Venezuela - International University of Japan...Venezuela December 2 0 02 he EcT onomsi t...

Country Report December 2002

Venezuela

December 2002

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Venezuela at a glance: 2003-04

OVERVIEW

The political environment will remain highly unstable and the military may beforced to assume a central role in mediating the deepening conflict. It looksincreasingly likely that one of the opposition’s tactics to secure the earlyremoval of the president, Hugo Chávez, whose elected term is scheduled torun until 2007, will succeed. Unless his enemies are more successful indiscrediting Mr Chávez than the Economist Intelligence Unit believes will bethe case, he would become a destabilising force in opposition if he were to beousted. Owing to the opposition’s problems, it is possible that Mr Chávez couldbe ousted and still win new national elections, although his mandate wouldbe weak. Mr Chávez’s loss of control of major state institutions will inhibitgovernability if he manages to cling on to power. Resort to heterodox measuresto tackle the fiscal imbalance in 2002 will complicate fiscal management in2003-04. After a sharp contraction of GDP in 2002, the rebound in 2003-04 willbe weak owing to depressed non-oil activity. Despite firm oil prices, theexchange rate will come under pressure owing to political uncertainties andunorthodox policies.

Key changes from last month

Political outlook• The Ministry of the Interior’s intervention of the Caracas Metropolitan

Police in November and the opposition’s launch of a nationwide strike onDecember 2nd reflect the escalation of hostilities between the governmentand the opposition.

Economic policy outlook• A large domestic debt swap operation carried out in November has eased

the government’s cash-flow position in 2003. However, the partial currencyguarantees included in the swap have set a worrying precedent.

Economic forecast• The decline in real GDP decelerated in the third quarter, taking the

contraction for the first nine months to 6.4%. However, strike action will setback production in December, resulting in a contraction of 6.4% for thefull year.

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Venezuela 1

Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002

Contents

3 Summary

4 Political structure

5 Economic structure

5 Annual indicators

6 Quarterly indicators

7 Outlook for 2003-04

7 Political outlook

9 Economic policy outlook

10 Economic forecast

12 The political scene

19 Economic policy

24 The domestic economy

26 Oil and gas

28 Mining and industry

29 Foreign trade and payments

List of tables

10 International assumptions summary

12 Forecast summary

20 Operations of consolidated public sector

20 Central government finances

23 Domestic bond swap, November 2002

25 Gross domestic product growth

26 Consumer price inflation

29 Trade balance

30 Balance of payments

31 Foreign reserves

List of figures

12 Gross domestic product

12 Bolívar real exchange rate

22 Venezuelan export basket

25 Real GDP

26 Consumer and producer prices, 2002

Venezuela 3


Summary December 2002

The political environment will remain highly unstable and the military may be

forced to assume a central role in mediating the deepening conflict. It looks

increasingly likely that one of the opposition’s tactics to secure the early removal

of the president, Hugo Chávez, who was elected to serve until 2007, will

succeed. However, unless the opposition is more successful in discrediting

Mr Chávez than the Economist Intelligence Unit believes will be the case, he is

likely to become a destabilising force in opposition if ousted and prevented from

standing in elections. If Mr Chávez manages to cling on to power, he will be

much weakened for the remainder of his term by the loss of control of major

state institutions. Resort to heterodox measures to tackle the fiscal imbalance in

2002 will complicate fiscal management in 2003-04. After a sharp contraction of

GDP in 2002, the rebound in 2003-04 will be weak owing to depressed non-oil

activity. Despite firm oil prices, the exchange rate will come under pressure

owing to political uncertainties and unorthodox policies.

The opposition’s campaign to force Mr Chávez’s resignation has become focused

on a proposed consultative referendum which could be held in early February.

As the government insists that the results will have no bearing on Mr Chávez’s

tenure, the military will probably have to mediate. The escalation of hostilities

between the government and the opposition prompted the interior ministry to

take control of Caracas Metropolitan Police. A rebellion by a group of senior

officers has exacerbated fractures in the military. Divisions within the ruling

MVR have deepened and Mr Chávez’s popular support has declined sharply,

although this has not translated into an increase in support for the opposition.

The deterioration of the central government’s finances in the third quarter

showed that the first-half improvement had been achieved through

unsustainable cuts in spending. The 2003 budget draft has been criticised for its

optimistic growth assumptions. A large domestic debt swap operation has eased

the government’s cash-flow position in 2003 but the partial currency guarantees

included have set a worrying precedent. The Central Bank Law was modified to

accelerate the transfer of foreign-exchange profits to the Treasury. A tightening of

monetary policy in the third quarter helped to stabilise the exchange rate.

The decline in real GDP decelerated to 5.5% year on year in the third quarter,

taking the contraction for the first nine months to 6.4%. Oil activity rebounded

from its collapse in the second quarter, but other areas of the economy

continued to decline. Inflation has continued to rise despite depressed demand.

Rising exports and falling imports took the trade surplus to a record US$5.2bn in

July-September. The increase in the current-account surplus was outweighed by

the deterioration in the capital account, and reserves fell by US$333m.

Editors: Justine Thody (editor); Ondine Smulders (consulting editor)

Editorial closing date: December 4th 2002

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

Next report: Full schedule on www.eiu.com/schedule

Outlook for 2003-04

The political scene

Economic policy

Foreign trade and payments

The domestic economy

4 Venezuela


Political structure

The Bolivarian Republic of Venezuela

Federal republic comprising 72 federal dependencies, 23 states, two federal territories and

one federal district

The president is elected for a renewable six-year term and appoints a Council of

Ministers; Hugo Chávez began a fresh six-year term following elections in July 2000 to

relegitimise public posts under the 1999 constitution

165-member unicameral National Assembly, headed by the president, which replaced the

bicameral Congress abolished by the new constitution adopted in December 1999

Supreme Court at the apex of the court system; appoints judges and magistrates in

consultation with civil society groups.

July 2000 (presidential, legislative and state government); December 2000 (municipal

authorities); next elections due in 2005 (legislative) and 2006 (presidential). A revocatory

referendum is possible in August 2003, half-way through Mr Chávez’s term. A non-

binding consultative referendum may occur before then, in February 2003.

Government: Movimiento Quinta República (MVR), a faction of Movimiento al

Socialismo (MAS) and Patria Para Todos (PPT).

Opposition parties: Acción Democrática (AD); the Comité de Organización Política

Electoral Independiente (COPEI); Movimiento al Socialismo (MAS); Primero Justicia (PJ);

La Causa Radical (LCR); Convergencia Nacional (CN)

President Hugo Chávez Frías

Vice-president José Vicente Rangel

Office of the presidency Brigadier-General Carlos Eduardo

Martínez

Communications and information Nora Uribe

Defence Colonel Luis Enrique Prieto Silva

Development & Social economy Nelson Merentes

Education, culture & sport Aristóbulo Istúriz

Energy & mines Rafael Ramírez

Environment & natural resources Ana Lisa Osorio

Finance Tobías Nóbrega Suárez

Foreign affairs Roy Chaderton Matos

Health & social development María Lourdes Urbaneja

Higher education Héctor Navarro

Infrastructure (transport, communications

& urban development) General Eliécer Hurtado Soucre

Interior & justice Diosdado Cabello

Labour María Cristina Iglesias

Planning & development Felipe Pérez Martí

Production & trade Ramón Rosales

Science & technology Nelson Merentes

Diego Luís Castellanos

Form of government

The executive

National legislature

Legal system

National elections

Main political organisations

Central Bank governor

Official name

Key ministers

Venezuela 5


Economic structure

Annual indicators

1998 a 1999 a 2000a 2001 a 2002 b

GDP at market prices (Bs bn) 52.5 62.6 82.5 90.4 109.4

GDP (US$ bn) 95.8 103.3 121.3 124.9 92.1

Real GDP growth (%) 0.2 -6.1 3.2 2.7 -6.4

Consumer price inflation (av; %) 35.8 23.6 16.2 12.5 22.5 a

Population (m) 22.8 23.2 23.5 23.9 24.3

Exports of goods fob (US$ m) 17,576 20,819 32,998 26,726 26,543

Imports of goods fob (US$ m) -15,105 -13,213 -15,491 -17,391 -12,805

Current-account balance (US$ m) -3,253.0 3,559.0 13,030.0 3,931.0 7,988.8

Foreign-exchange reserves excl gold (US$ m) 11,920.0 12,277.0 13,089.0 9,239.0 11,898.4 a

Total external debt (US$ bn) 38.2 38.2 38.2 37.4 b 35.4

Debt-service ratio, paid (%) 28.2 23.7 15.7 22.9 b 21.9

Exchange rate (av) Bs:US$ 547.6 605.7 680.0 723.7 1,187.6 a

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2001 % of total Components of gross domestic product 2001 % of total

Petroleum 26.4 Private consumption 68.2

Manufacturing 14.3 Government consumption 8.0

Construction 5.6 Investment incl change in stocks 18.7

Agriculture 4.9 Exports of goods & services 22.7

Services and others 48.9 Imports of goods & services 17.6

Principal exports fob 2001 US$ m Principal imports fob 2001 US$ m

Oil 21,710 Oil 1,878

Non oil 5,346 Non oil 15,404

Main destination of exports 2000 % of total Main origins of imports 2000 % of total

US 60.0 US 35.8

Brazil 5.5 Colombia 6.8

Colombia 3.5 Brazil 4.5

Italy 3.5 Italy 3.9

Spain 3.4 Germany 3.1

6 Venezuela


Quarterly indicators

2000 2001 2002

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Central government finance (Bs bn)

Ordinary revenue 4,910.4 3,650.0 4,868.6 4,221.6 3,695.7 3,099.8 5,405.4 n/a

Ordinary expenditure 6,531.6 4,184.6 5,219.3 6,082.7 5,909.9 3,708.8 5,075.9 n/a

Balance -1,621.2 -534.6 -350.7 -1,861.1 -2,214.2 -609.0 329.5 n/a

Net extra-ordinary revenue 1,737.6 416.4 247.3 1,640.7 2,024.3 597.2 1,485.8 n/a

Output

GDP at constant 1984 market prices (Bs m) 152,679 144,356 150,592 151,448 154,092 138,737 135,934 143,083

GDP at constant 1984 market prices (% change, year

on year) 5.7 4.0 3.1 3.3 0.9 -3.9 -9.7 -5.5

Employment & Prices

Consumer prices (1997=100) 204.1 209.1 215.7 223.3 229.5 239.5 256.4 278.7

Consumer prices (% change, year on year) 14.2 12.6 12.4 12.7 12.4 14.6 18.9 24.8

Producer prices (1997=100) 158.4 160.1 162.8 165.8 168.4 179.0 198.7 179.0

Producer prices (% change, year on year) 10.7 8.8 7.5 7.1 6.3 11.8 22.1 36.7

Venezuelan crude basket (US$/barrel; spot) 27.58 22.09 22.50 21.25 15.77 17.46 22.81 24.39

Venezuelan crude basket (% change, year on year) 26.3 -12.7 -10.3 -23.6 -42.8 -21.0 1.4 14.8

Financial indicators

Exchange rate Bs:US$ (av) 695.37 702.60 713.57 731.92 747.04 864.33 1,012.92 1,391.04

Exchange rate Bs:US$ (end-period) 699.75 707.75 718.25 743.00 757.50 891.75 1,316.75 1,475.00

Deposit rate (av; %) 15.85 13.25 12.65 16.55 19.59 31.07 33.96 24.27

Lending rate (av; %) 25.95 18.04 19.52 25.87 26.38 43.05 39.90 30.80

Money market rate (av; %) 8.70 5.93 12.57 19.87 14.93 42.63 26.70 19.07

M1 (end-period; Bs bn) 8,016 7,456 7,405 7,427 9,072 7,252 7,599 8,466

M1 (% change, year on year) 31.5 32.1 28.3 23.0 13.2 -2.7 2.6 14.0

M2 (end-period; Bs bn) 16,285 15,278 14,834 14,906 16,976 14,707 15,289 16,269

M2 (% change, year on year) 27.8 22.0 14.8 11.2 4.2 -3.7 3.1 9.1

BVC Caracas stockmarket index (end-period; Dec

1993=1,000) 6,825 7,357 7,560 7,043 6,570 6,875 7,452 7,410

BVC Caracas stockmarket index (% change, year on year) 26.0 33.9 7.5 2.6 -3.7 -6.6 -1.4 5.2

Sectoral trends

Crude oil production (m barrels/day) 2.99 3.00 2.80 2.77 2.67 2.27 2.35 2.52

Crude oil production (% change, year on year) 8.7 7.1 -2.4 -5.1 -10.7 -24.3 -16.1 -9.0

Aluminium production ('000 tonnes) 144.4 141.7 143.9 137.2 147.8 149.7 151.1 151.8

Aluminium production (% change, year on year) 2.2 1.7 0.6 -4.7 2.4 5.6 5.0 10.6

Iron ore production (‘000 tonnes) 4,312 5,062 5,269 5,124 4,535 4,838 4,849 4,988

Iron ore production (% change, year on year) -13.8 -7.4 -6.9 11.1 5.2 -4.4 -8.0 -2.7

Foreign trade & payments (US$ ma)

Exports fobb 8,571 7,299 7,112 7,014 5,301 5,479 6,473 8,238

Petroleum & products 8,076 6,029 5,816 5,699 4,030 4,353 5,144 6,897

Imports fobb -3,990 -3,964 -4,443 -4,696 -4,288 -3,438 -3,278 -3,032

Merchandise trade balanceb 4,581 3,335 2,669 2,318 1,013 2,041 3,195 5,206

Servicesb -816 -782 -793 -924 -835 -711 -697 -651

Income balanceb -311 -81 -193 -497 -681 -845 -825 -593

Net transfer paymentsb -71 -97 -168 -180 -172 -281 -85 -145

Current-account balanceb 3,383 2,375 1,515 717 -675 204 1,588 3,817

Reserves excl gold (end-period) 13,089 12,045 10,460 8,959 9,239 6,156 7,642 8,154

a Balance of payments basis. b Source, Banco Central de Venezuela.

Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Banco Central de Venezuela, Indicadores Econúmicos; VenEconomy, VenEconomy Monthly.

Venezuela 7


Outlook for 2003-04

Political outlook

It is increasingly likely that the military will be forced to assume a central role in

mediating Venezuela’s deepening political conflict. The opposition will press

ahead with its campaign to secure the early removal of the president, Hugo

Chávez, whose term is scheduled to run until 2007. In the coming weeks this

campaign will centred on convening a consultative referendum on whether the

president should stand down. Although the results of a consultative referendum

would be non-binding, the opposition hopes that a large vote against Mr Chávez

would force him to resign and call fresh national elections. Despite a ruling by

the national electoral authorities that this referendum could take place on

February 2nd, government supporters have insisted that the constitution permits

only one means of removing Mr Chávez before the end of his term�a

revocatory referendum which cannot be held until August 2003. As the

government and the opposition are unlikely to come to an agreement on the

validity of the consultative referendum, the military could be forced to act as

final arbiter.

A decisive struggle over the next few weeks will therefore be played out

between different currents of the armed forces. If the pro-Chávez ‘Bolivarians’

prevail, the military will support Mr Chávez remaining in power at least until a

revocatory referendum can be held in August 2003. If the Bolivarians are

overruled, Mr Chávez would be forced to step down if a consultative

referendum yielded a decisive vote against him. The parameters of what

constitutes a ‘decisive’ vote would therefore need to be clarified, not least given

the likelihood that the referendum will be marked by high levels of abstention.

Although Mr Chávez’s support among the poor has declined sharply, this has

not resulted in a rise in support for the opposition. Mr Chávez’s series of

electoral successes in 1999-2000 were themselves tainted by high rates of

abstention. However, the escalation of hostilities since then will make

abstention a particularly critical issue in any referendum aimed at securing

Mr Chávez’s removal. Consequently, a consultative referendum would have to

deliver an overwhelming result in favour of Mr Chávez’s resignation for the risk

of widespread violence to be contained if he is forced to step down.

In the event that Mr Chávez is forced to step down and national elections are

called, the outlook will still be extremely unstable. Despite his problems,

Mr Chávez remains the country’s most popular politician. Over 20% of the

electorate claim they would vote for him in the event of fresh presidential

elections. The opposition, by contrast, is fundamentally divided. If Mr Chávez is

displaced, a struggle for power between disparate opposition factions would

ensue. The only factor uniting the member groups of the heterogeneous

Coordinadora Democrática (CD) umbrella is antipathy to Mr Chávez. The

chances that the oppostion will unite behind a single presidential candidate thus

appear extremely slim. The CD lacks both a unified leadership and a ‘transition

strategy’. Finally, unless the opposition is more successful in discrediting

Mr Chávez than the Economist Intelligence Unit believes will be the case, he

would become a destabilising force in opposition if he were to be ousted and

Domestic politics

8 Venezuela


barred from standing in new national elections. Whether an ousted Mr Chávez

and his followers would choose to act within or outside the institutional

framework is a source of speculation and concern. For Mr Chávez to be

discredited, irrefutable evidence would need to be advanced of his involvement

either in corruption or acts of state-sponsored violence. Such an outcome

appears to be highly unlikely given the politicisation and discredit of the

judiciary.

Should Mr Chávez survive a consultative referendum, deadlock will persist

through to the August 2003 revocatory referendum. For Mr Chávez to be

defeated in a revocatory referendum, a greater number of voters would need to

reject him than voted in his favour in 2000, when he was elected with the

support of 34% of the electorate (or 60% of the vote, owing to record numbers of

abstentions). Should Mr Chávez cling onto power beyond 2003, the effectiveness

of the executive will be undermined owing to defections from the ruling

coalition and Mr Chávez’s loss of influence over key state institutions. Policy

stalemate will therefore persist and political alienation is likely to deepen. The

military’s vital role in mediating the conflict underscores the collapse of

credibility of Venezuela’s democratic institutions. Future governments will face a

colossal task in attempting to reverse the decay and promote greater political

stability over the long term.

A modus vivendi between the government and the US has developed since April,

when bilateral relations suffered a sharp deterioration owing to speculation that

the US was involved in the failed coup attempt. Such speculation was fuelled by

Washington’s failure to condemn Mr Chávez’s removal. Since April the

government has made a conscious effort to improve links with the US,

promoting two of the administration’s few English speakers to the posts of

foreign minister and ambassador to Washington. Bilateral relations will remain

strained, however, as conservative elements within the Republican Party will

maintain pressure on the Bush administration to adopt a more overtly critical

line towards Mr Chávez. On the Venezuelan side, Mr Chávez’s deep-seated

opposition to US policies on international trade and the “war on terrorism” is

unlikely to diminish. Mr Chávez’s influence within Latin America will remain

limited because of his reputation as a maverick, although the election of Luis

Inácio ‘Lula’ da Silva in Brazil in October and of Lucio Gutiérrez in Ecuador in

November will go some way towards reducing his isolation. Relations between

Mr Chávez and his Colombian counterpart, Alvaro Uribe, have been cordial

since Mr Uribe took office in August. However, underlying bilateral tensions

over security and trade are unlikely to be resolved in the near term.

If an anti-Chávez administration comes to power within the forecast period,

foreign policy would undergo a rapid, wholesale reversal. Relations with Cuba

would be drastically scaled back, co-operation would be given on the Free Trade

Area of the Americas (FTAA) initiative and Caracas would fall closer into line

with US policy on antiterrorism. Yet such an about-turn would prove highly

contentious domestically if, as seems likely, Mr Chávez retains popular

credibility. This would militate against the emergence of a market-friendly

government with broad popular support. The relationship with OPEC would

also undergo major revisions, and although we would expect Venezuela to stay

International relations

Venezuela 9


within the cartel, which it co-founded, an anti-Chávez administration would be

expected to maximise oil production.

Economic policy outlook

Although oil prices are forecast to stay firm in 2003, the public-sector finances

will remain fragile. This is because the lack of access to both domestic and

external financing is likely to remain acute. Furthermore, with political tensions

set to stay high, the government may find it increasingly difficult to contain

spending. In 2002, depressed demand contained the inflationary pass-through

of the maxi-depreciation of the bolívar but this still leaves a backlog of price

pressures to be worked out when demand picks up. The longstanding policy

dilemma inherent in attempting to promote growth while controlling inflation

within a lax fiscal environment will therefore sharpen. Erratic policymaking will

continue to be a hazard as the authorities attempt to respond to these conflicting

tensions. The introduction of protectionist import measures in September

despite the large devaluation exemplifies the policy incoherence to which these

tensions have led in recent months. The change to the Central Bank Law to

permit the Treasury to access foreign-exchange profits twice yearly is another

example of the resort to heterodox policies. Furthermore, with political tensions

set to remain high, the government may find it increasingly difficult to contain

spending. Against this backdrop, there will be continued pressure to eke out

revenues from every available source. Doubts will continue as to whether OPEC

oil production quotas will be strictly adhered to. The picture will worsen in

2004 as oil prices decline.

The deterioration of the central government finances during the third quarter

underscored the unsustainable nature of the adjustment in the first half, which

was achieved mainly by draconian cuts to capital spending and transfers to the

regions. A major domestic debt swap carried out in November will ease the

government’s liquidity position by reducing the bunching of public debt

amortisations. Nevertheless, the Treasury’s gross financing requirement (fiscal

deficit plus amortisations) is still officially projected to be close to 5% of GDP in

2003, even on the basis of optimistic growth assumptions. The swap also sets a

worrying precedent in that it marks the first time that the government has

offered a currency guarantee for domestic debt. If this becomes a habit, the

government’s domestic debt dynamics risk becoming unsustainable, particularly

given pressures on the exchange rate. The Ministry of Finance will probably

attempt another swap in 2003, perhaps even involving external bonds. A

currency guarantee would provide a strong incentive to holders of domestic

debt, but it is doubtful that any swap proposal involving external debt would

meet with a favourable reception from bondholders. The government’s revenue

base will weaken in 2003-04 as oil prices trend downwards while spending

commitments rise owing to worsening social conditions. There will be

growing pressures for wage adjustments, employment-creating public invest-

ment and programmes to alleviate poverty.

The monetary authorities’ recent success in containing pressure on the currency

and domestic prices will probably encourage the Banco Central de Venezuela

Fiscal policy

Policy trends

Monetary policy

10 Venezuela


(the Central Bank) to stick with the tighter monetary posture which it adopted

during the third quarter. Assuring that sufficient liquidity exists for banks to

purchase government debt has become a less critical issue following the recent

swap operation which rolled over around a quarter of 2003 maturities. The

other factor which favours the maintenance of relatively tight policy stance is

the realisation that until political conditions improve, monetary easing will be

largely ineffective in stimulating economic activity.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004

Real GDP growth

World 2.0 2.7 3.3 3.9

OECD 0.7 1.6 1.9 2.6

EU 1.4 0.9 1.6 2.2

Exchange rates

¥:US$ 121.5 125.5 128.8 130.5

US$:€ 0.896 0.948 1.070 1.053

SDR:US$ 0.785 0.771 0.737 0.744

Financial indicators

€ 3-month interbank rate 4.26 3.33 2.75 3.38

US$ 3-month Libor 3.78 1.85 1.44 3.25

Commodity prices

Oil (Brent; US$/b) 24.5 24.9 24.5 19.1

Gold (US$/troy oz) 271.1 308.0 307.5 290.0

Food, feedstuffs & beverages (% change

in US$ terms) -1.9 15.4 14.5 0.2

Industrial raw materials (% change in US$ terms) -9.8 0.2 6.1 9.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We have cut our forecast for world GDP and trade growth in 2003, reflecting

weakness in OECD economies in the second half of 2002, limiting forward

momentum. Strong average annual GDP growth in the OECD is now unlikely to

resume before 2004. A major risk to our global forecast is the prospect of a US

war with Iraq, particularly its potential impact on oil prices. Our central forecast

assumes that any conflict would be brief, resulting in Saddam Hussein losing

power, and that consequently the spike in oil prices would be short-lived.

However, several risks exist to this benign forecast, including the risk that the

war may become prolonged, that its scope will widen or that it will detonate a

sustained campaign of global terrorism. If a prolonged war has a negative effect

on US consumer confidence, the correction of long-standing imbalances such as

negative private savings rates and a wide current-account deficit would be

precipitated, delivering a major shock to global demand. Once the Iraq situation

is resolved, oil-market fundamentals will reassert themselves. The high prices of

the past few years have stimulated massive investment in additional oil capacity,

particularly in non-OPEC countries. From 2004 prices will tend to fall as the

exploitation of spare capacity pushes the market towards oversupply. Our

forecast assumes that stronger global growth will absorb part of the increase in

production, preventing a sharper decline in prices.

International assumptions

Venezuela 11


After shrinking by an estimated 6.4% in 2002, real GDP will remain weak in

2003 as political conflict and difficult credit conditions will continue to depress

economic activity. Venezuelan industry has rarely been able to respond robustly

to changes in relative prices. This time, the potential for a positive expenditure-

switching impact of the more competitive bolívar, in the shape of export

expansion and import substitution, will be even weaker than in the past, owing

to years of underinvestment in many sectors. In addition to the problem of

underinvestment, another factor inhibiting companies’ ability to respond is the

high volatility exhibited by the real exchange rate, making it difficult for

companies to gauge the structure of relative prices and thereby to plan ahead.

Although there is little prospect of a meaningful recovery in 2003-04, there

should still be a modest increase in real GDP. Foreign investors are continuing to

demonstrate a willingness to invest in capital intensive sectors such as

hydrocarbons (especially downstream and natural gas) and mining. Such growth

will be narrowly based and will not significantly increase employment. Should

the confrontation between the government and the opposition degenerate into

more widespread violence, the outlook for GDP growth would be worse than

we currently expect. There is little upside risk to this forecast: in the event that

Mr Chávez’s term were to end prematurely, political dynamics would not be

conducive to the election of a market-friendly government with broad-based

support.

The slight easing of inflation in October and November largely reflects the

depressed state of demand. Underlying inflationary pressures remain strong,

particularly in view of the monetisation of the fiscal deficit. A domestic debt

swap has lifted some of the immediate pressure on the fiscal front, but the

financing problem remains severe. The widening disparity between consumer

and wholesale price increases in 2002 provides an indication of repressed

inflation. With demand forecast to remain weak, a renewed sharp depreciation

of the exchange rate would not necessarily feed directly through to higher

prices. It would, however, compound the inflationary backlog which will exert

upward pressure on prices for several years.

With the political environment set to remain extremely tense, the currency will

continue to be vulnerable. The moderate appreciation of the exchange rate in

October and November was underpinned by growth in foreign reserves. In

2003-04, both reserves and the bolívar will remain sensitive to political tensions

and to fluctuations in oil prices. If oil prices spike owing to tensions in the

Middle East, the bolívar could stage a marked recovery after the maxi-

depreciation of 2002. Equally, the currency would quickly come under pressure

again were world oil prices to drop sharply. At US$12.4bn at the end of

November, reserve levels are relatively comfortable, although this level could

quickly diminish should the Central Bank be forced to intervene in defence of

the currency. Below the ‘psychological barrier’ of US$10bn, the risk of exchange

controls increases sharply.

As the devaluation of the bolívar will keep import spending depressed and oil

prices are forecast to stay firm, the current-account surplus will widen again

External sector

Inflation

Exchange rates

Economic growth

12 Venezuela


in 2002-03. Thereafter, these trends will reverse as oil earnings drop owing to

declining prices and limited growth of production, and as imports return to

positive, albeit modest, growth. Oil will be the principal determinant of external

performance in the medium term. Oil export earnings, which dwarf all other

items in the trade account, will keep the trade balance in substantial surplus. In

late 2002 monetary easing in the US restrained the expansion of the income

deficit, but this trend will start to be reversed from 2004, boosting interest costs

on the external debt.

Forecast summary(% unless otherwise indicated)

2001a 2002b 2003c 2004c

Real GDP growth 2.7 -6.4 2.6 3.7

Gross agricultural production growth 2.6 2.0 2.5 2.5

Unemployment rate (av) 13.3 18.1 17.8 17.6

Consumer price inflation (av) 12.5 22.5a 29.9 26.8

Consumer price inflation (year-end) 12.3 32.5a 26.8 26.8

Short-term interbank rate 22.5 38.0 45.0 42.0

Central government balance (% of GDP) -4.2 -1.5 -4.0 -3.7

Exports of goods fob (US$ bn) 26.7 26.6 27.2 23.3

Imports of goods fob (US$ bn) 17.4 12.8 13.4 14.0

Current-account balance (US$ bn) 3.9 8.0 8.4 3.5

Current-account balance (% of GDP) 3.1 8.7 9.5 3.8

External debt (year-end; US$ bn) 37.4b 35.4 35.7 36.4

Exchange rate Bs:US$ (year-end) 763.0 1,431.4a 1,751.0 2,071.1

Exchange rate Bs:¥100 (av) 595.5 946.3 1,254.6 1,444.2

Exchange rate Bs:€ (year-end) 672.4 1,474.4 1,864.8 2,164.3

Exchange rate Bs:SDR (year-end) 958.9 1,921.0 2,365.2 2,776.8

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

Political tension in Venezuela has continued to deepen in recent months as the

conflict between the president, Hugo Chávez, and opposition groups has

intensified. A heterogeneous array of opposition organisations, loosely grouped

under the Coordinadora Democrática umbrella (CD, Democratic Co-ordinator)

OAS-brokered talks seek to

arrest spiralling tensions

Venezuela 13


has mounted several campaigns to force Mr Chávez to stand down. In recent

weeks, opposition groups have drawn encouragement both from opinion

surveys suggesting a steep reduction in Mr Chávez’s popular support and from

evidence of mounting divisions within the ruling Movimiento Quinta República

(MVR) party. The intensification of the standoff between the government and its

opponents has fuelled mounting political violence despite mediation efforts by

the Organisation of American States (OAS). During November there were a

number of explosions in Caracas, with the headquarters of several CD groups,

private media organisations and the archbishop of Caracas targeted in a

bombing campaign which the opposition claims was instigated by the

government. Two people were also killed in street violence on November 4th

during the presentation by the opposition of a petition for a consultative

referendum at the headquarters of the national electoral authorities. This

violence has fuelled political hostilities and compounded a pervasive sense of

lawlessness.

Mr Chávez invited the OAS to act as a ‘dialogue facilitator’ in September, joining

similar efforts spearheaded by the Carter Centre and the UN Development

Programme (UNDP). The secretary-general of the OAS, César Gaviria, chairs the

negotiating committee. A Declaration of Principles signed in October as a

prelude to the OAS-sponsored talks committed both government and opposition

to act within the bounds of the 1999 constitution and to calm tensions by

scaling down street mobilisations. The government also pledged to tackle the

disarmament of the Círculos Bolivarianos (CBs, Bolivarian Circles), neighbour-

hood groups of pro-Chávez activists which the opposition allege have been

armed by the MVR. Yet the depth of mutual suspicion means that it is difficult to

envisage any substantive progress being made towards a negotiated settlement

of the political conflict. Irreconcilable differences exist even over the most

appropriate route to resolve the impasse. Although the government maintains

that a revocatory referendum on the president’s term is the only democratic and

constitutional mechanism that could be used to remove him, since October the

CD has been focusing its energies on a consultative referendum, with a view to

forcing early elections.

A consultative referendum is permissible under Article 65 of the constitution. It

can be called by the executive, the legislature or the “sovereign people” on issues

of “national transcendence”. For the populace to call a referendum, the

signatures of 10% of registered voters (approximately 1.2m people) are required.

The consultative referendum proposal was initially championed by two minor

opposition parties, Unión and Primero Justicia. Unión is the party of Francisco

Arias Cárdenas, a former army colleague of Mr Chávez who stood against him

in the 2000 presidential elections. Primero Justicia, dubbed the “yuppie party”

by its detractors, is led by Julio Borges, a 35-year-old lawyer who was elected to

the National Assembly in 2000. At first, other opposition organisations distanced

themselves from the consultative referendum proposal, which was deemed a

slow and uncertain route to secure Mr Chávez’s removal. Not only does this

route require intensive activist work in order to collect the requisite number of

signatures, but this kind of referendum is also non-binding. However, since

embarking on the OAS-brokered negotiations, the CD has united behind the

Anti-Chávez campaign shifts to

consultative referendum

14 Venezuela


consultative referendum option, which is now seen to offer three strategic

advantages. First, although not binding, the opposition is hoping that a large vote

against Mr Chávez would seriously undermine his legitimacy and credibility,

forcing him to step down and concede new elections. Second, the consultative

referendum can be held much earlier than the revocatory referendum, with

February 2nd 2003 suggested by the Consejo Nacional Electoral, (CNE, National

Electoral Council) as a viable option. The third strategic benefit of the

consultative referendum is that it is in keeping with the spirit of the Declaration

of Principles, in that it is permissible within the constitution.

The government has refused to accept the legitimacy of a consultative

referendum on the executive’s tenure. Accordingly, it insists that a negative vote

against Mr Chávez would not result in him stepping down. During his weekly

radio programme ‘Aló Presidente’ at the end of November, Mr Chávez argued

that, given the referendum’s non-binding character, even if 90% of the electorate

voted against him, he would not step down. The government insists that the

revocatory referendum permissible in August 2003 is the only legitimate means

of securing an early end to Mr Chávez’s elected term. The CNE has, however,

ruled that the consultative referendum is legitimate and can proceed, and its

decision has been broadly upheld by Tribunal Supremo de Justicia (TSJ, the

supreme court) rulings. These decisions underscore the extent to which

Mr Chávez’s project has unravelled and highlight his government’s loss of

control over key state institutions, which until mid-2002 had been regarded as

supine tools of the executive. The opposition argues that the rulings demonstrate

that state institutions have regained greater autonomy. However, it would be

more accurate to say that of late the opposition has itself become more

successful at colonising state institutions. This is particularly evident with regard

to the CNE, within which the CD now has control of five of the nine seats. To

increase pressure on the executive to consent to�and abide by the results of�a

consultative referendum, the CD launched a general strike on December 2nd, the

fourth such strike in 12 months.

The campaign for a consultative referendum is the latest in a series of campaigns

mounted by the CD in its efforts to secure Mr Chávez’s removal. In the months

following the failed coup in April, the primary strategy was to bring about the

president’s impeachment. The opposition’s enthusiasm for this route was lifted

by a TSJ ruling in August which demonstrated the judiciary’s increasingly

independent stance in relation to the executive (September 2002, pages 13-14).

Several proposed grounds were envisaged, ranging from corruption in election

campaign financing to economic mismanagement and human rights violations

in connection with the deaths of protestors in the anti-government

demonstrations which preceded the April coup. However, the impeachment

suits have been repeatedly blocked in the courts, on the basis that their

petitioners were unable to demonstrate, as legally required, that they were

personally affected.

The opposition’s other two principal strategies to force Mr Chávez to stand

down have been a campaign of civil demonstrations and the mobilisation of a

‘no’ vote with a view to a revocatory referendum in August 2003. In contrast to

the consultative referendum, a revocatory referendum is constitutionally

Altamira rebellion underscores

fragility of constitutional order

Venezuela 15


binding. Extremist groups within the CD, while publicly supporting the

referendum campaigns, have continued to press covertly for a military

intervention against the government. Concerns over a possible coup d’état have

risen since October, when a group of senior officers broadcast a televised call to

fellow servicemen to rebel against Mr Chávez. The rebel officers were led by an

army general, Enrique Medina Gómez, who played a central role in the April

military intervention; General Medina was one of the four senior officers who

was acquitted of charges of military rebellion by the TSJ in August, triggering

vehement protests from government supporters. In an attempt to win the

support of the ‘institutionalist’ majority within the military, the rebel officers

invoked the so-called ‘Article 350 argument’, under which constitutional

provision rebellion is permitted against “arbitrary and illegitimate government”.

The rebel officers were allowed free passage to Altamira, a wealthy district of

Caracas, where they and their civilian supporters have since continued their

occupation of the Plaza Francia. In November, one of the rebel officers, General

Pedro Sánchez Bolívar, broke with the rebellion. He claimed that the rebels were

stockpiling weapons and planning civil violence in order to provoke a military

intervention, although this was refuted by General Medina. There was no

response from the military hierarchy to the call for insurrection from the rebel

officers.

The popularity of the Article 35o argument means that a clause which was

inserted into the 1999 constitution at the behest of Mr Chávez’s supporters has

now become a central tool in the campaign to oust his government. Article 350’s

inclusion in the 1999 constitution was widely interpreted as an ex post facto

justification of Mr Chávez’s own attempt to overthrow the government of the

then president, Carlos Andrés Pérez, in a failed coup in 1992.

In the event that Mr Chávez is forcibly removed or voluntarily steps down, a

general election would exacerbate rather than ease political tensions. A power

struggle between members of the opposition is inevitable. Internal CD rivalries

remain acute, with member groups suspicious of each others’ long term

intentions. The only factor keeping the CD loosely together is opposition to

Mr Chávez. Besides lacking coherent leadership, the CD also lacks grassroots

popular support, particularly outside Caracas. The CD would therefore struggle

to agree on a unity candidate should elections be called. The main contenders

for the presidency from within the CD include Enrique Mendoza of the Comité

de Organización Política Electoral Independiente (COPEI) party, Julio Borges of

Primero Justicia, Henrique Salas Romer of Proyecto Venezuela and Antonio

Ledezma of Alianza Bravo Pueblo. None of these figures stand to attract more

than 15% of vote. Should Mr Chávez be prepared (and permitted) to participate

in new presidential elections�which will depend on the manner in which he is

removed from office�he would be likely to win if the opposition fails to unite

behind a single candidate.

Although Mr Chávez seems likely to be the strongest contender in the event of a

new general election, the latest opinion polls suggest that his support levels have

undergone a sharp decline. When Mr Chávez took office in 1999 he enjoyed

confidence ratings of 80%, an unprecedented high that allowed for a long

honeymoon period. Surveys by Datos and Datanálisis in October and

Elections seem unlikely to

resolve political tensions

16 Venezuela


November indicate that 67% of Venezuelans have little or no confidence in the

administration. Of those surveyed, 77% believed that the government had failed

to deliver on its pre-election promises, specifically to tackle corruption (in the

view of 71%), reduce personal insecurity (73%) and the cost of living (70%).

Mr Chávez has also experienced a haemorrhage of support from the poorest

sectors of Venezuelan society, which had previously been strongly loyal to the

government. Within the D and E social groupings, which represent these sectors

and constitute 80% of the population, 68% and 63% respectively have no

confidence in the administration. These polls need to be treated with a certain

amount of caution�sharp fluctuations have been common in the past�but the

message of growing frustration with lack of progress on tackling crime and

creating employment is nonetheless clear. One of the most striking factors to

have been confirmed by the poll results is that the opposition has failed to

capitalise on the decline in support for Mr Chávez. The CD continues to be

perceived as an aloof, middle-class organisation. The decline in support for

Mr Chavez has thus resulted in a wider sense of political disillusionment on the

part of the populace.

The political conflict, which forces the administration to focus primarily on

countermobilisation to the detriment of policy, leaves little room for Mr Chávez

to implement policies to help his government recuperate the support of the

poorest. The administration’s loss of its majority in the legislature is another

hindrance to policy effectiveness. The balance of forces in the chamber is highly

unstable, but the latest estimate suggests that the government may be able to

count on the support of 85 seats (51%), down from 103 (62%) in August 2000.

This slight majority is precarious, not least because of imperfect attendance and

party indiscipline, as well as the behaviour of several major swing votes. Four

years into his term, Mr Chávez has found it increasingly difficult to apportion

blame for economic recession and policy immobility to the legacy of previous

governments. Laying the blame on the disruptive activities of the opposition has

also become increasingly unconvincing. Instead, by drawing attention to the

administration’s impotence, this strategy has probably contributed to the fall in

support for Mr Chávez’s government.

The latest attempt to recover the political initiative was a cabinet re-organisation

announced in November. The presidential secretariat was abolished and

replaced by a new Office of the Presidency, headed by Brigadier General Carlos

Eduardo Martínez and subdivided into the Presidential Affairs Office and

Internal Administration Control Office. A new ministry, the Ministry for the

Development of Social Economy, has also been created. It is to be headed by

Nelson Merentes, the former finance minister. The reorganisation has been

presented as a streamlining initiative, with a view to stepping up delivery of

policies to reduce unemployment and generate economic growth.

With the political conflict likely to intensify in the closing weeks of 2002, the

military will again become a decisive political player. The high command’s

reluctance to become directly involved in mediating the conflict has been

repeatedly emphasised in recent months by official statements in which the

armed forces have reiterated their loyalty to constitutional procedures.

Cabinet re-organisation in

attempt to recover initiative

Military moves centre-stage

Venezuela 17


Nevertheless, the impasse over the consultative referendum will force the

military to act as final arbiter on the issue. The general strike launched by the

opposition on December 2nd highlighted the OAS’s inability to broker a

consensus on the matter. It is unclear how the military will act. ‘Bolivarian’

sections personally loyal to Mr Chávez may prevail, in which case the military

would insist that a revocatory referendum in August 2003 is the only legitimate

step for the opposition to take. However, should a consultative referendum be

prohibited, a wave of protests could be expected. If the military hierarchy were

to pronounce the consultative referendum legitimate, we expect that Mr Chávez

would allow the process to go ahead rather than risk a confrontation with the

armed forces. A solid defeat for Mr Chávez in the event of a consultative

referendum would also probably require heavy military involvement in order to

contain violence.

In a highly controversial move, in November the Ministry of Interior and Justice

decreed the takeover of the Policia Metropolitana (PM, Metropolitan Police). The

8,000-strong PM falls under the authority of the mayor of the metropolitan

authority. The current mayor, Alfredo Pena, is a prominent figure within the CD

and a staunch critic of Mr Chávez. The government justified the takeover as an

attempt to restore law and order in the capital, following a series of violent

attacks on pro-government supporters, which, Mr Chávez claims, were

perpetrated by the PM under orders from Mr Pena. The PM has long had a

reputation for brutality towards residents of the slums which surround the

capital. Over the past decade, it has also frequently been implicated in

corruption and arms-trafficking scandals. Mr Pena has sought to raise the PM’s

prestige by mounting a major public relations campaign. However, government

supporters contend that Mr Pena has transformed the PM into his own private

army. By ordering the armed forces and national guard to disarm anti-

government elements within the PM and by imposing a new executive board,

Mr Chávez has exposed his government to accusations of militarising the capital

in violation of the constitution. The intervention of the PM also triggered

speculation that the government was planning to impose a state of emergency.

The opposition claims that the government may be considering taking such a

step�under which all constitutional rights would be suspended�as a stratagem

to stymie the proposed consultative referendum and to create the conditions for

the arrest of opposition leaders. Imposing a state of emergency would only be

possible with the support of the military, and would deepen rather than resolve

the political conflict.

Mr Chávez’s authority has become increasingly circumscribed by contending

forces within the ruling MVR. Moderate factions favour negotiations with the

opposition while more radical elements are committed to pushing ahead with

the government’s agenda of ‘revolutionary’ change. Should Mr Chávez side with

the hardline sections, dubbed the Talibanistas, moderates will continue to defect

from the MVR, both in the legislature and at the grass-roots level. A decision to

side with the hardliners would also exacerbate Mr Chávez’s international

isolation, while further polarising the domestic political situation. The

Talibanistas are themselves internally divided, largely by conflicts of personality.

Against this backdrop, the pro-government Patria Para Todos (PPT, Homeland for

Intervention of Caracas police

highlights depth of hostilities

Divisions deepen within

the MVR

18 Venezuela


All) party will continue to play a critical balancing role. Figures from the PPT

also occupy a number of key cabinet and ambassadorial positions, in addition

to the presidency of Petróleos de Venezuela (PDVSA, the state-owned oil

company). The PPT would be alienated if Mr Chávez were to adopt a more

hardline position. Indeed, the PPT may yet capitalise on Mr Chávez’s decline

and emerge as a leading left-of-centre option for a highly disaffected and

frustrated electorate.

The handover to the Colombian military in November of eight members of the

Fuerzas Armadas Revolucionarias de Colombia (FARC, Colombia’s largest

guerrilla group) captured in Venezuela has been interpreted as a sign of

improved political co-operation between the two countries. Mr Chávez has long

been regarded with suspicion by key groups in the US and Colombia for his

perceived sympathies to the FARC. He has been accused of permitting the FARC

to launch terrorist attacks in Colombia from within Venezuela. The handover of

the eight FARC captives may be a small step towards dispelling these suspicions.

Relations between Mr Chávez’s government and the administration of the

Colombian president, Alvaro Uribe, have been cordial since Mr Uribe took office

in August.

Nevertheless, underlying tensions over security and trade issues remain

significant. Incursions by left- and right-wing Colombian paramilitary groups

have exacerbated instability and political violence on the border between

Venezuelan and Colombian. The UN refugee agency, the UNHCR, has voiced

concerns over the growing number of refugees forced into Venezuela as a result

of Colombia’s escalating conflict. Friction over trade has been stoked by

Venezuela’s introduction of protectionist import measures in September

(September 2002, page 24), in violation of bilateral free-trade agreements.

Progress has nonetheless been made on several bilateral projects. In a meeting

held in November, Mr Chávez and Mr Uribe discussed plans for a bridge

between the northern Santander Department in Colombia and Zulia state in

Venezuela. This would reduce travelling times and increase the speed of

Colombian coal exports. Joint ventures between Ecopetrol, the Colombian state-

owned oil company, and its Venezuelan counterpart, PDVSA, were also

discussed. It was announced that construction of a 500-km, US$50m-70m gas

pipeline to export gas from Colombia to Venezuela will start in January. PDVSA

will undertake construction, while Ecopetrol, in partnership with Chevron-

Texaco, is to provide about 200m cu ft/day of gas from their platforms in the

Caribbean in 2005-12.

Relations between Venezuela and the US have remained strained. The US

government failed to condemn the attempt to remove Mr Chávez from power

in April 2002, leading to suspicions that the US covertly abetted the abortive

coup. The government’s suspicion of US activity in Venezuela has been

compounded by Washington’s financial assistance to Venezuelan opposition

groups, channelled through the National Endowment for Democracy and the

Office for Transition Initiatives (September 2002, pages 16-17). Since September,

the US administration has assumed an increasingly critical position towards

the Venezuelan opposition and has sought to make clear, via a series of official

US-Venezuelan relations

remain strained

Practical co-operation with

Colombia but tensions persist

Venezuela 19


communiqués from its embassy in Caracas, that it would not support any

extra-constitutional attempts to bring down Mr Chávez’s government. At the

same time, the US embassy has sought to emphasise the importance of

negotiations between government and opposition to resolve the political

crisis.

However, the re-emergence of a more ‘hawkish’ line on Venezuela remains a

possibility. Some of the more outlandish claims to have been made recently

appear to enjoy credibility among influential quarters of the Republican Party.

The Hudson Institute’s claim, put forward in August by one of the institute’s

spokesmen, Constantine Menges, that Venezuela formed part of a new “Axis of

Evil” along with Brazil and Cuba, was reiterated in October, just days before the

second-round Brazilian elections, by Henry Hyde, the chair of the House

International Relations Committee. Mr Hyde called on the US president, George

W Bush, to take assertive action to defend the “southern flank” of the US from

this perceived terrorist threat. Mr Chávez has also come under strong attack from

Otto Reich, until recently the US’s undersecretary of state for Latin America and

a former ambassador to Venezuela. Although Mr Reich was removed from his

post as undersecretary in late November after the Senate failed to confirm his

appointment, this situation could be reversed when the new Republican-

dominated Senate takes over in January. Either way, Mr Reich is likely to remain

an influential figure in US policy towards Latin America. Mutual political

suspicions will not, however, interfere with practical co-operation. Mr Chávez

has emphasised his government’s commitment to maintaining oil supplies to

the US in the event of war against Iraq.

Economic policy

The latest available figures for the consolidated public sector financial accounts

are for the first half of 2002. They confirm that the authorities were reasonably

successful in containing the fiscal imbalance during the opening months of the

year. During this period, public-sector revenues largely matched expenditure,

resulting in a virtually balanced budget. This was a big improvement on the

second half of 2001, when spending far outstripped income, resulting in a large

fiscal deficit for the whole year. In relation to GDP, revenues were down

significantly in the first half of 2002 compared with the first six months of 2001.

This was primarily the consequence of a decline in the operating surplus of

Petróleos de Venezuela (PDVSA, the state oil company) owing to lower world

prices. Expenditure was held down to practically the same extent primarily

through cuts to non-interest current outlays.

There was an acute lack of financing to cover maturing debt obligations. The

repayment of domestic debt was equivalent to 1.5% of GDP in net terms, and net

payments to external creditors caused a further drain equal to 0.4% of GDP. Both

had to be financed by drawing down deposits built up earlier in the Fondo de

Inversión para la Estabilización Macroeconómica (FIEM, Macroeconomic

Stabilisation Investment Fund).

Budget deficit widens

20 Venezuela


Operations of consolidated public sector(% of GDP)

Year Year Jan-Jun Jan-Jun

2000 2001 2001 2002

Total income 31.8 26.9 13.1 11.5

Current income 31.8 26.8 13.1 11.5

Tax revenues 9.1 9.4 4.5 4.5

Operating surplus of PDVSA 18.2 12.3 6.7 4.6

Operating surplus non-oil

state cost 1.4 0.5 0.5 0.6

Other 3.2 4.6 1.4 1.8

Capital income 0.0 0.1 0.0 0.0

Total expenditure 27.5 31.4 12.8 11.6

Current spending 19.1 20.6 8.7 7.8

Primary 16.1 17.3 7.1 5.6

Interest payments 3.0 3.3 1.6 2.2

Capital spending 7.3 9.4 3.5 3.1

Concessions (net) & off-budget 1.1 1.4 0.6 0.6

Primary balance 7.3 -1.2 1.9 2.2

Financial balance 4.3 -4.5 0.3 0.0

Financing

Internal 1.3 5.3 1.3 -1.5

External -5.6 -0.8 -1.7 1.6

FIEM -3.6 -1.2 -1.5 1.9

Source: Ministerio de Finanzas.

Information on the financial position of the central government is produced

on a more timely basis. Preliminary figures had shown that that there was a

small budget surplus in the first half, although these were subsequently

revised to a position of virtual balance. Provisional numbers for the third

quarter indicate that there was a marked worsening in the central government

fiscal balance in July-September. Consequently, the outturn for the first nine

months was little better than the same period of 2001, which ended with a

sizeable deficit. The deterioration in the third quarter was due to a sharp

upturn in government outlays, indicating that the earlier improvement had

been achieved through a postponement of spending rather than a

restructuring of government finances.

Central government finances(% of GDP)

Year Jan-Sep

2000 2001 2001 2002

Total income 19.6 20.4 15.5 14.7

Current income 19.6 20.4 15.5 14.7

Tax revenues 12.5 11.2 8.4 7.8

Oil related 4.1 2.5 2.1 0.9

Non-oil related 8.4 8.7 6.3 6.9

Non-tax revenues 7.1 9.2 7.1 6.9

Oil related 5.7 6.8 5.4 6.1

Non-oil related 1.4 2.4 1.7 0.8

Capital income 0.0 0.0 0.0 0.0

Venezuela 21


Central government finances(% of GDP)

Year Jan-Sep

2000 2001 2001 2002

Total expenditure 21.2 24.7 17.3 16.2

Current spending 17.1 19.0 12.7 12.6

Wages & salaries 3.6 4.3 2.9 2.8

Purchase of goods & services 0.7 1.2 0.8 1.2

Interest payments 2.5 2.9 2.0 3.5

Transfers & other 10.3 10.6 6.9 5.0

Capital spending 3.2 4.3 2.7 2.3

Concessions (net) & off-budget 1.0 1.4 1.1 1.3

Primary balance 0.9 -1.4 0.2 2.0

Financial balance -1.6 -4.3 -1.8 -1.5

Financing

Internal 3.9 3.9 2.3 1.2

External -2.3 0.3 -0.5 0.3

FIEM -1.8 0.1 -0.6 0.8


As part of a number of desperate efforts to cover public financing needs, in

September the authorities decided to accelerate the payment of dividends by the

Banco Central de Venezuela (the Central Bank) to the national Treasury. This

required a modification of the Central Bank Law, which was approved by

Congress in mid-October. The change establishes that from now on the

payments will be made on a semi-annual rather than an annual basis. In

addition, as a transitory measure, it was established that the first semester of

2002 should have a duration of nine months and the second semester three

months. This was to allow for the immediate payment of accumulated year-to-

date profits, amounting to around Bs1,135bn (US$1bn). Most of these revenues

derived from the foreign-exchange gains made by the Central Bank buying

dollars at a certain rate then selling them at a higher one as the bolívar

depreciated. This represents a monetisation of the deficit, as the Central Bank

must print bolívars in order to effect the transfer. This helps explain why

inflation has continued to rise steadily despite the fact that the economy is deep

in recession.

The draft 2003 budget was presented to Congress in mid-October. The oil sector

assumptions seem to be reasonably conservative. The average oil price is put at

US$18/barrel, considerably below the US$22/b achieved in the first eleven

months of 2002. Oil production is projected to rise to 3.14m barrels/day from

2.73m b/d in 2002, with exports up to 2.63m b/d from 2.44m b/d in 2002. The

latter compares with the country’s present OPEC quota of 2.5m b/d, which most

probably is being exceeded by up to 300,000 b/d. Consequently, the estimate of

oil revenues in the budget would appear to be feasible. However, the projections

for non-oil revenues appear to be founded on unrealistic assumptions. Most

importantly, real GDP growth is assumed to be 3.7%. Oil-sector growth is

projected at 2% and non-oil-sector growth at a stellar 8.7%, well above our

forecast. An increase in the elasticity of non-oil taxes to GDP would seem to be

factored into the calculations, as non-oil revenues are projected to rise from 10%

Central Bank hands over

profits

2003 budget considered

unrealistic

22 Venezuela


of GDP in 2002 to 11.9% in 2003. Total revenues are put at 21.2% of GDP, up from

20.1% a year earlier.

On the expenditure side, an increase from 21.8% of GDP to 23.2% of GDP is

envisaged, although this may not fully reflect the government’s liabilities: the

Economic Advisory Office of the National Assembly (OAEF) has suggested that

large pending payments from 2002 are not properly accounted for in the budget.

Other assumptions contained in the draft budget include inflation of 20% in

2003 and an average exchange rate of Bs1,602:US$1.

The official projections assume that the central government deficit will widen to

2% of GDP, from 1.6% in 2002. The most recent modification of the

macroeconomic stabilisation fund (FIEM) legislation in October will provide

some flexibility on the financing side. The suspension of contributions to the

FIEM has been extended until the end of 2003 (previously end-2002). In

addition, until June 2003, 20% of FIEM transfers to states and municipalities can

be used to cover current rather than investment spending. However, even taking

into account the successful debt swap subsequently carried out in November,

gross financing needs for 2003 are still officially estimated at 4.9% of GDP.

As the government has struggled to cover its financing needs in recent years

because of limited access to external markets, its domestic debt burden has risen

markedly. The problem is not so much the size of the domestic debt. Although

this almost tripled as a proportion of GDP between 1998 and 2001, the starting

point was so low that even at the end of 2001 the ratio was still a relatively

comfortable 11.5% of GDP. But there was a severe bunching of scheduled

amortisation payments in 2002-04. Of the debt outstanding at the end of

June 2002, 28% fell due for repayment in the second half of the year, a further

28% in 2003 and 24% in 2004. As the political and economic situation has

deteriorated, the authorities have found it ever more difficult to roll over these

obligations. This has been at the heart of the fiscal problem of late. After

attempts to seek fresh financing in the international markets failed in September

and October, the government became reliant on drawing down funds from the

FIEM as a stop-gap measure. The urgency of the change to the Central Bank Law

to access the Central Bank’s foreign-exchange profits was due to the growing

Domestic debt swap alleviates

financing burden

Venezuela 23


cash-flow crisis. The domestic debt swap was conceived as a means to achieve

more lasting relief by stretching out payments on domestic obligations.

The exchange was voluntary in nature, although given that most of the domestic

debt is held by local financial institutions, the government would have been in a

position to exert some pressure. The operation was largely successful. Two

auctions were held towards the end of November, the first covering bonds

maturing in 2004 and the first half of 2005, and the second those maturing in

December 2002 and throughout 2003. The total amount of eligible debt was

around Bs8,350bn (around US$6.3bn), and the government aimed at swapping

25-30% of this for longer-dated instruments. Each auction was divided into two

stages. In the first, bonds tendered were exchanged for new ‘ordinary’ bonds

with the maturity extended by one year and a premium paid over the previous

yield. In the second stage, those participants that exchanged bonds in the first

stage could then swap part of their new holdings for ‘extraordinary’ bonds

maturing in 2006-07. The attraction of these instruments for investors is that

they have a partial exchange-rate guarantee, under which holders will be

compensated if the depreciation of the bolívar exceeds the difference between

the yield on the bonds and a dollar reference rate of Libor plus 1%.

The result of the operation was that Bs2,630bn (US$1.97bn) of bids were

accepted, representing 31.5% of eligible debt. New bonds totalling Bs2,793bn were

issued, of which Bs1,813bn were ordinary bonds and Bs980bn extraordinary

bonds. The average maturity of the new instruments is three years, compared

with 1.3 years for the old ones. The net reduction in amortisation payments will

be Bs92bn (US$69m) for December 2002, Bs1,013bn (US$760m) for 2003 and

Bs594bn (US$445m) for 2004. The decrease represents 26% of originally

scheduled payments for 2003 and 19% for 2004. This will go some way towards

easing payments capacity over the next two years, although it by no means

addresses the causes of Venezuela’s fiscal difficulties. The reduction in financing

needs in 2003 is equivalent to around 0.7% of GDP, lowering official projections

of the gross borrowing requirement from 5.6% of GDP in the budget to 4.9%. The

cost to the state of the bond swap is an increase of three to five percentage

points (to 36-38% per year) in the annual yield on the new ordinary bonds

compared with the bonds retired, and the partial exchange-rate guarantee on the

extraordinary bonds, the cost of which will depend on developments in the

foreign-exchange market.

Domestic bond swap, Nov 2002(Bs bn by maturity)

2002 2003 2004 2005 2006 2007

Bonds withdrawn 92.9 1,013.4 1,184.4 343.5 – –

New bonds – – 590.7 892.4 755.8 554.5

Ordinary bonds – – 590.7 892.4 330.4 –

Extraordinary bonds – – – – 425.4 554.5

Reduction in amortisation

payments 92.9 1,013.4 593.7 – – –


Evidently concerned about the collapse of the currency, in late September the

Central Bank tightened monetary policy substantially. This came after several

Monetary policy tightening

stabilises exchange rate

24 Venezuela


months of vacillating policy, which had contributed to the weakness of the

bolívar. The exchange rate reached a low of Bs1,492:US$1 on September 11th, at

which point the price of the dollar was up by 97% from the end of 2001

(implying a nominal depreciation of 52%). The rapid depreciation in the currency

clearly threatened to cause a surge in inflation. The Central bank responded by

lifting its discount rate from 37% to 40%, its rate on short-term repos (an

instrument to absorb liquidity from the system) from 20.5-25.5% to 22-27% and its

rate on short-term reverse repos (an instrument to inject liquidity) from 30-31% to

33-34%. Somewhat surprisingly, this proved effective in stabilising the exchange

rate. Higher oil revenues deriving from stronger prices and increased export

volumes also played a role, although as oil prices were volatile during this

period, by themselves they do not fully explain the stabilisation of the bolívar.

Global oil prices peaked in late September and then underwent a sharp

downward correction before recovering partially in the latter part of November.

The Venezuelan average export price peaked at US$27.11/b in the week ending

October 4th and then fell to US$21.83/b in the week to November 15th before

moving back up to US$23.5/b in the last week of November. Although the fall in

prices would not have had an immediate impact on cash revenues owing to the

customary lag before payments are received, it might have been expected to

have fuelled pressures in the foreign-exchange market. Despite this, the exchange

rate appreciated to Bs1,427:US$1 at the end of October and Bs1,322:US$1 at the

end of November, compared with a peak of Bs1,491:US$1 in mid-September.

The domestic economy

Real GDP fell by 5.5% year on year in the third quarter of 2002. This was an

improvement on the second quarter, when output plunged by 9.7% (restated

from a preliminary estimate of 9.9%). However, for the first nine months of 2002

as a whole, real GDP was still down 6.4% year on year. Some encouragement

can be derived from signs of a rebound on a quarter-on-quarter basis. The

official seasonally adjusted numbers are not yet available for the July-September

period. Nonetheless, assuming the same kind of seasonal pattern in activity as

in previous years, it may be estimated that real GDP rose by just over 5% in

quarter-on-quarter terms. This is not as impressive as it sounds as it must be set

against the steep decrease of the first half. In fact, the seasonally adjusted series

shows that output was 9.5% lower in the April-June period than in the final

quarter of 2001. The quarter-on-quarter recovery in July-September was almost

entirely due to the rebound of the oil sector, which had been hard hit in the

second quarter by the partial strike in the industry in the run up to the April

coup. The recovery of oil activity in the third quarter was officially attributed to

an increase in production by the private companies operating in the Orinoco

heavy-oil belt as well has a higher through-put at the country’s refineries.

However, it also seems likely that PDVSA raised its production of crude;

company officials have tacitly admitted that violation of Venezuela’s OPEC

quota is now substantial.

Decline in output decelerates

Venezuela 25


Gross domestic product growth(% real change, year on year)

2001 2002

Year 2 Qtr 3 Qtr Jan-Sep

Oil -0.9 -15.9 -1.3 -8.2

Non-oil 4.0 -6.6 -5.5 -4.8

Mining 1.1 0.3 -0.2 -0.6

Manufacturing 2.9 -10.9 -5.4 -7.2

Construction 13.5 -27.6 -24.0 -20.5

Commerce 4.2 -11.8 -12.0 -10.0

Communications 13.0 4.7 2.7 4.5

Financial services 1.1 -9.2 -11.0 -9.0

Public services 1.4 -1.2 -1.8 -1.3

GDP 2.8 -9.7 -5.5 -6.4

Source: Banco Central de Venezuela.

Activity in the non-oil sector has remained deeply depressed. The drop in

aggregate output for the non-oil economy in the third quarter was almost as

sharp as in the second quarter. Some sectors�including transport,

communications and financial services�put in a worse performance than in the

second quarter. Construction remained deep in depression, although the 24%

year-on-year slide in activity represented a slowdown in the rate of contraction

compared to the second quarter. There were some muted signs of improvement

in manufacturing, in that output fell by substantially less than in the April-June

period. This was probably linked to the improvement in competitiveness

brought about by the real depreciation of the bolívar. All the same,

manufacturing GDP was still 5.4% lower year on year. The weaker currency is

advantageous for producers of tradeables, but is far from sufficient to stimulate

non-oil activity. The forces depressing activity, in particular the lack of

confidence related to political uncertainty, are more powerful.

Annual consumer price inflation has continued to rise steadily, reaching 30.7% in

November compared with only 12.3% at the beginning of the year. In September,

the index jumped by 4.5%, the biggest monthly increase of the year. This was the

result of a combination of factors, including the sharp depreciation of the

Non-oil activity remains in

doldrums

Inflation eases off

26 Venezuela


currency over previous months and the one-off impact of the hike in the rate of

value-added tax (VAT) from 14.5% to 16%. Adjustments to some utility tariffs,

such as telephones, were also made in September. On top of this there was the

seasonal hike in school fees that happens at the start of the academic year.

However, the monthly rate slowed down in both October and November,

helped by the stabilisation of the bolívar and the relative stability of the prices

of basic services. Given the depressed state of the economy, monthly inflation

of 1-2% is still substantial. Moreover, underlying inflationary pressures remain

strong, as indicated by the widening divergence between the wholesale and

consumer price indexes. The wholesale price index rose by 51.4% in the 12

months to October. Inflationary financing such as the monetisation of Central

Bank exchange rate profits will compound pressure on prices.

Consumer price inflation(% change; Caracas metropolitan area price index)

2001 2002

Monthly Cumulative Year on year Monthly Cumulative Year on year

Jan 0.9 0.9 12.6 0.9 0.9 12.3

Feb 0.5 1.4 12.7 1.8 2.7 13.7

Mar 0.8 2.2 12.5 4.2 7.0 17.6

Apr 1.1 3.3 12.1 2.1 9.3 18.7

May 1.5 4.9 12.6 1.1 10.5 18.3

Jun 1.0 5.9 12.5 2.0 12.8 19.6

Jul 1.5 7.5 13.0 3.6 16.9 22.0

Aug 0.6 8.2 12.9 2.4 19.7 24.2

Sep 1.2 9.5 12.3 4.5 25.0 28.2

Oct 0.9 10.5 12.3 2.2 27.8 29.9

Nov 1.0 11.6 12.7 1.6 29.9 30.7

Dec 0.7 12.3 12.3 – – –


Oil and gas

Bidding for three of the five natural gas blocks on offer in the Deltana Platform

closes on December 16th. Block 1 has already been allocated to British Petroleum

(BP). At the start of November, the Ministry of Energy and Mines distributed the

Bidding for Deltana gas project

advances

Venezuela 27


terms and conditions for the rights to explore and develop Blocks 2, 3 and 4.

British Gas and Chevron-Texaco are competing for Block 2, while Statoil and

TotalFinaElf are participating in the tender for Blocks 3 and 4. The winners are

due to be announced on December 20th so that work can get underway in

2003. The Deltana Platform covers some 6,500 sq km and the first stage is

projected to result in the production of 1bn cubic feet of natural gas per day,

with an estimated total investment of US$4bn. The projects will be joint

ventures with PDVSA, whose equity participation will be between 1% and 35%.

The joint-venture partners will be allowed to hold no more than an 80% interest

in each project, with the remaining 20% reserved for minority shareholders.

Figures on the number of exploration rigs in operation suggest that the country’s

future crude oil production potential is in decline. It is reported that that there

were just 37 rigs active in September, down from 65 a year earlier and 121 five

years ago when activity was at its peak following the opening of the sector to

private involvement. The president of PDVSA, Ali Rodríguez, has admitted that

the country is currently producing in excess of its OPEC quota, as had been

widely assumed. He put production at around 3m barrels/day, which, after

excluding some 140,000 b/d of condensates and 60,000 b/d of extra-heavy

crude that does not form part of OPEC quotas, means that production is some

300,000 b/d in excess of the country’s current quota of 2.5m b/d. However, if

exploration activity as gauged by the rig count continues on a downward trend,

the country may soon lose the ability to exceed its quotas.

After being suspended for almost five months following the failed coup against

Mr Chávez in April, crude oil began to be exported to Cuba again in early

September. This followed the reported repayment of around US$29m of the

US$142m arrears that Cuba had accumulated on previous shipments. The sales

are made under preferential terms, with Cuba allowed to defer payments for

25% of the 53,000 b/d of crude it receives. The government has rejected repeated

allegations by the opposition that it is squandering national resources to help

prop up the regime of Fidel Castro in Cuba.

Betapetrol, a locally owned oil distribution company, has submitted a proposal

to the Corporación Venezolana de Guayana (CVG, the Guayana state

development corporation) to construct the country’s first privately owned oil

refinery. The facility would have a capacity of 400,000 b/d and would cost

about US$2bn. It would be located on the Orinoco river in the south-eastern

state of Bolívar and would process extra-heavy crude from the region. The

output of gasoline and other products would be exported mainly to markets

such as Brazil, Colombia and the Caribbean. Betapetrol operates a chain of

petrol stations and is majority owned by Nelson Mezerhane, a Venezuelan

banker. The company’s proposal seeks to take advantage of the 2001

hydrocarbons law, which, although it insists on the state taking a controlling

stake in new oil exploration and production projects, opened the way for greater

private-sector participation in downstream activities such as refining. Under the

new hydrocarbons law, refineries are granted a 40-year lease before the facilities

revert to state ownership. Betapetrol’s proposal envisages that construction of

the new refinery would take place in three stages over nine years. Investment

Rig count down

Shipments to Cuba resumed

First privately owned oil

refinery is proposed

28 Venezuela


costs would be kept down by making use of existing idle installations such as

a dock, oil tanks and pipelines. However, the project would require foreign

financing, which could prove difficult to secure given the current political

climate.

Mining and industry

The Canadian-owned Crystallex International Corporation has been selected by

the CVG to operate the Las Cristinas gold mine in the south-eastern state of

Bolívar. This is the latest instalment in a long-running saga surrounding the

development of the deposits, estimated to rank among the top five undeveloped

gold resources in the world. Originally the CVG formed a partnership with

Canada’s Placer Dome, but this broke down in 1999 when investment was

frozen by Placer Dome on the grounds that low world prices rendered the

project unviable. Placer Dome then sold a controlling stake in the operation to

another Canadian concern, Vancouver-based Vannessa Ventures. This proved to

be highly controversial and the transaction was not recognised by the CVG,

which argued that it violated the terms of the original concession contract. Using

this as justification, the government took control of the mine in mid-2002.

Vannessa bitterly contested this decision and is still awaiting a final ruling on an

appeal it lodged with Tribunal Supremo de Justicia (TSJ, the supreme court). It

has also said that it will seek international arbitration for redress under an

investment protection agreement between Canada and Venezuela. Vannessa

estimates that it has spent around US$170m on exploration and preparatory

work at the site. Vanessa’s problems with the government did not deter several

other foreign companies from showing interest in taking over the concession.

Crystallex was selected because it already has other mining properties in the

country and offered the prospect of the quickest opening of the mine. Detailed

contract negotiations will now take place, with the project calculated to require a

total investment of around US$500m. Construction work will take

approximately 18 months to complete. The mine is forecast to process 40,000

tonnes of ore per day when it comes into production in 2004-05, with proven

and probable reserves put at 11.8m ounces of gold.

The Guayana state development corporation CVG has announced plans to

expand output capacity at the two primary aluminium smelters it controls at

Puerto Ordaz in the Guayana region by more than 400,000 tonnes to above 1m

tonnes a year by the end of the decade. A new production line (number five) at

the Alcasa facility will lift production potential by 200,000 tonnes to 410,000

tonnes per year, while the planned number six line at the Venalum facility will

add as much as 250,000 tonnes per year to existing capacity of 430,000 tonnes.

Investment costs are projected at US$500m and US$650m respectively. It is not

clear how such large amounts will be raised, although CVG president Francisco

Rangel has said that five foreign companies are interested in becoming joint-

venture partners for the Alcasa expansion. Meanwhile, the CVG also plans to

develop a new large bauxite deposit at El Palmar, in addition to the Pijiguaos

mine operated by its Bauxilum affiliate. The company says discussions have

been held with BHP-Billiton to develop the deposits, to build a new aluminium

Canadian company to

reactivate gold project

Ambitious plans for

aluminium sector

Venezuela 29


smelter and to invest in the downstream fabricating industry. Thus far, it seems

that talks are at a very preliminary stage.

Foreign trade and payments

Rising exports combined with falling imports resulted in a sharp year-on-year

increase in the trade surplus in July-September. The US$5.2bn trade surplus

recorded in the third quarter was not only well up on the previous three months

but also substantially greater than during the same quarter of 2001. It pushed

the year-to-date surplus up to US$10.4bn, comfortably exceeding the total for the

whole of 2001. Third-quarter export earnings were 17.5% higher than the year

before, boosted by a 21% year-on-year increase in oil earnings due to stronger

world prices. Non-oil export earnings, on the other hand, rose by only 2% year

on year. In an environment of difficult global market conditions and low

confidence at home, the maxi-depreciation of the bolívar has been insufficient

to boost non-oil exports. The best that can be said is that they are rising

modestly instead of falling as they did in the opening three months of the year.

The fall in value of the bolívar had a bigger impact on imports. With the

depressed state of domestic demand also acting as a dampening factor, imports

contracted even further in the third quarter. They were not just below the levels

of the previous two quarters, but 35.4% down on year-earlier levels.

Trade balance, 2002

(US$ m, unless otherwise indicated)

1 Qtr 2 Qtr 3 Qtr Jan-Sep

% change

year on year

Exports 5,479 6,473 8,238 20,190 -5.8

Oil 4,353 5,144 6,897 16,394 -6.6

Non-oil 1,126 1,329 1,341 3,796 -2.2

Imports 3,438 3,278 3,032 9,748 -25.6

Oil 331 419 280 1,030 -30.3

Non-oil 3,107 2,859 2,752 8,718 -25.0

Balance 2,041 3,195 5,206 10,442 25.5


In addition to the widening in the trade surplus, there was a moderate

narrowing of the services deficit in the third quarter. This resulted from a

reduction in freight and insurance charges (linked to the drop in imports) as well

as smaller tourism outgoings. As the income deficit narrowed slightly from the

huge imbalances recorded in the first and second quarters, the current-account

surplus soared to US$3.8bn in July-September, far exceeding what was seen in

the first two quarters combined. This pushed up the positive balance for the first

nine months to US$5.6bn, substantially larger than the US$3.9bn posted for the

whole of 2001.

The rise in the current-account surplus in the third quarter was outweighed by

the sharp deterioration in the capital and financing account during the same

period. As a result, there was a further loss of international reserves, albeit at a

much more modest rate than had occurred during the first quarter. The

worsening capital account deficit was the result of the same forces that have

Trade surplus soars

Current account surplus covers

capital outflows

30 Venezuela


been at work for some time now: the amortisation of external debt, the virtual

absence of new voluntary lending and, above all, unrelenting capital flight.

Foreign direct investment (FDI), which had held up quite well in 1998-2001, has

slowed to a trickle in 2002. Inward FDI totalled just US$321m in the third quarter

and US$995m in the first nine months, compared with US$2.3bn in the same

period of 2001. One of the main factors behind this decline has been the tailing

off of outlays by foreign-owned oil companies. (The national presentation of

Venezuela’s balance of payments presented below calculates ‘net FDI’ as the

sum of inward and outward flows.)

Balance of payments(US$m, unless otherwise stated)

2001 2002

Jan-Sep 1 Qtr 2 Qtr 3 Qtr Jan-Sep

Current account 4,607 204 1,588 3,817 5,609

Trade 8,322 2,041 3,195 5,206 10,442

Services -2,499 -711 -697 -651 -2,059

Income -771 -845 -825 -593 -2,263

Transfers -445 -281 -85 -145 -511

Capital & financing account -6,088 -3,905 -1,662 -4,150 -9,717

Net direct investment 2,137 124 147 22 293

Net portfolio investment 297 -626 -610 -259 -1,495

Net other investments -4,276 -1,841 -1,361 -2,585 -5,787

Errors and omissions -4,246 -1,562 162 -1,328 -2,728

Change in reserves -1,481 -3,701 -74 -333 -4,108


The sharp deterioration in sentiment towards Venezuela prompted two of the

major US credit rating agencies to cut Venezuela’s foreign-currency ratings

towards the end of September. Citing the deteriorating political situation,

Moody’s cut the country ceiling for foreign-currency bonds and notes to B3 from

B2. At the same time, the country ceiling for foreign-currency bank deposits was

lowered to Caa1 from B3. Moody’s downgrade takes Venezuela’s sovereign rating

to six notches below investment grade and its lowest level since Moody’s started

evaluating Venezuela in 1987 with a Ba3 classification. Shortly after Moody’s

downgrade, Standard and Poor’s lowered its long-term foreign currency issuer

rating from B to B- and the short-term foreign-currency rating from B to C and

confirmed its negative outlook for the ratings. The new rating is the lowest

classification that Standard and Poor’s has ever assigned to Venezuela since it

began rating the country in 1977. In the late 1970s and early 1980s Venezuela was

accorded an AAA rating. Venezuela’s score in the Economist Intelligence Unit’s

Country Risk Service was sharply downgraded in February 2002 to reflect our

revised outlook of the sovereign’s deteriorating creditworthiness in the

aftermath of the devaluation and in view of rising political tensions.

Subsequent to the sovereign downgrades Moody’s, and Standard and Poor’s,

lowered the ratings of some overseas affiliates of the state-owned oil company,

Petróleos de Venezuela (PDVSA), to below investment grade. Standard and

Poor’s reclassified around US$3.8bn of senior unsecured notes of PDVSA Finance

Ltd to BB+ from BBB-. It justified the change by saying that there is a heightened

risk of sovereign interference in the repayment of the notes because of the

Sovereign credit ratings

downgraded to record lows

Venezuela 31


political and economic crisis. Later, at the start of November, Moody’s

downgraded PDV America Inc. to Ba1 from Baa3 (which, similar to Standard and

Poor’s BBB- is the rung just above speculative or ‘junk’ status). PDV America is

the holding company for most of the US refining assets of PDVSA.

After falling persistently during the first nine months of the year, international

reserves�including deposits of the Fondo de Inversión para la Estabilización

Macroeconómica (FIEM, Macroeconomic Stabilisation Investment Fund)�

subsequently recovered somewhat in October and November. From their low

point of US$14.8bn at the end of September, they rose by US$1.1bn (7.1%) during

the next two months. However, this made up only part of the ground lost earlier

in the year and at the end of November reserves were still down US$2.6bn

(14.3%) since the start of the year. All the same, with holdings back up to almost

US$16bn, Venezuela’s reserves cushion has become more comfortable, although

it remains vulnerable to any future decline in world oil prices or a resurgence in

capital outflows provoked by political uncertainty. The partial recovery was

mainly the result of the upswing in oil export prices, which generally feeds

through with a lag of two months or so owing to the standard credit terms

provided to purchasers. At the same time, import demand remained low while

a renewed tightening in monetary policy, coupled with the earlier depreciation

of the exchange rate, may have averted an even higher rate of capital flight.

Foreign reserves(US$m; end-period)

Foreign

reserves FIEMa Total Change

1999 15,164 215 15,379 530

2000 15,883 4,588 20,471 5,092

2001 12,296 6,227 18,523 -1,948

2002

Aug 11,303 3,704 15,007 -246

Sep 11,482 3,344 14,826 -181

Oct 12,189 3,349 15,538 712

Nov 12,529 3,353 15,882 344

a Fondo de Inversión para la Estabilización Macroeconómica (Macroeconomic Stabilisation

Investment Fund) deposits.


The Corporación Andina de Fomento (CAF, Andean Development Corporation)

has approved a new US$200m loan to Venezuela, taking CAF’s total loan

approvals for 2002 to over US$700m. The new credit, which will help finance a

multi-sector public investment programme for 2002-03, has a ten-year maturity

with a two-year grace period. The investment programme covers four main

sectors: transport, education, health and the environment. The approval of the

loan shows that some multilateral financing is still available to the country,

although long-term finance from the private capital market is extremely scarce.

Reserves rebound

CAF approves new loan

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