measure acts as a straight-jacket on them as only one-third of workers participate in the elections, andhave warned there could be a corresponding rise in redundancies in December.Employers have also complained that such measures do little to promote eitherinvestment or production.

The domestic economy

Economic trends

Although Venezuela’s economy has recorded higher growth rates than mostother regional economies in 2001, nevertheless its deceleration is evident fromsecond-quarter GDP data, according to which GDP grew by 2.9% year on year,compared with 3.8% in the first quarter. Growth in the second quarter washeld back by a contraction in the oil sector and a liquidity squeeze. The oilsector has not seen much improvement and liquidity conditions remainedtight during the third quarter and into the fourth. In addition, global growthhas been slowing rapidly, especially the US.

A slow recovery

More labour regulation

Venezuela 23


The terrorist attacks on the US in September aggravated an already difficultenvironment for Venezuela, with continued falls in oil prices, reduced exportdemand, increased protectionism, particularly for steel, and rising pressure onthe tourist industry.

Retail sales have been sluggish generally, with the exception of the car industry,which has been boosted by a government-sponsored family car programme.But even this sector is now experiencing difficulties. Sharp rises in interest ratescaused month-on-month vehicle sales to tumble by 13% in September, the firstsuch drop in 2001. Average interest rates on car loans rose from 25% to 45% inthe final two weeks of September, although by late October they had easedback to 35%. Sales in the first nine months of 2001 were still 55% higher yearon year as tax incentives for family cars and special loan programmes spurreddemand, but this growth rate is now slowing. High interest rates have not onlyaffected sales, but will also generate payment problems for consumers. A totalof 70% of all car sales and 80% of cars bought under the family car scheme arefinanced by credit.

Figures from the Banco Central de Venezuela (the Central Bank) continue toshow a fairly optimistic sales picture, compared with assessments made byvarious trade associations, but the picture is also deteriorating. Two-thirds ofCentral Bank categories show softer sales in August than average in the firstseven months of 2001. The general index recorded a 31% year-on-year rise inAugust, compared with 34% on average in the year up to that month. Worst-hitis textiles, which is crumbling under the weight of cheaper imports. Also sig-nificant are the falling growth rates for hardware and construction, and trans-port, the leading indicators for general levels of growth, illustrating the delay ingovernment projects, as well as tightening credit conditions. Slowing growthrates for construction, one of the strongest engines of national economic growth,will certainly be reflected in the GDP data for the third and fourth quarters.

Retail sales(current prices; % change, year on year)

2000 Jan-Aug 2001 Aug 2001

Food 30 25 22

Beverages & tobacco 5 17 22

Clothing 24 –12 –24

Health & beauty 20 30 32

Hardware & construction 19 27 14

Transport 36 52 45

Machinery 29 49 46

Household 48 73 82

Other 43 3 –5

General index 29 34 31

Source: Banco Central de Venezuela.

However, the Confederación Venezolana de Industriales (Conindustria, theindustrial federation) gives a much gloomier assessment of total sales trends,estimating that industrial sales rose by only 6.6% in the first half of 2001. In

Faltering sales

24 Venezuela


addition, some sectors saw a drastic decline in sales, especially clothing andfootwear, with clothing sales plunging by 40%. The Cámara Venezolana de laIndustria de Alimentos (Cavidea, the national food industry chamber) alsoreported another sign of the slowdown in the third quarter, when processedfood sales dropped by 1% year on year.

After a fairly benign 0.6% year-on-year rise in August, consumer prices jumpedby 1.2% by September and by 0.9% in October. The price rises are part of theseasonal pattern that occurs at the beginning of the new school term, andschool fees accounted for more than one-half of the price effect (+9.2%). Butprices for other services and goods also rose faster than in previous months.Accumulated inflation in the first ten months of 2001 reached 10.5% year onyear, two-thirds of which was attributable to rising prices for services.Disinflation is the cornerstone of the government’s economic policy and isengineered by a rigid currency regime that has left the bolívar stronglyovervalued. In this regard, the authorities have been reasonably successful asyear-on-year inflation in October fell to 12.4%, compared with 15.1% in theyear-earlier period. If the same level of average monthly inflation of 1% seen sofar in 2001 is recorded in the remaining months of the year, the year-end ratewill fall below 13%, down from 13.4% in 2000. But this policy of disinflationwill prove increasingly difficult as prices tend to be as prices tends to be lesslikely to decline once they drop to a certain level. The economic hardshipgenerated by this policy will therefore rise, although global and domesticslowdowns in demand will ease price pressures, particularly for goods.

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

2000 2001 Monthly Year on year Cumulative Monthly Year on year Cumulative

Jan 1.7 19.3 1.7 0.9 12.6 0.9

Feb 0.4 17.9 2.1 0.5 12.7 1.4

Mar 0.9 17.5 3.0 0.8 12.5 2.2

Apr 1.5 18.0 4.6 1.1 12.1 3.3

May 1.0 16.9 5.7 1.5 12.6 4.9

Jun 1.1 16.4 6.8 1.0 12.5 5.9

Jul 1.0 15.8 7.9 1.5 13.0 7.5

Aug 0.8 15.0 8.8 0.6 12.9 8.2

Sep 1.7 15.9 10.6 1.2 12.3 9.5

Oct 0.8 15.1 11.6 0.9 12.4 10.5

Nov 0.6 14.2 12.3 – – –

Dec 1.0 13.4 13.4 – – –


The debate on employment trends continues. Official sources claim that thesituation is improving, but employers and unions depict a more challengingenvironment. The Instituto Nacional de Estadística (INE, the national statisticsinstitute) reported a drop in unemployment from 13.3% in June to 12.8% inJuly 2001, compared with the 14.7% registered in July 2000. The percentage ofthe population employed in the informal sector also fell from 52.4% in June to

Inflation proving slightlystubborn

Mixed employmentdevelopments

Venezuela 25


50% in July. Unemployment among women exceeds that among men,respectively 14.2% compared with 11.9%. But the young are worst affected,with 22.7% of those aged between 15 and 24 years looking for work.

Concern is growing about the pattern of job creation. Public-sector employ-ment rose by 133,000 people, nearly one-tenth of the 1.4m unemployed, butprivate-sector employment declined by 33,333 posts. However, according tothe Centro de Análisis y Documentación de los Trabajadores (Cenda, theWorkers Analysis and Documentation Centre), unemployment reached 19.4%in the third quarter of 2001, compared with 19.9% in the first quarter and 19%in second. This figure is echoed by Conindustria, according to which show thatdespite first-half growth, industrial employment fell by 6% in the first sixmonths of the year. The industries most affected were iron and steel (down by44%), metallic products (down by 34%), textiles (down by 30%) andconfectionery (down by 16%). In the past five years 23% of industrialcompanies have been forced to close. Conindustria has warned that job losseswill accelerate as companies have halted their investment programmes andthat the worsening global economic environment will also result in morebusiness failures.

The employment minister, Blancanieves Portocarrero, has announced thatwith assistance from Spain the government is to set up a national employmentnetwork in the next 12 to 18 months. The network will consist of 22 regionalemployment offices and will provide sectoral as well as regional employmentinformation. But similar initiatives of this kind have disappointed so far. Oneof these is the government’s national employment plan, known as the SimonRodríguez Plan, which is expected to generate an extra 238,838 jobs betweenJuly and December 2001, equivalent to a reduction in the unemploymentrate of 2 percentage points. However, little has been heard about this projectrecently and with delays affecting all areas of public spending, it is unlikelyto meet its target by year-end. The biggest obstacles to employment growthare the country’s onerous labour regulations and the overvalued currency.

Oil and gas

The basket price for Venezuelan oil slumped to US$16/barrel in Octoberfollowing the global slide in oil prices since August and particularly in the wakeof the September terrorist attacks in the US. With global demand weakeningrapidly and the outlook for prices hardly upbeat, president Hugo Chávez wenton a worldwide tour of oil producing nations to shore up support forproduction cuts in October. But his efforts are unlikely to be fruitful as othernations do not want to appear to be harming global growth under presentcircumstances and are worried that further cuts may harm their oil revenue. Bylate October the average price for Venezuelan crude for the first ten months of2001 had fallen to US$21.5/b. Since September Venezuela’s production quotastands at 2.67m barrels/day, but the 2002 budget nevertheless forecasts 3m b/d.The squeeze will not only be felt in the oil industry as oil production accountsfor about a one-third of GDP, one-half of government income and three-quarters of export earnings.

Pressure on oil revenue

Moves to stemunemployment

26 Venezuela


A new Hydrocarbons Law has generated heated controversy, having beenapproved unchanged in November under an Enabling Law that had justexpired (see Political scene). The new law confirms the state’s exclusive owner-ship rights over Petróleos de Venezuela (PDVSA, the state-owned oil monopoly)and its subsidiaries. The primary activities of exploration, extraction andstorage are reserved exclusively for state-owned enterprises or companies inwhich the state has a majority shareholding. Moreover, all such joint ventureswill require legislative approval, the conditions of which the NationalAssembly will have the right to modify. This stipulation will limit the sector’sattractiveness to foreign investors, who will probably balk at the idea offinancing government-controlled projects. Under the law, privately ownedcompanies will be allowed to refine, but the government will have the right toset prices for refined products sold in the domestic market.

The government has also launched a plan to create a new independent state-owned gas company. Gas exploration is currently handled by PDVSA Gas, a gasaffiliate of PDVSA. The new company will be forged from PDVSA Gas, but willbe independent from PDVSA itself as the government wishes to provide the gasindustry with an identity of its own. The new company is part of a plan to tapproven gas reserves of some 100trn cu ft located in the offshore coastal plat-form, involving investment of up to US$50bn over 30 years. But the ann-ouncement triggered protests from workers at PDVSA Gas, who fear it will leadto job cuts and the loss of benefits. The project has also been criticised as need-lessly expensive and bureaucratic as a new department within the Ministry ofEnergy and Mines will monitor it. Moreover, the government may struggle tofinance projects and investment of US$10bn budgeted by PDVSA Gas for2001-07. The ministry has set up a commission with industry officials todetermine whether to go ahead with the plans, the outcome of which is notyet known.

PDVSA does not expect any major changes in investment spending, budgetedat about US$7bn, in 2002 (the budget will be approved in late 2001). Accordingto company vice-president Vincenzo Paglione, spending of about US$35bn isplanned in the next five years. The company proposes to issue up to US$800m

New national gas company

PDVSA sticking toinvestment plans

Hydrocarbons Law castsshadow over industry

Venezuela 27


of asset-backed debt to service its debt and to finance normal corporate oper-ations, even though prices for its outstanding paper have fallen with thedeterioration of the outlook for global oil markets and as the impact ofArgentina’s debt rescheduling on bond markets begins to be felt. PDVSA willpay the government a total of Bs3.4trn (US$4.8bn) in dividends in the 2001fiscal year, based on revenue earned in 2000. This sum is more than theBs2.5trn originally forecast in the 2001 budget, following higher than expectedoil prices in 2000 and four increases in PDVSA’s OPEC output quota. In 2002the company is expected to pay another Bs3.4trn in dividends on top ofBs2.8trn in royalties and Bs1.3trn in income tax (these amounts are calculatedon the basis of the current tax regime rather than using the new system). Itremains to be seen whether the company’s 2002 cashflow will cover thesepayments as the forecasts are based on relatively high average levels of outputof 3m b/d and an oil price of US$18.5/b. But the company should generateextra savings by not paying its contribution, set at 6% of revenue, to the Fondode Inversión para la Estabilización Macroeconómica (FIEM, theMacroeconomic Stabilisation Investment Fund) in 2002.

The Sincor consortium will increase its oil output in the Orinoco belt from thecurrent level of 40,000 b/d of sulphur-laden crude to 180,000 b/d of high-quality synthetic crude in 2002, when a major new upgrader comes on stream.The consortium running the US$4bn joint venture consists of TotalFinaElf(France), with a 47% stake, PDVSA, with 38%, and Statoil (Norway), with 15%.PDVSA, Exxon Mobil and Veba Oel have also inaugurated the US$790m CerroNegro refinery plant. Cerro Negro can upgrade about 120,000 b/d of localextra-heavy 8.5 grade API crude to 108,000 b/d of synthetic 16.5 grade API,which will be subsequently shipped to Exxon Mobil’s refinery in Louisiana.PDVSA and Exxon Mobil had been discussing plans to expand the site toaccommodate a petrochemical plant and a liquefied natural gas (LNG) plant,but Exxon Mobil questioned the profitability of the project after a possible 30%increase in royalties was announced. Venezuela’s Ministry for Foreign Affairsannounced that the Royal Dutch/Shell Group (Shell) would invest US$1bn inan integrated LNG project in the Paria Peninsula in Zulia. The authorities alsoannounced separately that PDVSA and the newly established gas company,PDVSA Gas, will be major shareholders in the LNG project in northern Paria inSucre state. The remaining stakeholders, Mitsubishi, Exxon Mobil and Shell,will have to renegotiate their shares as a result of the state’s decision to take a51% stake in the project, in which foreign companies previously held a com-bined stake of 67%. The LNG project will have an initial capacity of4m tonnes/year, requiring investment of US$2.2bn. The government is ex-pected to finance a contribution of more than US$1bn. The project has beendelayed and work has not yet started, but is expected to be operational in 2006.Repsol YPF (Repsol) has begun production of gas condensate at the Quiriquirefield in the western state of Monagas. Repsol signed an agreement with PDVSAin February to produce gas from the field, which was already yielding 13,000b/d of oil. Reserves in the field are estimated at 145m barrels of oil equivalent.Gas production has begun at 2.1m cu metres/day and is forecast to reach7.6m cu metres/day when the development is completed in 2002.

Mixed news for oil and gasprojects

28 Venezuela


Industry

Although Central Bank figures show that manufacturing expanded by 5.3%year on year in the second quarter of 2001, industry pessimism has prevailedthroughout the year and the majority of companies (59%) surveyed byConindustria claimed they had not made any first-half investment. Only 50%of those surveyed were operating at capacity and a mere 4% were planning toacquire machinery or equipment in the next six months, painting a ratherbleak outlook. Conindustria blames a drop in investment, sales contractions(see below) and an absence of stimulating private-sector policies. It also re-quested new measures similar to those applied in Colombia, which recentlysaw corporate taxes and interest rates lowered and new policies to promoteexports implemented. A downward trend in Central Bank production dataappears to have emerged since the Economist Intelligence Unit published itsSeptember report. Production of cement, aluminium and oil derivatives hassustained falls in recent months, and iron and steel also seem to be suffering.The only sector to show a recent improving trend is fertiliser production.

The steel industry has been hit by the slowdown, as well as by protectionisttrends in the US and Mexico, and within Mercado Común del Sur (Mercosur,the southern customs union) countries and others. Steel representatives haverepeatedly called for Venezuela to implement protectionist measures. Theauthorities, together with sector-wide institutes, are studying proposals to limitsteel-related imports and to shield the industry from possible dumping.Although 50% of steel output is exported and only 1% goes to the US,increased protectionism is creating excess supply globally, which is seekingnew markets. Moreover, the domestic market is in no position to absorb anyexcess capacity.

Production trends in main sectors, 2001(% change, year on year)

Crude Oil derivatives Iron ore Steel Aluminium Cement Electricity Sugar Fertilisers

Jan 6.8 7.0 7.6 25.1 9.2 –16.1 8.8 –2.0 –50.4

Feb 2.5 2.0 –28.9 –1.4 –0.9 –6.9 0.6 –30.3 –54.1

Mar 3.9 –0.1 –7.2 13.3 0.9 16.3 8.5 –31.0 –20.1

Apr 1.3 –7.4 1.7 14.7 5.2 19.3 6.9 –43.2 –15.1

May –0.4 –1.8 3.8 –58.4 0.1 –11.1 3.1 –66.3 –16.0

Jun 4.3 –2.9 –11.8 11.7 –5.1 –5.2 5.9 9.9 –16.3

Jul 2.7 –5.0 –11.7 2.7 –6.6 –13.5 6.6 –10.6 8.8

Aug –3.5 –6.8 9.2 n/a –6.1 –18.3 5.2 –2.8 6.8


The Orinoco steel mills company, Siderurgica del Orinoco (Sidor), has alreadystarted an internal reorganisation in response to falling demand. Aninternational consortium owns 70% of Sidor, with the Corporación Venezolanade Guayana (CVG, the state’s industrial holding company) holding theremaining 30%. Previously, Sidor officials had projected 2001 production toreach 3m tonnes, rising to 3.5m tonnes in 2002, but owing to global economicslowdown, projections have been revised down. CVG has also announced that

Industrial productionvaries widely across sectors

Venezuela 29


it is studying how to boost aluminium processing in Venezuela. Currently, 74%of primary aluminium produced by CVG is exported, with the rest processed inwithin the country.

Agriculture

Mr Chávez passed the Ley de Tierras (Land Law) using powers granted underan expired Enabling Law (see Political scene), thereby raising a storm ofprotest. Sources close to the president have insisted that the emphasis of landreform will be on distributing plots to landless peasants, mostly by grantingthem land owned by the government through the Instituto Agrario Nacional(IAN, the National Agricultural Institute) and by verifying land title. Land-owners who cannot prove title, of which there are thought to be a significantnumber, are liable to lose out, particularly where land stands idle. But validconcerns also exist that the security forces and the judiciary will be unable tocontrol squatters and land invasions once the new law begins to be enforced.

The authorities have indicated that they will not only include regulations onagricultural land ownership, but will also implement proposals on rural devel-opment. IAN will provide technical assistance to farmers and promote infra-structure improvements. A national land institute and an agricultural invest-igate institute will collect statistical data on land use and productivity.

Under the new Banking Law there are plans to provide financing for small-scale agricultural producers, defined as those who do not have sufficient guar-antees to obtain other loans and who are not organised in any associations.The new law obliges banks to set aside an as yet undetermined percentage oftheir small business loans portfolio for agriculture. Mr Chávez recently passed adecree requiring banks to provide small loan financing amounting to aminimum of 3% of their capital. (See Economic policy). The ConfederaciónNacional de Asociaciones de Productores Agropecuarios (Fedeagro, the nationalfarmers’ federation) has indicated that the sector will need at least Bs1.5trn.

In 2001 banks and the government agreed to expand the total agricultural loanportfolio to Bs700bn, compared with Bs644bn at the end of 2000. Figures froma consulting firm, Softline Consultores, show that by the end of Septemberbanks had outstanding agricultural loans amounting to Bs690bn. The exec-utive also strengthened its agricultural lending institutes. In the first half of theyear the Fondo Nacional de Desarrollo Agropecuario, Pesquero, Forestal yAfines (Fondapfa, the national fund for the development of agriculture,fishing, forestry and associated activities) provided Bs52bn in loans to 18,812producers. The authorities also disbursed Bs70bn in 2000 and plan to grant atotal of Bs40bn in 2001 under the Sobremarcha plan.

Agriculture is one of the economic sectors currently most adversely affected bythe strength of the bolívar. Agricultural federations complain that the countryis only self-sufficient in rice production as it buys in additional imports for allother food categories. According to the minister of production and trade, LuisaRomero, Venezuela imports more than 70% of its food. The president of the

More loans to be made toagriculture

Rising food imports

Land Law causes concern

30 Venezuela


Federación Nacional de Ganaderos (Fedenaga, the national cattle farmers’federation), José Luis Betancourt, claims that a lack of financing and subsidy islimiting production increases, rather than a lack of capacity.

Infrastructure

The government is launching a public campaign to promote efficient energyuse and power savings in order to avoid a collapse of the electricity network inearly 2002. Water levels at the important Guri hydroelectricity plant havedropped to historical lows because of insufficient rainfall. Generation has fallen2,800 gwh below normal as a result, and other generators are not in a positionto compensate fully for the lack of supply. The Guri plant usually providesmore than 70% of national electricity needs. But energy rationing has not beenrequired yet and the final months of the year tend to be wet, so water-basedpower generation may increase. The critical period will be March-May 2002,when government officials have indicated that energy rationing will probablybe needed.

A new electricity distributor will start to operate in Guayana in 2002 to servethe population of Bolívar state, which is currently inadequately supplied withelectricity. GE Power Systems, part of the US giant General Electric, woncontracts totalling US$107m to supply equipment and services for a 295-mwexpansion of a power plant in Maracaibo. Local generation in Andean andwestern regions is no longer reliable owing to underinvestment in plant.Additional electricity is imported from Colombia. In June the Ministry ofEnergy and Mines promised to invest Bs1.5bn in the region, but work onprojects has yet to start. Local sources claim at least US$300m is needed.

In September a US-based company, AES Corporation (AES), which successfullycompleted a hostile takeover of Electricidad de Caracas (EDC) in 2000,launched a hostile bid for the Compañía Autónoma Nacional Teléfonos deVenezuela (CANTV, the state-owned telecoms company). The bid has beenvehemently opposed by CANTV’s board and the controlling consortium oflarge shareholders, Venworld, which is dominated by the US-based VerizonCommunications and Telefoníca de España. In an attempt to acquire 43.2% ofoutstanding shares, AES offered US$3.43 per share or US$24 per AmericanDepositary Receipt (ADR) in a US$1.4bn tender offer. Added to its 6.9% currentholding, the bid would give AES control of CANTV, but CANTV retaliated witha 15% share buyback programme and an extraordinary dividend payment tothwart the offer.

The National Securities Commission ruled the tender offer must run until thebuyback is concluded on November 23rd. CANTV has reaffirmed its guidancefor 2001 of consolidated revenue of US$2.6bn, earnings before interest anddepreciation (EBITDA) of US$1.1bn and an EBITDA margin of 44%, comparedwith 41% in 2000. Free cash flow is projected to exceed US$750m after a 20%in capital expenditure was cut from original plans. CANTV expects its wirelesssubscriber base to grow to 2.2m by the end of 2001.

Energy rationing expected

Telecoms competitionintensifying

Venezuela 31


New technologies have been introduced into the sector in the past fewmonths. In September a satellite station, DIRECTV Latin America, launchedinteractive television, offering banking services, video games, e-mail and WorldCup football from individually chosen camera angles among other services.Healthy competition is also fuelling the growth of broadband Internet access.By year-end a total of 70,000 users are expected to register with CANTV(35,000), Telcel (10,000) and Net Uno (25,000). According to the Datanalisispolling institute, the number of Internet users in Venezuela has reached850,000 and will grow to nearly 1m by the end of 2001. Internet use grew by62% year on year in 2001 and by 124% in 2000, but the development ofe-commerce is being held back by a lack of confidence in payment methods;uncertainty about product quality and delivery times; low levels of PC andcredit card penetration of 20% and 2% respectively; weak purchasing power;and a limited choice of products and services.

Tourism airlines have suffered most from the impact of the September terroristattacks in the US. Cancellations of reservations and flight routes, increasedsecurity measures and price adjustments to cover rising insurance costs haveput severe financial pressure on airlines. The government took over res-ponsibility for indemnification in case of attacks on Venezuelan airlines for themonth of October when insurance charges skyrocketed, but no further aid hasbeen announced. The sector’s profitability has come under severe strain,despite the expected pick-up in travel during the Christmas period.

Financial and other services

Mr Chávez has approved a decree requiring banks to allocate a minimum of3% of their capital to small business loans. Three newly created state financeinstitutions, the People’s Bank, the Women’s Bank and the Small Business LoanFund, also offer financing to low-income Venezuelans. The decree is part of areform package to modernise the country’s banking laws. Banks have protestedagainst the measure, claiming that the 3% minimum is too high and that itwill force them into unfair competition with the state banks, which have lessstringent regulations.

State banks have come under pressure as profits dropped 22% in the thirdquarter of 2001, according to the Superintendencia de Bancos (the bankingwatchdog). Although interest income from loans and investments coveredneither operating costs nor interest payments on deposits, state banks avoidedlosses owing to the revenue they derived from other banking activities.Personnel costs jumped by an unsustainable 27% and the largest institution,the Banco Industrial de Venezuela, saw a 51% jump in bad loans, which nowmake up 25% of its total credit portfolio.

Economic hardship is evident in loan developments across the sector, withmanufacturing and construction the worst-hit, according to the Super-intendencia de Bancos. Past-due credit card loans registered a 27% rise toAugust, even before September’s jump in interest rates hit borrowers. Depositscontinue to fall, with a shift away from low-yielding saving deposits to higher-

Tourism suffering

Connectivity rates rising

State banks feel economicheadwinds

Mr Chávez pushes banksinto small business loans

32 Venezuela


yielding term deposits. Insurance has also been affected and the sector’s reg-ulator has warned that 17 institutions, accounting for 30% of the market, arebordering on collapse. Their reserves have been mostly invested in governmentbonds, which have lost value in recent months.

Bank deposits, 2001(Bs m unless otherwise indicated)

% change Sep Month on month Year to date Year on year

Current-account deposits 6,241 –0.1 n/a 20.2

Savings account deposits 3,969 –3.5 n/a n/a

Term deposits 3,147 3.4 n/a n/a

Total deposits incl others 14,123 –0.4 –3.0 14.8

Source: Softline.

Consolidation in the financial sector continues, driven by the need to reduceoperational costs, to increase client numbers and to raise profitability. A furtherstep has been made in the slow process to merge Banesco and Unibanca. Bothbanks own smaller institutions that are being integrated before the parent com-panies join forces. Once the merger is complete, the new bank, which will keepthe name of the dominant partner, Banesco, will manage Bs1.7trn in deposits,according to August data.

A Spanish banking group, Santander, hopes to conclude the merger of itsVenezuelan subsidiaries, the Banco de Venezuela and the Banco Caracas, byearly 2002. Once merged, the group will form the country’s largest bank,holding close to 20% of the overall market and US$4.9bn in assets. At presentSantander’s Spanish competitor, the Banco Bilbao Vizcaya Argentaria, has acontrolling position in the market through its Banco Provincial. A newInternet bank, Bolívar Universal, which was launched in February, has gained1% and 0.6% the lending and deposit markets respectively. Its share of thelending market is expected to double in 2002.

Consolidation also continues in the insurance market. Grupo MercantilServicios Financieros (Grupo Mercantil) has announced it is to buy 75.1% ofone of the country’s top ten insurers, Seguros Orinoco, subject to regulatoryapproval. The acquisition would give Grupo Mercantil a 10% market share.

Even for the strongest corporations, long-term finance is difficult to obtain andmost loans mature within three years. In addition, heavy domestic borrowingby the government is increasingly crowding out private borrowing. The marketfor corporate bonds is hardly any better, although in late September theCaracas Stock Exchange launched its first corporate bond, issued by EDC, to betraded on the market in the hope of providing a boost. Three more bonds wereexpected to follow by the end of 2001.

Further consolidation inthe financial sector

New corporate bondstraded

Venezuela 33


Foreign trade and payments

The Servicio Nacional Integrado de Administración Aduanera y Tributaria(Seniat, the tax authority) launched a new tax register for exporters whoqualify for value-added tax (VAT) rebates. The measure is part of a strategy tostrengthen the competitiveness of domestic products and to reduce taxevasion. Venezuelan exporters will receive Bs500bn (US$650m) in tax rebatesin 2001, according to Seniat’s calculations. The authorities owe the sectorabout Bs70bn in the form of draw-back debt.

In August the government suggested it was planning a wide-ranging package ofmeasures to reduce imports by at least 20% in 2001 and by an even greaterpercentage in 2002. The announcement provoked an outcry among bothVenezuela’s trading partners and the local business community, and for weeksthe government went silent on the subject. But it seems that the plan remainson the agenda as the government hopes to support domestic producers and tohalt the deterioration in the trade balance, which has been adding to currencypressure. In September Seniat also announced that it would widen the VATbase for importers. This move would affect Andean trade in particular and islikely to upset Venezuela’s second largest trade partner, Colombia. The WorldTrade Organisation (WTO) has already set up a study group to analyseVenezuela’s import restrictions, especially its use of a system of import licences,which are mostly targeted at agricultural products. The WTO suspects thesystem might not live up to international standards on simplicity, transparencyand ease of compliance, in which case Venezuela could face sanctions. ButVenezuela is not the only country to show protectionist tendencies and its steelsector has been demanding increased protection against imports in response tosimilar measures recently announced elsewhere, including the US.

Trade data from the statistics institute seem to support claims that imports arerising fast, but confirm only in part that exports are struggling. The sole sector tosee strong export growth and falling imports in 2001 is electrical goods.

Trade trends by sector, 2001(US$ bn unless otherwise indicated)

Exports Imports % change % change

Jan-Aug year on year Jan-Jun year on year

Farming 152 –23 416 4

Food, drinks & tobacco 148 10 450 23

Minerals 739 70 484 64

Chemicals 595 41 1,081 22

Non-precious metals 1,152a –6.6a 630 16

Electrical goods 103 20 2,094 –9

Transport goods 146 6 1,169 60

Non-oil total 3,477 12 7,973 15

a Excludes state iron exports.Source: Oficina Central de Estadística Informatíca.

Protectionist measuresmay be implemented

Import spending risessteadily

New tax register shouldbenefit exporters

34 Venezuela


Farming and metals exports have contracted, while minerals and chemicalsexports performed well. But all sectors will be vulnerable to the currentslowdown in global demand. Import growth will probably not ease withoutfurther measures.

The government looks set to support additional measures to reduce imports offood, clothing and footwear, some of the most badly affected sectors. As long asthe currency remains overvalued, particularly as neighbouring currenciesweaken, the steady fall in the trade surplus is set to continue.

Trade trends by country, 2001(US$ bn unless otherwise indicated)

Exportsa Imports % change % change

Jan-Aug year on year Jan-Jun year on year

The AmericasUS 1,369 20 2,801 2Colombia 483 2 654 42Mexico 168 –7 378 28Brazil 114 39 446 27Peru 81 –7 67 26Ecuador 123 37 80 86Bolivia n/a n/a 85 215Chile 42 2.4 n/a n/a

EuropeItaly 93 41 273 –16France n/a n/a 151 –3UK 20 –43 n/a n/aGermany n/a n/a 262 0Netherlands 88 0 n/a n/a

Far EastJapan 84 –52 306 29

Non-oil total 3,477 12 7,973 15

a Exclude state iron exports.Source: Oficina Central de Estadística Informatíca.

Even when oil exports are excluded, the US remains Venezuela’s largest tradingpartner by far. Exports to the US to August rose by 20% year on year, but importswere fairly stable. The opposite is true of trade with Venezuela’s second largesttrade partner, Colombia, as imports registered a 42% rise, but exports were flat,reflecting the weak peso.

Imports from other local partners are also rising fast, which is not surprisinggiven Venezuela’s growing comparative currency disadvantage. But for Japan andMexico although important, currency effects are not the only factors as structuralproblems in the export sector such as labour costs, red tape, corruption andinsufficient funding are also causing problems.

The authorities were taken aback by the drop in foreign reserves during thesecond quarter of 2001, when total outflows outweighed trade and investmentinflows. Reported reserves held by the Banco Central de Venezuela (the CentralBank) and in the Fondo de Inversión para la Estabilización Macroeconómica

Reserves slumpunexpectedly

Venezuela 35


(FIEM, the Macroeconomic Stabilisation Investment Fund), which areindicative of the reserves item on the balance of payments, fell by US$909m inthe second quarter and by US$902m in the third, despite an easing of currencypressure by the end of the third quarter.

Foreign reserves(US$ m, end-period)

Foreign reserves FIEMa Total Change

1998 14,849 n/a 14,849 –2,969

1999 15,164 215 15,379 530

2000 15,883 4,588 20,471 5,092

2001Jan 16,718 4,613 21,331 860Feb 15,755 4,932 20,687 –644Mar 14,865 6,036 20,901 214Apr 14,298 6,060 20,358 –543May 13,800 6,331 20,131 –227Jun 13,425 6,567 19,992 –139Jul 13,529 6,587 20,116 124Aug 12,443 6,861 19,304 –812Sep 12,009 7,081 19,090 –214

a Fondo de Inversión para la Estabilización Macroeconómica (Macroeconomic StabilisationInvestment Fund) deposits.Source: Banco Central de Venezuela.

Amid the gloom created by the global slowdown and the terrorist attacks onthe US in September, there is some welcome news on Venezuela’s external debtpayments. The National Assembly’s Economic Advisory Committee has cal-culated that for every 1-percentage-point drop in interest rates, Venezuela savesabout US$200m, potentially resulting in total savings of some US$700m indebt-servicing in 2001. But the savings will be partly offset by rises in domesticinterest rates.

Some internationaldebt-servicing relief

Documents

Venezuela - iuj.ac.jp€¦ · Venezuela’s president, Hugo Chávez, remains popular relative to his predecessors at similar stages of their terms, but recently he dropped to second