For decades, the Venezuelan economic model based on high oil prices that secured high economic growth through steady public spending. But things have changed, as oil remains a necessary but not sufficient condition to boost the Venezuelan economy.

The Venezuelan oil barrel started the week at USD 73.30, while energy consulting companies put the minimum price this year at USD 70, a level that in 2007 led to an economic growth of 8.2 percent. However, despite oil prices, the future looks gloomy.

Spanish BBVA group, which runs Banco Provincial in Venezuela, foresees a 2.5 percent economic downturn in 2010. Meanwhile, research firm Ecoanalítica predicts a 1.3 percent decline.

Venezuela's public spending has lost strength to boost economic growth. Asdrúbal Oliveros, director of research firm Ecoanalítica says that after an inflation adjustment, it appears that "in 2006, the government managed to increase the Gross Domestic Product (GDP) by one percent, by injecting USD 2.6 billion into the Venezuelan economy. However, it required USD 13.4 billion in 2008 to do the same thing."

This situation has several causes. The private sector has invested little in the expansion of production capacity and although demand increases due to the injection of public spending, the growth cap has lowered. In fact, private investment declined 8.2 percent in 2009.

Note that the increasing inflation rate has diluted the purchasing power of the Venezuelan bolivar coming from public expenditure.

In addition, Venezuela has increasingly adopted an oil-dependent economic model under which the country basically exports oil, obtains foreign exchange to import goods and services and for domestic spending, while domestic industries vanish.
vsalmeron@eluniversal.com

Translated by Gerardo Cárdenas