High Oil Prices Boost Venezuela's Economy, but Growth Isn't Sustainable

| May. 20, 2011 |

Published by Minyanville

The Venezuelan economy has grown 4.5% in the first quarter, compared to the same period last year, following two years of recession. This was significantly higher than the expected figure of 1.7%. The IMF predicted 1.4% annual growth for the next five years.

The positive news is thought to be the result of a simple balancing of statistics following two years of recession, with the first quarter of last year registering a 4.8% decline thanks in part to an electricity crisis. This, coupled with a 10.4% rise in expenditure, has helped private consumption to recover, according to a briefing note sent out by Barclays Capital.

According to central bank president Nelson Merentes, the public sector grew 3.3% while the private sector grew 4.6%. Imports rose 22% during the period.

Despite the 1.8% decline in oil production, Venezuela’s primary money-spinner, revenues from oil exports increased 25.7%, or $4 billion, thanks to high international prices.

Alejandro Grisanti of Barclays Capital believes that it is oil prices that Venezuela has to thank for the news.

“The result suggests the continuity of an unsustainable growth model that depends on increasing oil prices to propel domestic demand,” he says. “In the short run, we expect the government to continue to stimulate the economy by increasing expenditures, which could put the public sector in a more vulnerable position over the long term and may require significant reform after the 2012 presidential election.”

However, the Financial Times was quick to point out that the strongest growth (8% plus) experienced by Venezuela came in 2006 and 2007, when oil prices were around $60 a barrel.

“It seems that oil prices now need to be much higher to support similar levels of growth, thanks to the government’s unorthodox economic policies,” says Benedict Mander. “[These] have failed to stop continued high inflation and left the private sector’s productive apparatus much diminished after ongoing expropriations and nationalisations.”

President Hugo Chávez, as per usual, ignored the more nuanced analyses, keen to celebrate, tweeting: ““Well, steady growth once again started within our economy! Let’s push on everyone! Workers in the vanguard! We shall overcome!”

Financial minister Jorge Giordani added: “Venezuela is turning the page and is in recovery,” Giordani said. “Growth will contribute to President Chavez’s leadership in the 2012 elections.”

News was not all good in Venezuela, however. Inflation was up 1.4% in April from March, which is 22.9% up from April 2010.

“Nothing exemplifies the mismanagement of Venezuela more than the electricity crisis,” says Miguel Octavio writing on his infamous Devil’s Excrement blog. The crisis has been apparent for years and even hit the capital city Caracas recently. Rather than simply blame the lack of investment, Octavio puts pressure on the lack of planning and “capable people”.

The government has said, however, that it expects Venezuela’s power supply to be “reliable” in 2012, after installation of new thermal power units and the revamping of old equipment later this year.

The power faults are hitting oil production too. One hit Venezuela’s main refinery at Amuay, halting the 310,000 barrel-per-day Cardon facility there last week. Oil production appears to be down according to the International Energy Agency (IEA). Venezuelan production came in at 2.25m barrels a day in April, lower than the 2.26m produced in March. The IEA blames the problems on power supply.

Chávez has been looking to focus on gold production to perhaps reduce the monopoly oil has on his success. He recently said that he wanted to make the precious metal, “a highly strategic resource for the country.” The means of doing this would be a state-run entity such as Petroleos de Venezuela, the much criticized oil company.

CVG Minerven, the country’s state-run gold miner, has asked for $70m to boost production. The mining industry in the country is weak, hit by low investment, strikes and illegal smuggling which allows up to 11 tons of gold to slip through the country’s fingers.

Chávez was pleased this week to announce his gift of a signed red guitar from Shakira. "I was practicing last night, looking for the plugs. It's electric, a very modern guitar and I'm not used to it," he said. "I was singing some songs, old ones, a Mexican one."