Venezuela: Economic growth along with imbalances

Increased public expenditure has led to economic growth during six quarters in a row in Venezuela, yet some imbalances have emerged.

In the light of recent heavy public expenditure, salaries and subsidies have increased and housing construction has been boosted, leaving behind recession and reporting economic growth in a six consecutive quarters. Notwithstanding, a great deal of imbalances are very likely to become apparent upon the Venezuelan presidential election on October 7.

The rent-seeking model, which from the beginning of the 1980's has translated into reduced formal employment, excessive dependence on oil revenues, and the impossibility to achieve long-lasting wealth, has been reinforced.

Official data reveals that deindustrialization exacerbates, Venezuela exports petroleum only and obtains oil revenues that enable it to import massively. Thus, the sectors reporting the higher growth are those that do not compete with products purchased abroad. 

Furthermore, manufacturing, a key sector that entails industrial activities namely the making of machinery and equipment, chemical products, textiles, metallurgy, etc., has lost ground in the Venezuelan economy with GDP slipping from 18% in the first half of 1998 to 14% this year.

Despite a long list of regulations, including those of prices, the country is currently hit by the highest inflation rate in Latin America, while shortage surpasses by far the level considered as normal.

Regarding foreign exchange, the Venezuelan Government has kept the same rate (VEB 4.30 per USD) for two years. Considering the rise in public expenditure and the gap between expenses and income, it all seems that said rate will hardly remain the same.

Public expenditure exceeds tax collection and oil revenues by 12 percent of GDP, hence, debt increases sharply. Overall, debt amounts to 50 percent of GDP.

Consequently, it is believed that a new devaluation may be implemented so as to obtain further local currency through petrobonds and meet pending liabilities.

The campaign

Fully aware of the connection between popularity and spending and amid an electoral campaign, Hugo Chávez's Government boosted public expenses, thus undermining relevant financial indicators.

Official data reveals that the Venezuelan oil basket averages USD 105 per barrel. However, the country's international reserves and deposits in US dollars are falling, public debt is increasing sharply, state-run oil company Pdvsa is demanding additional financial aid from the Central Bank of Venezuela (BCV), and the Foreign Exchange Administration Commission (Cadivi) finds itself unable to provide enough US dollars to citizens and companies.

This situation comes as a result of the government decision to increase public spending during the first eight months. Only central government spending rose 23% in said period compared to 2011. This represents a dramatic leap that demands more resources in addition to those obtained from oil revenues and taxes.

Determined to spend more, the Government ordered the BCV to transfer USD 3.5 billion from the country's international reserves to the National Development Fund (Fonden).

Additionally, in keeping with governmental decisions, state-run oil firm Pdvsa reduced the amount of petrodollars it transferred to the BCV to feed international reserves. Consequently, reserves have recorded a steady decline of 17% so far this year.

Such decline has dried liquid reserves, which are the US dollars in cash that the BCV sells, through the Foreign Exchange Administration Commission (Cadivi), to companies to pay imports at the official exchange rate.

Entrepreneurs have warned that the country may be hit further by shortages if imports are not increased.

In addition to hitting international reserves, the Government has depleted Pdvsa's cash flow. Today the oil company relies on resources from the BCV, which has to print new bills to meet the oil holding's needs.

BCV data shows that the financial institution has provided Pdvsa with USD 4.3 billion so far this year. Thus, Pdvsa's debt to the BCV amounts to USD 26.5 overall.

Translated by Jhean Cabrera