BY WALTER T. MOLANO
Por Ahora (“For Now”) is the new government slogan pasted across much of Caracas. This was the qualifier used by President Chavez to acknowledge the referendum’s rejection of his constitutional reforms. However, it could be better suited to describe the economic growth that Venezuela is currently enjoying. A change in external conditions could put the country in a precarious position that could make the boom a fleeting memory.
The Venezuelan economy is roaring. GDP grew 8.4 percent y/y in 2007, despite a sharp decline in oil production. Oil output fell 5.3 percent y/y in 2007, with production dropping 143,000 barrels per day (bpd) to 2.4 million bpd. Low levels of investment are taking its toll.
Fortunately, soaring oil prices compensated for the reduction in output, flooding the Venezuelan economy with liquidity. As a result, banks expanded credit sharply in 2007—lending funds at negative real interest rates. As a result, Venezuela experienced an unprecedented consumer boom—with private consumption surging 18.7 percent y/y. Consumer credit spiked 69 percent y/y in 2007, resulting in record sales for automobiles and durable goods.
The consumption boom also drove inflation higher, with the CPI reaching 22 percent. As a result, Caracas is now the most expensive city in Latin America—with prices for basic goods and servicing outstripping London and Moscow. To make matters worse, a combination of bottle necks, price controls and high levels of demand produced shortages in essential products, such as milk, meat, sugar and coffee. A stride down the supermarket aisle reveals long stretches of empty shelves that should have been stocked with basic staples.
The consumer boom is also creating problems for the external accounts. Imports jumped 33 percent y/y in 2007, with exports increasing only 8 percent y/y. As a result, the current account surplus fell to $21.6 billion. Heavy lending by President Chavez to Bolivarian allies led to $22 billion in capital account outflows, producing a small decline in international reserves.
NO FORMAL ACCOUNTING
One of the problems with the Venezuelan economy is that the government is accumulating enormous level of assets abroad. However, in contrast to Sovereign Wealth Funds or other external savings programs, there is no formal accounting for these assets. Private economists estimate that the government could have as much $52 billion in external financial assets, not including the $30 billion in PDVSA-owned assets. These assets could provide a large cushion to soften any major decline in oil prices and/or output. However, no one really knows the location, amount or even quality of the assets/loans.
This means that Venezuela remains very vulnerable to external conditions. The maelstrom in the international capital markets and the looming U.S. recession paints a bleak picture for the future of oil prices. Unfortunately, the level of Venezuelan demand will need to adjust quickly if oil prices decline. Likewise, the Venezuelan government may have to take other measures, such as reducing expenditures, cutting subsidies and raising gasoline prices from the current level of 3.3 cents per liter. All of this bodes poorly for President Chavez, who is trying to pump up support for his constitutional reforms. Therefore, the Venezuelan economy may look good “Por Ahora,” but a change in external conditions may cast a dark pall over the oil-fueled economy.
Walter Molano is head of research at BCP Securities.