Venezuela is headed for economic adjustments despite oil boom
While income doubled in five years, poverty dropped only 4.1 points in the same period
Despite the six-year oil boom, Hugo Chávez's performance in the social aspect is quite poor with respect to his first term in office. Key indicators have clearly dropped. In fact, when the reelected president commences his new term (2013-2019) on January 10, he will be leading a country that is on its way to implement some adjustments, including devaluation and a cut in expenditure.
Hugo Chávez performance may be analyzed from two different perspectives. On the one hand, according to information disclosed by the Central Bank of Venezuela (BCV), during his first period in office (1999-2006) the Venezuelan president received some USD 248.9 billion in oil revenues and loans. On the other hand, in his second term in office (2007-2012) the revenues of Chávez's administration doubled to USD 501 billion thanks to high oil prices in international markets.
Notwithstanding, the Government that has been awash in money should not be very proud. Data compiled by the National Statistics Institute (INE) from 1999-2006 reveals that poverty dropped 13 points, slipping from 43.9% to 30.6%; and from 2007-2011 (latest information available) it decreased just 4.1 points (26.5%).
Indeed, during Chávez's first term in office, the average rate of households without basic utilities dropped from 15.7% to 8.7%. However, in his second term, said average jumped to 9.7%.
Further, economic growth has been sluggish. A report based on official data and produced by analysts from think tank Barclays shows that average growth during the two presidential terms accounted for 2.9% only.
Moreover, while annual inflation stood at 19.3% from 1999-2006, it leaped to 26.7% in Hugo Chávez's second presidential term (2007-2012).
The future has changed
The way authorities have managed oil wealth has led to weak public accounts. Everything suggests that there will be no other choice but to take hard steps.
Government expenditure over the last six years has surpassed vast oil revenues and tax collection. Consequently, the government has relied on an accelerated increase in public debt, which will amount to 51.6% of GDP by the end of 2012, therefore more than doubling the figure recorded in 2006.
Although this ratio is still manageable, the fast pace of indebtedness is unsustainable. Everything suggests that in the first year of his new government, Hugo Chávez will have no other choice but to cut expenditure and implement devaluation to bridge the gap in public accounts, estimated by different sources at more than 11% of GDP.
Both reduction of public expenditure and the impact of more expensive imports on an economy highly dependent on imports will hit consumption, and therefore growth.
Thus, Barclays estimates economic growth in 2013 at 0.3%. Similarly, Bank of America has hinted that imbalances are so significant that the Executive Office has already started to trim down public spending.
Bank of America has outlined that growth will drop significantly as a result of the post-election fiscal contraction. Moreover, it has asserted that upon cuts in expenditure, economic growth in the last quarter of 2012 will stand at 2.8% as against the 5.2% reported in the third quarter.
A set of economic adjustments, including devaluation and public spending cuts, will not be a surprised.
After rampant disbursement of funds during the 2006 electoral campaign that led to imbalanced public accounts, the Government curbed expenditure in 2007. Meanwhile, continuous devaluations have raised the price of the US dollar from VEB 0.5 in 1998 to VEB 4.30 per US dollar today.
Exacerbated rent-seeking model
In addition to weak fiscal accounts and the basic instincts of an oil-rich country, Hugo Chávez's Government is trying to replace the private sector. Indeed, such move has had a dramatic impact on the reduction of poverty and overall economic performance.
Booming oil prices in 2007-2012 allowed the Government to adopt classic mechanisms, such as overvaluation, which encourages imports and restrains industrial growth; accelerated indebtedness, as high oil prices help lower the country risk and obtain more loans; continued subsidies on gasoline price, which prevents state-run oil company Pdvsa from meeting costs; skyrocketing public spending and a sharp increase in the government payroll.
Consequently, as expected, Venezuela's imports have skyrocketed; oil exports have dropped; public debt has jumped, and private investments have fallen sharply amid a massive wave of expropriations and regulations.
Consequently, Venezuela's dependence on oil has become extremely heavy. Although the average annual oil price is USD 103 per barrel, some adjustments will be necessary.
In Escaping the Resource Curse, Columbia University Professor Jeffrey Sachs, well known for his research on the negative aspects of oil-rich economies, explains some ways to avoid the imbalances brought about by oil booms.
He advises, for instance, using a large portion of oil revenues in public investments to boost agriculture and industries, as well as in seaports and highways.
He also suggests adopting mechanisms to control oil revenue volatility, and promoting transparency by disseminating information on the use of resources and future revenue projections.
However, for the last six years Venezuela has been moving against the grain of these recommendations.
Translated by Jhean Cabrera
President Nicolás Maduro is not only the heir to the throne, but also to an economic crisis which demanded urgent measures to rectify the course. The crisis showed up in two aspects: a 50% inflation estimate, and shortage of staples ranging between 70% and 98%. These issues might hit the President's poor popularity; considering his feeble electoral victory of 1% over his challenger.