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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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
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 - Khomeini
Revolution
Beginning ofIran-Iraq War
Gulf War
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
On a per capita basis, however, real oil exports are still 18% below their peak (1974)
Oil Exports(2008 US$)
87.443
1.199
3.091
3.808
3.139
0
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.000
90.000
100.00019
5919
6019
6119
6219
6319
6419
6519
6619
6719
6819
6919
7019
7119
7219
7319
7419
7519
7619
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7819
7919
8019
8119
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8519
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8719
8819
8919
9019
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9219
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9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
08
Oil
Exp
ort
s (M
illio
n U
S$
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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
En
e-02
Mar
-02
May
-02
Ju
l-02
Sep
-02
Nov
-02
En
e-03
Mar
-03
May
-03
Ju
l-03
Sep
-03
Nov
-03
En
e-04
Mar
-04
May
-04
Ju
l-04
Sep
-04
Nov
-04
En
e-05
Mar
-05
May
-05
Ju
l-05
Sep
-05
Nov
-05
En
e-06
Mar
-06
May
-06
Ju
l-06
Sep
-06
Nov
-06
En
e-07
Mar
-07
May
-07
Ju
l-07
Sep
-07
Nov
-07
En
e-08
Mar
-08
May
-08
Ju
l-08
Sep
-08
Nov
-08
En
e-09
Mar
-09
MBPP Deposits Quasi-money Liquidity - M2
200358%
200448%
200552%
200670%
200729%
200825%
2009(April):4.6%
2004-2008: 517%CAGR: 44%
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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%
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
-02
Sep
-02
En
e-03
May
-03
Sep
-03
En
e-04
May
-04
Sep
-04
En
e-05
May
-05
Sep
-05
En
e-06
May
-06
Sep
-06
En
e-07
May
-07
Sep
-07
En
e-08
May
-08
Sep
-08
En
e-09
CPI WPI Food
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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%
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Yea
rs
Venezuela PROMEDIO Chile Colombia USA
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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 …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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%
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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$, 1998 - 2008)
13.213
16.86519.211
13.36010.483
17.021
24.008
32.498
45.46348.095
15.105
0
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
50.000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Cheap imports were eased by massively overvaluing domestic currency…
Exchange Rates US$/Bs.F.(Jan 2000 - Apr 2009)
2,15
6,61
5,93
5,46
6,78
0
1
2
3
4
5
6
7
8
Ene-0
0
May-0
0
Sep-0
0
Ene-0
1
May-0
1
Sep-0
1
Ene-0
2
May-0
2
Sep-0
2
Ene-0
3
May-0
3
Sep-0
3
Ene-0
4
May-0
4
Sep-0
4
Ene-0
5
May-0
5
Sep-0
5
Ene-0
6
May-0
6
Sep-0
6
Ene-0
7
May-0
7
Sep-0
7
Ene-0
8
May-0
8
Sep-0
8
Ene-0
9
Official Parallel Rate PPP CPI (1990=100) M2/RIN PPP - WPI (1990=100)
Source: BCV, my own PPP estimations
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
6
May-9
7
Ab
r-9
8
Mar-
99
Feb
-00
Ene-0
1
Dic
-01
Nov-0
2
Oct
-03
Sep
-04
Ag
o-0
5
Jul-
06
Jun-0
7
May-0
8
Ab
r-0
9
RER Official RER 100% RER Parallel
RER = 100%
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
And then oil prices came down… the future is not what it used to be …
At US $45 per barrel, oil exports per capita would fall 53% when compared to 2008 …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
We need to cut down sharply in imports at a point when our dependence of imports is very high: 36-37% of total internal demand
Volume of imports as a percentage of total internal demand (1997-2008)
24%
26%25%
26%28%
24%
22%
26%
30%
33%
37% 36%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 *
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Total US$ granted at official rate (2.15) fell by 29% in Jan and Feb, 59% in March, sending importers to the parallel market …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
… where the prevailing exchange rate is 200% higher!
Tasa de Cambio Oficial y Paralela(Ene 2000 - Abr 2009)
0,00
1,00
2,00
3,00
4,00
5,00
6,00
7,00
8,00
En
e-00
Jul-
00
En
e-01
Jul-
01
En
e-02
Jul-
02
En
e-03
Jul-
03
En
e-04
Jul-
04
En
e-05
Jul-
05
En
e-06
Jul-
06
En
e-07
Jul-
07
En
e-08
Jul-
08
En
e-09
Oficial No Oficial M2/ RIN
6.61
2,15
6.97
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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)
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Var. PrivateAssets (net)
VariationRIN
Does not include:- Debt service- FDI (positive or negative)- (Negative) Variation of public assets abroad
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
Var. PrivateAssets (net)
Does not include: Debt service FDI (positive or negative) (Negative) Variation of public assets abroad
VariationRIN
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
1Q Balance of Payments: A deficit of US $15.261 Million …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
2006 2007 2008
Oil Exports (US$ 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 …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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$) 6.973 10.961 16.217
How much is the over-estimation of oil exports?
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
How much US$ 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
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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
$
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Oil forecasts point (very volatile) out to a slow (but steady) recovery …
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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?
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Just a word on oil revenues and poverty (income-measured)…
MisionesLaunched
MisionesLaunched
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
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?
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Venezuela: 2009 …
… and
beyond?
Outlook for Venezuela’s Economy: 2009 and Beyond © Miguel Angel Santos
Thanks!Thanks!