Recession, higher inflation confirmed

| Jan. 2, 2015 | England

Event

According to official data from the Banco Central de Venezuela (BCV, the Central Bank), released on December 30th, the economy contracted sharply in the first three quarters of 2014. Annual consumer price inflation also rose, to 63.6%, the highest level in the hemisphere, in November.

Analysis

Just before a speech in which the president, Nicolás Maduro, promised major economic reforms in the first half of 2015, the BCV released key economic data for 2014. As expected, the figures showed a sharp year-on-year contraction in economic activity in the first three quarters of 2014: by 4.8%, 4.9% and 2.3% respectively. After not having published inflation data since August, the bank also provided monthly inflation data figures November. Monthly consumer prices rose by 4.8% in September, 5% in October and 4.7% in November, higher than most annual rates in the rest of Latin America.

The president said that 2015 would be a year of "great economic transformation" in Venezuela, adding that his government would introduce policies aimed at reducing liquidity and boosting international reserves, which are now near their lowest level in more than a decade, at just US$20bn (around three months of import cover), a decline of nearly 30% since January 2013. Mr Maduro indicated that the currency system would be "perfected" in 2015, perhaps hinting at plans to overhaul Venezuela's complex three-tiered exchange-rate system or devalue the currency, whether by decree or by stealth (by forcing importers to use weaker rates of exchange). On the black market, the local currency fell by 63% against the dollar in 2014 alone. However, Mr Maduro's speech included no policy announcements. Domestic economic problems have been exacerbated by the recent drop in international oil prices. Venezuela's oil basket, composed of heavier crude, is currently selling for US$46/barrel. Mr Maduro continued to blame the country's economic woes on an "economic war" waged by the opposition, which included nationwide anti-government protests in February and March 2014, which he claims caused disruptions to production and distribution.

Impact on the forecast

In light of the latest official data—which point to a deeper recession than we had estimated in 2014—we will review our GDP forecasts.