Venezuela Economic Landscape

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PESTLE Country Analysis Report: Venezuela OHCP0170/Published 05/2013 MarketLine. This report is a licensed product and is not to be photocopied Page 42

ECONOMIC LANDSCAPE

Summary

Venezuela is one of the largest crude oil exporters in the world. Crude oil exports to the US alone amount to 1 million

barrels a day. According to PDVSA, the country exported 2.57 million barrels per day of crude oil and byproducts in

2012. However, an overdependence on exports of "black gold" has proven to be an Achilles heel for the economy as a

whole. Economic performance during the 1990s was erratic, with significant fluctuations in export and growth

performance due to fluctuations in oil prices. The economy contracted by around 5.97% in 1999 as the authorities

attempted to rein in a ballooning fiscal deficit through a series of austerity measures. The country grew at an average

rate of 4.17% during 2000 06. Due to increasing oil revenues, the countrys GDP grew by 8.15% in 2007. The global

economic slowdown and low oil prices brought down the countrys GDP growth to 5.28% in 2008, and the economy

contracted by 3.20% and 1.49% in 2009 and 2010, respectively. In 2011, the countrys GDP growth rate was 4.18% and

in 2012, it was 5.63%. The economy is likely to show slow growth of 2.53% in 2013 according to MarketLine forecasts.

Evolu t ion

The evolution of the Venezuelan economy is described below.

Petroleum has been the core economic activity of the country since the 1920s, and accounts for

one-quarter of GDP, around 80% of export earnings, and as much as half of the central

governments operating revenue. Economically, the country performed fairly well between the 1950s

and 1980s, but failed to develop strong infrastructure and remained closed to foreign investment.

Although inequality is still not as severe as in some other Latin American countries, poverty and

inequality were on the rise throughout the 1990s.

Unemployment also grew as a succession of macroeconomic crises hit the country. Real wages

were hit hard, falling by an average of 23% over 1990 99.

Upon his election, Chavez inherited an economy in disarray. Real GDP growth was just under 6.4%

in 1997, which fell sharply to close to zero in 1998, as the external current account swung sharply

into deficit on the back of declining oil revenues. Although the current account returned to surplus in

1999, GDP growth declined further. The economy is estimated to have contracted by 5.97% during

1999, as the new administrations austerity program cut domestic demand.

During 2000 and 2001, the economy moved towards moderate growth of around 3.69% and 3.39%

respectively, which is impressive for a country recovering from recession and experiencing relatively

high rates of population and labor force growth.

Overall, Venezuelas economic performance has been extremely weak in recent years , with the

economy growing at a compound annual growth rate (CAGR) of only 2.2% over 1990 2005.

In 2009, the economy contracted by 3.20%, and further contracted by 1.49% in 2010 as global

financial meltdown affected the price as well as the demand for oil.

The bolivar was devalued twice in 2010 and it led to a reduction in the pretax earnings of

multinationals; Mead Johnson Nutrition Company for instance took a $24m hit.


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According to the oil minister of Venezuela, Rafael Ramirez, the country as of August 2012 has been

selling 640,000 barrels of oil per day to China. Increasing oil exports to China is a part of the strategy

to reduce dependence on the US as the market for majority of its oil exports.

Figure 5: Historical GDP growth rate of Venezuela, 1992 2012

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Source: Country Statistics, MarketLine MARKETLINE

Structure and pol ic ies

Financial system

Financia l author i t ies and regula tors

Banco Central de Venezuela is the central authority of the country's financial system. It was established in 1939, based

on the Central Bank Law. The bank is an official body subject to public law and has full autonomy. It has the

independence to devise and execute policies on its own. The fundamental objectives of the bank are to achieve and

maintain price stability in the country and sustain the internal and external value of the currency in order to ensure the

healthy growth of the economy.

Stock markets

The Caracas Stock Exchange (Bolsa de Valores de Caracas [BVC]) is the only securities exchange in Venezuela. The

exchange was established in 1947. It is a classified exchange, providing services for the purchase and authorized sale of


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securities according to the Capital Marketing Laws of Venezuela. It is also a member of the Executive Committee of the

Latin American Federation of Stock markets. At the BVC, corporate businesses make available instruments of fixed

income and securities with the purpose of securing capital from public investors. The BVC is also used as a location for

trading in bonds and other debt instruments. According to the World Bank, the market capitalization amounted to $25.30

billion as of December 2012.

Insurance

The Venezuelan insurance market comprises health and automobile insurance, which constitutes around 80% of market

premiums. The various other products offered as part of insurance include personal accident and property/casualty

insurance coverage for small- and medium-sized enterprises (SMEs). Indeed, the focus of insurance companies has

been to develop and retain SME insurance coverage. The government is moving into the insurance sector. The creation

of a state-run insurance and reinsurance company to be called Bolivariana de Seguros y Reaseguros in early 2010, has

reorganized the insurance sector. The government begun its intervention in La Previsora, an insurance company

connected to recently seized banks, during early 2010. The company is considered financially solid and is ranked fourth

in the market with 7.9% of net premiums. La Previsora, like Seguros Premier, was also nationalized. In 2009, insurance

companies in Venezuela were r equired to pay a special contribution of 0.3% of their total net premiums to the state.

Key policies

Chavezs economic reform policies have been at the center of establishment resistance to his controversial presidency.

The context behind his reforms was a background of profound income inequality, limited social mobility, and

macroeconomic volatility. The underlying cause of most of these ills is the economys overdependence on oil and, to a

lesser extent, other mineral commodity exports. The administration of late President Chavez used oil profit windfalls to

increase outlays for a host of state projects, which in turn have made the public sector the driving force of economic

growth.

The bolivar was devalued twice in 2010 and in February 2013, the bolivar was devalued once again in order to meet the

burgeoning deficit. The government of Venezuela had approved a $69.2 billion budget for 2012, however, as of

September 2012, new liabilities compelled the Executive Office to approve additional funds that increased the budget by

36% to $94.4 billion. The Venezuelan National Assembly approved an additional amount of $25.1 billion in January 2012

and in September 2012, the legislature authorized another $1.9 billion. The increased budgetary allocation were made to

meet the expenditure on salary adjustments, liabilities due to social programs and increase in expenditure in sectors

such as roads, housing, industry and science.

The Venezuelan government has presented the 2013 budget in October 2012 amounting to $92.2 billion; 33.09% more

compared to 2012. The budget forecast oil prices to be around $55 per barrel and predicted economic growth to be 6%.On March 19, 2013, the government announced the introduction of the new system for buying foreign currency called the

Complimentary System of Foreign Currency Acquirement (Sicad) in order to prevent the sale of bolivar in the black

market.

Performance

GDP and growth rate

Overview

According to MarketLine estimates, the Venezuelan economy grew at 3.39% during 2001. The GDP growth rate

contracted during 2002 and 2003 by 8.86% and 7.75%, respectively, due to increasing political instability. Then the


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economy grew at an average rate of 12.91% during 2004 06. Moreo ver, due to increasing oil revenues, the countrys

GDP grew by 8.15% in 2007. The global economic slowdown and low oil prices brought the countrys GDP down to

5.28% in 2008, and in 2009 the economy contracted by 3.20% due to the global economic crisis. The economy

contracted by 1.49% in 2010. In 2011, the economy grew at 4.18% and in 2012 it grew by 5.63% driven by the

construction and service sectors. Growth in these sectors accelerated due to increased government spending funded by

high oil prices and increased public borrowing. According to MarketLine forecasts, the economy is likely to grow at 2.53%

in 2013.

Figure 6: GDP and GDP growth rate of Venezuela, 2006 16

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GDP Real GDP growth rate


GDP compos i t i on by sec to r

According to MarketLine estimates, the services sector contributed 57.21% of GDP in Venezuela in 2012. The industrial

sector followed, with a 39.05% contribution, while agriculture added 3.73%.


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Figure 7: Sector specific GDP in Venezuela, 2012

Agriculture, 3.73%

Industry, 39.05%

Services, 57.21%


Agricul ture

While agriculture constituted only around 3.73% of GDP in 2012, it continues to play a significant role in rural areas.

According to MarketLine estimates, 9.51% of the population was involved in agricultural activities in 2012. Key

agricultural products in the country include corn, sorghum, sugarcane, rice, bananas, vegetables, coffee, beef, pork, milk,

and eggs. During 2010, agricultural output increased by 45.95%, and in 2011 it increased by 24.93%. In 2012,

agricultural output amounted to VEF58.71 billion ($9.32 billion).


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Figure 8: Agricultural output in Venezuela, 2007 12

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Agriculture output Growth rate

Note: the sectoral breakdown is given in local currency due to foreign exchange fluctuations and their impact on the growth figures.


Indust ry

The country's key industries are petroleum, construction materials, food processing, textiles, iron ore mining, steel,

aluminum, and motor vehicle assembly. According to MarketLine estimates, almost 22.97% of the population is

employed in the industrial sector in 2012. The oil industry accounts for around 70% of national income, and the country is

one of the largest oil exporters in the world. Total industrial output grew by 41.75% in 2010. In 2011, growth in industrial

output declined and recorded a growth of 32.26%. In 2012, industrial output amounted to VEF614.07 billion ($97.47

billion).


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Figure 9: Industrial output in Venezuela, 2007 12

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Industry output Growth rate

Note: the sectoral breakdown is given in local currency due to foreign exchange fluctuations and their impact on the growth f igures.


Services

According to MarketLine, the services sector accounts for 57.21% of the country's GDP, and accounted for 67.52% of

employment in 2012; finance and trade produce are responsible for around one-sixth of GDP apiece. Tourism is a

growing component of Venezuelas eco nomy, and is largely focused on the countrys cultural sites, beaches, and natural

parks, such as the tepuis of the Guiana Highlands and the world famous Angel Falls. Services sector output increased by

45.69% and 28.28% in 2010 and 2011, respectively. In 2012, service output amounted to VEF899.61 billion ($142.79

billion).


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Figure 10: Services output in Venezuela, 2007 12

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Services output Growth rate

Note: the sectoral breakdown is given in local currency due to foreign exchange fluctuations and their impact on the growth figures.


Fiscal situation

Overview

Venezuela s fiscal policy is geared towards gradual and sustainable use of petroleum revenues.

Fiscal def ic i t /surplus s i tuat ion

The sharp decline in oil revenue increased the fiscal deficit to 8.11% of GDP in 2009, from around 2.84% of GDP in

2008. Venezuela posted a fiscal deficit of 5.90% in 2010 and it amounted to $17.35 billion. According to MarketLine

estimates, the fiscal deficit in 2011 was $36.51 billion, which constituted 11.56% of GDP. The huge expenditure incurredby the government ahead of the October presidential elections further widened the fiscal deficit. According to CIA The

World Factbook, the budget deficit in 2012 was 17.5% of GDP.

Current account

The Venezuelan economy maintained a strong surplus during 2000 10. According to the World Bank, the country had a

current account surplus of $32.22 billion in 2008. In 2009 with the global financial meltdown, the surplus came down but

did not result in a deficit. The current account surplus was $2.33 billion in 2009, which rose to $8.88 billion in 2010. With

soaring oil prices and an increase in oil exports, the current account balance at the end of 2011 was $24.44 billion.

According CIA The World Factbook, the countrys current account surplus reached $ 20.6 billion in 2012. The current

account surplus is mainly due to higher oil prices and regulations curbing imports.


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Foreign trade

Venezuelas economy suffers from an overwhelming dependence on oil exports. The country is the worlds fifth largest oil

exporter behind Saudi Arabia, Russia, Norway and Iran, and its oil reserves are among the top 10 in the world. Oiltypically generates 80% of the countrys total export revenue s, while a lmost the entirety of the countrys $3 4 billion

foreign investment is channeled to the sector. Prior to the 2002 03 oil strike, Venezuelan crude oil exports to the US

amounted to almost 1 million barrels per day. According to CIA The World Factbook, oil exports to the US make the

country Venezuelas leading export market by a significant m argin, as the US accounts for 40.2% of Venezuelan exports.

Other key export partners are China, which accounts for 10.5%, India at 5.5%, and Cuba at 4% in 2011. Venezuela

increased petroleum shipments to China by 39% between January and June 2012, and China may soon surpass the US

as the number one destination for Venezuelan oil exports. On the import side, the US again dominates, accounting for

some 28.60% of total imports. China and Brazil are Venezuela's other most important trading partners, accounting for

15.10% and 10.60% respectively in 2011. Exports increased from $94.34 billion in 2011 to reach $107.76 billion in 2012,

while imports increased from $59.47 billion to $65.85 billion over the same period.

Figure 11: Venezuela s external trade position, 2008 12

97.03

59.6367.37

94.34107.76

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Exports Imports Total trade


External debt

According to the data from the Central Bank of Venezuela (BCV), the external debt of the country was $94.6 billion in the

third quarter of 2011 and it has increased by 21% compared to the same period in 2010 when it was at $78.5 billion.


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Figure 12: Consumer price index and inflation in Venezuela, 2006 16

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Consumer price index Inflation


Banking sector

In early 2010, Chavez announced plans to nationalize all private sector banks, as banks' credit portfolios declined by

6.6% in real terms between December 2009 and April 2010. According to Chavez, banks must embrace the

government's development project and meet the legal requirements to provide credit, or else they will be nationalized

and their owners will be compensated under the government's conditions. However, banks claim that it is very difficult to

meet the government's minimum lending requirements, as industrial production declined and manufacturing companies

are continuing to reduce output. At the beginning of 2012, the assets held by the Central Bank of Venezuela (BCV)

amounted to $29.8 billion. The cash reserve ratio fell to $2.7 billion, which is the lowest since 2007.

Employment

According to MarketLine, employment in the country is largely provided by the services sector, which accounts for

67.52% of labor, followed by the industrial and agricultural sectors, which account for 22.97% and 9.51% respectively in

2012. The employment level increased during 2004 and 2005, with the rate of employment rising by 8% year-on-year.

However, it fell to around 3.60% in 2006 and further declined to around 2.92% in 2011. In 2012, employment growth rate

was 2.86%. Venezuelas unemployment rate f ell continuously during 2003 08, and reached 8.65% in 2010. In 2011, it

dropped to 8.28% and was 8.10% in 2012.


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Figure 13: Unemployment in Venezuela, 2006 16

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Total unemployment Rate of unemployment (%)


Out look

The global economic slowdown and l ow oil prices brought down the countrys GDP growth to 5.27% in 2008, and the

economy contracted by 3.20% and 1.49% in 2009 and 2010, respectively. In 2011, the countrys GDP growth rate was

4.18% and in 2012 growth increased slightly to 5.63%. The country s eco nomic growth is likely to slow down and reach

2.53% in 2013. According to MarketLine estimates, the fiscal deficit in 2011 was $36.51 billion, which constituted 11.56%

of GDP. The huge expenditure accrued by the government ahead of the October 2012 presidential elections further

widened the deficit. According to CIA The World Factbook, the budget deficit in 2012 was 17.5% of GDP. According

CIA The World Factbook, the countrys current account surplus reached $ 20.6 billion in 2012.The increasing current

account surplus is mainly due to higher oil prices and regulations curbing imports.

In August 201 2, S&P lowered Venezuelas long term foreign and local currency sovereign credit ratings to B+ from BB .

In April 2013, the institute affirmed the ratings but downgraded the outlook from stable to negative. The downgrade was

mainly because political uncertainty could deteriorate the economic environment of the country and hinder the execution

of economic policies.

On March 19, 2013, the government announced the introduction of the new system for buying foreign currency called

the Complimentary System of Foreign Currency Acquirement (Sicad) in order to prevent the sale of bolivar in the black

market.


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C o p y r i g h t o f V e n e z u e l a C o u n t r y P r o f i l e i s t h e p r o p e r t y o f b u s i n e s s a n d i t s c o n t e n t m a y n o t b e c o p i e d o r e m a i l e d t o m w i t h o u t t h e c o p y r i g h t h o l d e r ' s e x p r e s s w r i t t e n p e r m i s s i o n d o w n l o a d , o r e m a i l a r t i c l e s f o r i n d i v i d u a l u s e .

Venezuela Economic Landscape

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