Venezuela Macroeconomic Outlook (CSIS)

Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos

Outlook for Venezuela’s Economy:2009 and BeyondCenter for Strategic and International Studies / Program

Americas

May, 2009

Miguel Ángel SantosAdjunct Professor, Center of Finance, IESA

www.miguelangelsantos.blogspot.com


After five years of sustained increase in oil price, the Venezuelan oil basket plummeted, closing Jan-Apr 53.7% below same period 2008 …

First ChávezPolicy Package:Feb, 18 2002:Vzla. Oil Price: 16,71Devaluation: 39% (one day)Taxes: IVA + IDBReduction in public exp.

First ChávezPolicy Package:Feb, 18 2002:Vzla. Oil Price: 16,71Devaluation: 39% (one day)Taxes: IVA + IDBReduction in public exp.

Second ChávezPolicy Package


Starting 2005, oil exports in real terms have been the highest in Venezuelan history, reaching a peak in 2008 at US$87.443 billion

Oil Exports(2008 US$)

87.443

1.199

3.091

3.808

3.139

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.00019

5919

6019

6119

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

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7919

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9319

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9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

08

Oil

Exp

ort

s (M

illio

n U

S$

2008

)

0,00

500,00

1.000,00

1.500,00

2.000,00

2.500,00

3.000,00

3.500,00

4.000,00

4.500,00

5.000,00

Oil E

xpo

rts per C

apita (M

illion

US

$ 2008)

Oil Exports (Base 2008) Oil Exports per Capita (Base 2008)

Oil Embargo - Yom Kippur War

Sha overthrown - Khomeini

Revolution

Beginning ofIran-Iraq War

Gulf War


On a per capita basis, however, real oil exports are still 18% below their peak (1974)

Oil Exports(2008 US$)

87.443

1.199

3.091

3.808

3.139

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.00019

5919

6019

6119

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

7319

7419

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7719

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7919

8019

8119

8219

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8619

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8819

8919

9019

9119

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9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

08

Oil

Exp

ort

s (M

illio

n U

S$

2008

)

0,00

500,00

1.000,00

1.500,00

2.000,00

2.500,00

3.000,00

3.500,00

4.000,00

4.500,00

5.000,00

Oil E

xpo

rts per C

apita (M

illion

US

$ 2008)

Oil Exports (Base 2008) Oil Exports per Capita (Base 2008)

Oil Embargo - Yom Kippur War

Sha overthrown - KhomeiniRevolution

Beginning ofIran-Iraq War

Gulf War


Oil revenues were translated into public expenditure, causing a massive increase of liquidity…

Inflation22%-32%

Inflation14%-20%

Liquidity - M2(MMM VEF)

0

50

100

150

200

250

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e-02

Mar

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-09

MBPP Deposits Quasi-money Liquidity - M2

200358%

200448%

200552%

200670%

200729%

200825%

2009(April):4.6%

2004-2008: 517%CAGR: 44%


GDP growth registered a 63.8%+ increase between 2004-2008, but it was already decelerating at a fast pace before oil prices came down…

1Q 20090,3%

1Q 20090,3%


The inflation rate reported does not correlate with the large difference between M2 and GDP growth…

Annualized Consumer Price IndexAréa Metropolitana (Ene- 02 - Abr-09)

29,1%30,6%

35,4%

5%

15%

25%

35%

45%

55%

65%

75%

En

e-02

May

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Sep

-08

En

e-09

CPI WPI Food


Before the Central Bank changed the base year and the methodology of estimation, investment (public and private) were at historic lows…

Gross Formation of Fixed Capital(% of GDP, 1958-2008)

5,48%

8,50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Private Base 1984 Total Base 1984

AverageDepreciation1982-2002(% of GDP):

7.53%

AverageDepreciation1982-2002(% of GDP):

7.53%


The new methodology incorporates imports of durable goods (among other changes) as gross formation of capital…

Gross Formation of Fixed Capital(% of GDP, 1958-2008)

8,50%

16,0%

31,5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Private Base 1984 Total Base 1984 Total Base 1997


By 2004 the average age of the Venezuelan capital was 67% higher than Chile, 25% higher than Latin America …

If we start investing twice as much as Chile, by 2025 we may expect to catch up in terms of technology and age of capital

If we start investing twice as much as Chile, by 2025 we may expect to catch up in terms of technology and age of capital

Average Age of Capital(1970-2004)

4,00

5,00

6,00

7,00

8,00

9,00

10,00

11,00

1970

1971

1972

1973

1974

1975

1976

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1978

1979

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1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

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1994

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1997

1998

1999

2000

2001

2002

2003

2004

Yea

rs

Venezuela PROMEDIO Chile Colombia USA


Venezuela is currently the worst destination for private capital in Latin America… That can not be changed by decree …

ARGENTINA

BOLIVIA

BRAZIL

CHILECOLOMBIA

COSTA RICA

ECUADOR

EL SALVADOR

GUATEMALA

HONDURAS

MEXICO

NICARAGUA

PANAMA

PERU

URUGUAY

VENEZUELA

R DOMINICANA

1

21

41

61

81

101

121

141

161

0 10 20 30 40 50 60 70 80 90 100

Political Stability Index (World Bank, 2008)

Do

ing

Bu

sin

ess

Ran

k (W

orl

d B

an

k, 2

008)

Best Profile Governance / Business Climate

ARGENTINA

BOLIVIA

BRAZIL

CHILECOLOMBIA

COSTA RICA

ECUADOR

EL SALVADOR

GUATEMALA

HONDURAS

MEXICO

NICARAGUA

PANAMA

PERU

URUGUAY

VENEZUELA

R DOMINICANA

1

21

41

61

81

101

121

141

161

0 10 20 30 40 50 60 70 80 90 100

Political Stability Index (World Bank, 2008)

Do

ing

Bu

sin

ess

Ran

k (W

orl

d B

an

k, 2

008)

Profile Governance / Business Climate

• In ease of doing business Venezuela is only above Chad, Sao Tomé, Burundi,Republic of Congo, Guinea-Bisseau, Central Africa y Democratic Republic of Congo• It is a lot easier to do business in Sudán, Irak, Haití, Zimbabwe y Afganistán

• In ease of doing business Venezuela is only above Chad, Sao Tomé, Burundi,Republic of Congo, Guinea-Bisseau, Central Africa y Democratic Republic of Congo• It is a lot easier to do business in Sudán, Irak, Haití, Zimbabwe y Afganistán


First set of ideas…

The Venezuelan growth experience was based on a combination

of idle capacity, and oil fueled-public expenditure

With net investment in fixed capital close to zero, increases in

public expenditure had less effect on growth and more in prices

Had oil prices remained high, inflation (demand driven) would have

been even higher, but there would have been more room to keep

on increasing consumption through cheap imports …


If GDP grew at 63.8% between 2004-2008, consumption grew at an even higher rate: 84.1% (equivalent to 66.3% per capita)

Consumption(000s Bs. F. 1997, 1998-2008)

-

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

60.000.000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

84.1%84.1%


The gap between production and consumption was bridged through a massive inflow of imports …

2003

-200

7

CAGR: 4

4.3%

2008: 5.8%Imports(US$, 1998 - 2008)

13.213

16.86519.211

13.36010.483

17.021

24.008

32.498

45.46348.095

15.105

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10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

50.000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Cheap imports were eased by massively overvaluing domestic currency…

Exchange Rates US$/Bs.F.(Jan 2000 - Apr 2009)

2,15

6,61

5,93

5,46

6,78

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2

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7

8

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Official Parallel Rate PPP CPI (1990=100) M2/RIN PPP - WPI (1990=100)

Source: BCV, my own PPP estimations


Cheap imports were eased by massively overvaluing domestic currency…

Real Exchange Rate - Jan 1990 - April 2009(CPI - Jan 1990 =100%)

36,3%

111,5%

30%

50%

70%

90%

110%

130%

150%

Ene-9

0

Dic

-90

Nov-9

1

Oct

-92

Sep

-93

Ag

o-9

4

Jul-

95

Jun-9

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May-9

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r-9

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99

Feb

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RER Official RER 100% RER Parallel

RER = 100%


And then oil prices came down… the future is not what it used to be …

At US $45 per barrel, oil exports per capita would fall 53% when compared to 2008 …


We need to cut down sharply in imports at a point when our dependence of imports is very high: 36-37% of total internal demand

Volume of imports as a percentage of total internal demand (1997-2008)

24%

26%25%

26%28%

24%

22%

26%

30%

33%

37% 36%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 *


Total US$ granted at official rate (2.15) fell by 29% in Jan and Feb, 59% in March, sending importers to the parallel market …


… where the prevailing exchange rate is 200% higher!

Tasa de Cambio Oficial y Paralela(Ene 2000 - Abr 2009)

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Jul-

08

En

e-09

Oficial No Oficial M2/ RIN

6.61

2,15

6.97


What have we done with the US$ coming from the oil bonanza?

In 2008, with the average Venezuelan barrel at US $88.6 and oil exports at US $87.433 billion net accumulation of foreign reserve was US$9.275 billion …

Balance of Payments 2008

(US$ Million)

93.542

1.394

48.095

6.2459.194

18.380

3.747 9.275

0Exports FDI Imports Services /

OtherVar. PublicAssets (net)

Errors &Omissions

VariationRIN

Bonds/US$Supplied to

Parallel market

94% Oil

Var. PrivateAssets (net)


Given the fears and expectations fueled by the government, to keep the parallel market stable means to finance a large private capital outflow

Private Capital Outflows

(US $ Million, 2000-2008)

9.841

3.783

8.797

11.738

7.310

18.916

22.127

6.118

9.403

0

5.000

10.000

15.000

20.000

25.000

2000 2001 2002 2003 2004 2005 2006 2007 2008Source: BCV


At run rate, to keep imports and private outflows (parallel market) at the same pace implies losing US$30.5 billion of international reserves …

Assuming oil exports at 2.8 MBD (official figure) at US $45 per barrel …

Balance of Payments (pro-forma)(US $ Million)

45,990 48,095

6,245

22,127 (30,477)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

50,000

60,000

Exports Imports Services /Other


VariationRIN

Does not include:- Debt service- FDI (positive or negative)- (Negative) Variation of public assets abroad


If, instead of official figures, we use the Venezuelan oil exports reported by international sources (2.2 MBD) …

“Toto, I don’t thinkwe are in Kansas anymore”

Balance of Payments (pro-forma)(US $ Million)

36,135 48,095

6,245

22,127(40,332)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

50,000

60,000

Exports Imports Services /Other


Does not include: Debt service FDI (positive or negative) (Negative) Variation of public assets abroad

VariationRIN


1Q Balance of Payments: A deficit of US $15.261 Million …


2006 2007 2008

Oil Exports (US$ Million – BCV) 58.438 62.555 87.443

Average Venezuelan Basket Price(US$ per barrel – MENPET)

56,4 64,7 88,7

Implicit Volume (MBD) 2,84 2,65 2,70

Domestic Consumption (MBD) 0,5 0,5 0,5

Total Implicit Volume of Oil Production (Venezuela)

3,34 3,15 3,20 ?

“Net accumulation of foreign public assets abroad” may be a way to conceal the over-estimation of oil exports …


2006 2007 2008

Total Production (Venezuela) MBD 2,70 2,40 2,40

Oil-Derivatives (included in oil exports but not in estimates of international sources) MBD

0,3 0,3 0,3

Total production + derivatives (MBD) 3,00 2,7 2,7

Domestic Consumption (MBD) (0,5) (0,5) (0,5)

Oil Exports (MBD) 2,5 2,2 2,2

Average Venezuelan Basket Price(US$ per barrel – MENPET)

56,4 64,7 88,7

Oil Exports (US$ Million) 51.465 51.594 71.226

Oil Exports (US$ Million – BCV) 58.438 62.555 87.443

Over-estimation of oil exports (MM US$) 6.973 10.961 16.217

How much is the over-estimation of oil exports?


How much US$ does the government has to face the crises?

US$ 29.555 million of international reserves

Other funds accumulated abroad and neither reported formally anywhere and nor subject to any mechanism of accountability (FONDEN, FONDESPA, BANDES, Fondo Chino, Fondo Miranda)

According to the government:

- US$ 27.811 million

- 14 months of imports, 10 months of imports + private capital account

Other private sources:

- US 8.000 million

- 9 months of imports, 6 months of imports + private capital account


Accounting for the fiscal and balance of payments gap have become an art since the approval of the Central Bank Law (2005)

2005 onwards …

Before 2005 …

Bs Bs

BCV

GC

BsBs

Bs

$

$

PDVSA

$

$

$

FONDEN

FR

Bs

PDVSA BCV

FEM

$

Bs$ Bs

$

Bs

BsGC Public

ExpenditureG&I

$ Bs

Public Expenditur

eG&I

Public Expenditur

eG&I

Public Expenditur

eG&I

$


Oil forecasts point (very volatile) out to a slow (but steady) recovery …


What has been the policy package so far?

Fiscal

Implemented: Increase VAT from 9% to 12% Increase base for calculating

Income Tax by 19%, with inflation running at 32%

Increase minimum wage by 10% May + 10% September (a sharp reduction of real minimum wage)

Sell more dollars in the parallel market, enjoy the benefits of depreciation without devaluation

Finance fiscal gap by issuing domestic debt

In the making: Luxury tax

Exchange/BOP

Implemented:

Sharp reduction in the

allotment of dollars at official

rate

Transfer international reserves

to funds abroad (without

absorbing liquidity)

Allow large depreciation of

currency in the parallel market

(100% YOY)

In the making:

Dual exchange rate system?

Sincere / formalize parallel

market?

Monetary

Implemented:

Decrease reserve

requirements for banks

Decrease maximum interest

rate (from 28% to 26%)

Reduce the growth of liquidity

(M2) by selling less dollars to

the Central Bank and more to

the parallel market

In the making:

Nationalization of the banking

system?


Just a word on oil revenues and poverty (income-measured)…

MisionesLaunched

MisionesLaunched


Venezuela: 2009 …

With oil revenues 55% lower than 2008, the government will restrict imports, focusing

official allotment of dollars to food and medicines (31% of basic consumption basket)

GDP and consumption will fall (1%-3%), with inflation above 40% (and the

government introducing “new inflation indexes”)

Devaluation will be delayed at least one more year, but access to the official rate will

be restricted (depreciation of parallel market used to finance fiscal gap)

Expropriations/Nationalizations will continue, with the government paying in

bolivares-denominated public bonds (trying to get short-term gains / political capital)

An “effort / collaboration” will be demanded to the private sector, production will be

commoditized and profit margins forced down

The government does not have fuel to continue being the big employer of the

Venezuelan economy …

How will the government cope with the economic results in the short-to-medium term

if oil prices do not recover?


Venezuela: 2009 …

… and

beyond?


Thanks!Thanks!

Venezuela Macroeconomic Outlook (CSIS)

Economy & Finance

Transcript of Venezuela Macroeconomic Outlook (CSIS)