Venezuela: Effects of Global Recession and Future Prospects
In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have noted the remarkable recovery in Latin American stock markets relative to the rest of the world. Over the next few weeks, I will be publishing a series of studies written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.
I have already posted country studies on Argentina, Brazil, Chile, and Colombia. The Venzuelan study is published below
Venezuela: Effects of Global Recession and Future Prospects
by Diana Colmenares, Silvia Sandoval and Elliott Morss
Executive Summary
The economy depends primarily on oil. Oil exports plummeted in 2009, but in recent months the oil price has recovered somewhat. However, major imbalances continue exist due to bad government policies. Inflation and the government budget deficit are very high. Venezuela is the riskiest Latin American country for foreign investors. But the government can continue in this manner because of tremendous oil reserves.
Impact of Credit Freeze
The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, $36 trillion was lost worldwide in stock markets directly following the credit freeze. Markets have recovered somewhat, cutting back stock losses to $22 trillion. Latin American stock markets have recovered dramatically.
Table 1. – Global Stock Market Losses (in mil. US$)
| Index | |||||||
| Index |
Index High |
Index Low |
Hi-Lo % Loss |
Hi-Low $ Loss |
Recent High |
Hi-Now % Loss |
Hi-Now $ Loss |
| DJ Eurstoxx 50 |
4.543 |
1.810 |
60,20% |
7.210.000 |
2.763 |
39,20% |
4.700.000 |
| Nikkei 225 (Japan) |
18.239 |
7.569 |
58,50% |
2.590.000 |
9.844 |
46,00% |
2.040.000 |
| S&P 500 (US) |
1.558 |
683 |
56,20% |
10.350.000 |
1.059 |
32,00% |
5.900.000 |
| S&P Asia 200 |
6.749 |
3.145 |
53,40% |
6.850.000 |
4.540 |
32,70% |
4.200.000 |
| TSX (Canada) |
14.984 |
7.591 |
49,30% |
810.000 |
11.173 |
25,40% |
420.000 |
|
|
|
|
|
|
|
|
|
| Argentina (Merval) |
2.339 |
829 |
64,56% |
21.985 |
2333 |
0,26% |
159 |
| Brazil (Bovespar) |
73.516 |
29435 |
59,96% |
641.844 |
67413 |
8,30% |
133.079 |
| Chile (IPSA) |
3.499 |
2.101 |
39,95% |
149.307 |
3465 |
0,97% |
2.416 |
| Colombia (IGBC) |
11.439 |
6461 |
43,52% |
61.599 |
11693 |
-2,22% |
-2.422 |
| Mexico (Mexbol) |
32.721 |
16.869 |
48,45% |
227.146 |
31017 |
5,21% |
22.945 |
| Peru (IGBVL) |
23.790 |
6.054 |
74,55% |
23.970 |
15733 |
33,87% |
31.900 |
| Venezuela (IBVC) |
62.013 |
34172 |
44,90% |
? |
54111 |
12,74% |
? |
|
|
|
|
|
|
|
|
|
| Total 7 LA Countries |
|
|
|
1.125.851 |
|
|
188.077 |
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
28.660.000 |
|
|
17.550.000 |
| Total Adjusted* |
|
|
|
36.000.000 |
|
|
22.050.000 |
While Venezuela still has a stock market, it is hardly significant. Because of exchange restrictions, companies prefer to list their stock on other markets. This means that Venezuelan stock market fluctuations had very little impact on incomes in Venezuela.
Impact of Declining Global Demand
According to LatinFocus, oil constitutes 93.5% of Venezuelan exports. Consequently the collapse in oil prices from a high of $140 in early 2008 to $30 in January 2009 had a devastating effect on exports. Oil prices have recovered some of their losses, but Venezuelan exports are still expected to fall 46% in 2009.
|
EXPORTATIONS |
||||||
|
ECONOMIC |
MILLIONS |
2008% |
MILLIONS |
2009% |
VAR % |
|
| Vegetable / Animal |
36 |
0,80 |
36 |
2,40 |
-1,60 |
|
| Food, Drinks & Tabaco |
75 |
1,80 |
26 |
1,70 |
-65,90 |
|
| Minerals |
581 |
13,50 |
146 |
9,70 |
-74,90 |
|
| Chemicals |
717 |
16,70 |
186 |
12,30 |
-74,10 |
|
| Plastic & Manufacturing |
78 |
1,80 |
21 |
1,40 |
-72,70 |
|
| Metals |
2.160 |
50,40 |
839 |
55,70 |
-61,10 |
|
| Electric Material |
164 |
3,80 |
87 |
5,80 |
-47,10 |
|
| Shipping Material |
230 |
5,40 |
98 |
6,50 |
-57,20 |
|
| Left |
248 |
5,80 |
69 |
4,60 |
-72,20 |
|
OIL PRICES
Evolution 2007 – 2009
(US$/Barril)
|
|
VENEZUELAN PRICE |
OPEP |
W.T.I. |
BRENT |
| 2007 |
64.74 |
69.08 |
72.24 |
72.59 |
| 2008 |
86.49 |
94.45 |
99.90 |
98.54 |
| Q1 |
85.19 |
92.72 |
97.72 |
96.36 |
| Q2 |
105.32 |
117.65 |
123.50 |
122.40 |
| Q3 |
110.25 |
114.42 |
118.93 |
117.68 |
| Q4 |
45.40 |
53.25 |
59.70 |
57.97 |
| AÑO 2009* |
55.34 |
59.11 |
60.12 |
60.87 |
| Q1 |
38.60 |
42.78 |
43.07 |
45.78 |
| Q2 |
54.53 |
58.22 |
59.41 |
59.51 |
| Q3 |
64.04 |
67.76 |
68.31 |
69.04 |
US/ Venezuelan Trade
For the first half of 2009, Venezuela exported US$ 12.1 billion to the US, a drop of 53% over the same period in 2008.
Domestic Economy
The fall in oil exports had wide ranging effects on the domestic economy. GDP will be down 2.1% in 2009. Consumption is expected to be off by 2.1% with investment falling by 6.7%. Unemployment is projected to increase in 2009 to 8.3% from 6.1% in 2008.
The government budget has been seriously affected by the loss in oil revenues. The deficit as a percent of GDP is expected to grow from 1.2% in 2008 to 4.8% in 2009.
Exchange Rates
Because of currency controls, there is a large gap between the government’s pegged rate and the black market rate. In September, the black market rate for the Bolivar Fuerte was 5.55 per US$ while the official rate was exchange market the 2.15 Bolivar Fuertes for per US$. That means the official price is less than half the market price, an extremely serious imbalance. Spreads of this sort invite extensive black market profiteering.
In an attempt to sop up some of the excess demand for US dollars in Venezuela, Chavez issued US$3.0 billion in the sovereign debt bonds. The issue was oversubscribed, attesting to the internal demand to sell Fuertes for dollars.
Inflation
Inflation is expected to be 30% in 2009 and slightly higher in future years.
Foreign Investment
There will be little foreign investment as long as current policies are continued. Foreigners investing in Venezuela have little chance to get their money out. And the government regularly chooses which obligations to pay and which ones to ignore. The riskiness of Venezuela is reflected in its Sovereign Spread (bbs) of 884 in September, higher than any other Latin American country other than Ecuador.
The Future
Table 2 . – World Bank Latin American GDP Growth Estimates
|
Country, Region |
1995-2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
|
Brazil |
2,4 |
3,7 |
5,7 |
5,1 |
-1,1 |
2,5 |
|
Mexico |
3,6 |
4,8 |
3,3 |
1,4 |
-5,8 |
1,7 |
|
Argentina |
2,3 |
8,5 |
8,7 |
6,8 |
-1,5 |
1,9 |
|
Venezuela |
1,6 |
10,3 |
8,4 |
4,8 |
-2,2 |
-1,4 |
|
Colombia |
0,7 |
6,8 |
7,5 |
2,5 |
-0,7 |
1,8 |
|
Chile |
4,2 |
4,3 |
4,7 |
3,2 |
-0,4 |
2,7 |
|
Peru |
3,3 |
7,6 |
9,0 |
9,8 |
3,0 |
4,3 |
Venezuela’s economy is expected to continue down in 2010.
But remember this: Venezuela exports about one billion barrels of oil annually. It has more than 50 billion barrels of oil reserves. This means Venezuela can live off its oil almost indefinitely under existing Chavez policies.
