Economy
After five years of expansion, the Venezuela economy is in technical recession as Gross Domestic Product has declined over two successive quarters.

The sharp 4.5 percent contraction in the third quarter follows a 2.4 percent drop in the second quarter of the year. The downturn shows that all the "economic engines" that drive growth and prosperity are not working properly.

According to the Central Bank of Venezuela (BCV), consumption fell 4.8 percent in the third quarter; investment plummeted 14.5 percent; exports plunged 48.5 percent, whereas government spending is kept afloat with a 2.6 percent increase, the smallest gain in the last seven years.

As a result, the economy has fallen into the deepest contraction for a third quarter of the year since the third quarter of 1994, excluding the 2002-2003 period, when the lockout and political upheaval destabilized the country.

The BCV indicators mirror the impact on key sectors: manufacturing industry production shrank 9.2 percent compared to the third quarter of 2008; trade dropped 11.5 percent, transport activity declined 11.1 percent, oil sector activities fell 9.5 percent and the mining sector sank 18.3 percent.

On the contrary, the construction sector increased 4.3 percent, communications rose 11.4 percent, while electric generation and water surged 4 percent.

In general, the non-oil sector of the economy was down 3 percent while oil production declined 9.5 percent.

If production does not increase, the sales drop, businesses do not hire new staff and there are no profits to increase salaries.

Another negative factor is the fact that recession in Venezuela is accompanied by the highest inflation in Latin America. As a consequence, purchasing power declines every month.

BCV said that the decline of the non-oil economy is partly due to "the gap caused by a lower availability of imported inputs."

The price of oil, which is the product that provides 92 percent of foreign currency entering Venezuela, has fallen from an average of USD 110 in the third quarter of 2008 to USD 64 in the third quarter of 2009.

As a result, the Foreign Exchange Administration Commission (Cadivi), which is the agency responsible for allocating dollars at the official exchange rate, established severe restrictions and in the first nine months of the year the private sector was hit by a 47 percent decline in authorizations of foreign exchange to import products.

At the same time, inflation has affected wages, and purchasing power has declined 5 percent compared to the third quarter of 2008. As a result, consumption and sales have decreased.

José Guerra, former chief financial officer of the Central Bank of Venezuela, said that "this recession occurs when the rest of the countries are emerging from crisis. We are reaping the fruits of a policy that has maintained foreign exchange unchanged, an ineffective policy to contain inflation that negatively impacts the profitability of the industry."

Meanwhile Abelardo Daza, an economist and professor at the Institute of Higher Education in Business Administration (IESA), considers that the worst part of the economic downturn is behind us and that liquidity is beginning to rebound. Daza forecasted that the economic growth in the fourth quarter will be around zero and it will grow positively in 2010, driven mainly by government spending.
vsalmeron@eluniversal.com

Translated by Gerardo Cárdenas