VENEZUELA MACROECONOMIC UPDATE

UNCLAS CARACAS 001479 SIPDIS STATE FOR WHA/AND, WHA/EPSC, EB TREASURY FOR OASIA - GIANLUCA SIGNORELLI USCINCSO FOR POLAD E.O. 12958: N/A TAGS: ECON EFIN PGOV VE SUBJECT: VENEZUELA MACROECONOMIC UPDATE -------------- OVERVIEW -------------- ¶1. (U) Venezuela's most recently published economic indicators illustrate the negative effects of deep recession, exchange and price controls, and chronic fiscal deficits. Strong international reserves position and high average oil prices have contributed to reduce the country risk and facilitated the partial public external debt refinancing. However, the current political uncertainty is affecting the economic decision-making for both the private and public sectors. NOTE: Most official data reported here does not include Q1 of 2004. -------------- ECONOMIC GROWTH -------------- ¶2. (U) Total GDP decreased 9.2 percent in real terms during 2003 compared with the previous year. This figure was the steepest decline in Venezuelan history. The hardest-hit sectors were construction (-37.4 percent),commerce (-12.0 percent),petroleum (-10.7 percent),and manufacturing (-10.6 percent). During the last quarter of 2003, Venezuela registered a GDP increase of 9 percent after seven consecutive quarters of economic recession. A recovery is foreseen during 2004 after two consecutive years of severe economic contraction. REAL GDP GROWTH RATE (PERCENTAGE) -------------- OIL NON-OIL TOTAL 1994 4.6 (4.5) (2.8) 1995 7.1 2.5 4.0 1996 7.7 (2.5) (0.2) 1997 9.4 4.2 6.4 1998 2.0 (0.9) 0.2 1999 (7.4) (5.4) (6.1) 2000 3.2 3.0 3.2 2001 (0.9) 4.0 2.8 2002 (12.6) (6.5) (8.9) 2003(1) (10.7) (8.0) (9.2) (1) Preliminary figures SOURCE: Central Bank of Venezuela. -------------- UNEMPLOYMENT -------------- ¶3. (U) Second semester 2003 figures (the latest published as of April 28, 2004) from the National Institute of Statistics (INE) indicate an unemployment rate of 16.8 percent. This figure represents 2.01 million unemployed out of a labor force of 12.01 million, and a total population of 25.63 million. Shifts in the work force from the formal to the informal sector of the economy, which accounts for more than a half of the occupied working labor force, have mitigated unemployment to some extent. However, some economists suggest that the informal sector may have reached its capacity to absorb new entrants. UNEMPLOYMENT (percentage in second semester) -------------- 1996 12.4 1997 10.6 1998 11.0 1999 14.5 2000 13.2 2001 12.8 2002 16.2 2003 16.8 SOURCE: GOV National Institute of Statistics (INE). -------------- OIL PRODUCTION AND EXPORTS -------------- ¶4. (U) Oil production and export reductions during 2003 were partially offset by the increase in the average export price during the year. The total value of oil exports reached USD 20.8 billion in 2003 with an average export price of USD 25.7 per barrel. Venezuela's OPEC production quota is 2.704 million barrels a day starting on April 1, 2004. Oil prices have been increasing during 2004, reaching a record high of USD 30.9 per barrel during the last week of March. OIL PRODUCTION AND EXPORTS (THOUSAND B/D) -------------- AVERAGE EXPORT PRICE EXPORTS PRODUCTION(2) EXPORTS (USD/B) (USD MILLION) 1996 2,984 2,752 18.4 18,523 1997 3,248 3,052 16.3 18,180 1998 3,279 3,116 10.6 12,111 1999 2,950 2,785 16.0 16,419 2000 3,060 2,791 25.9 27,884 2001 3,044 2,711 20.2 21,574 2002 2,567 2,432 22.0 21,530 2003 (3) 2,330 1,963 25.7 20,831 (2) Crude oil, including condensates. (3) Preliminary figures. SOURCE: Central Bank of Venezuela, and private sector estimates. -------------- MONEY SUPPLY/M2 -------------- ¶5. (U) Monetary liquidity increased 57.5 percent during 2003, largely as a result of exchange controls. This the highest money supply annual increase of the last six years. Most of the excess liquidity accumulated in the economy during these months was withdrawn by the BCV by allocating government bonds and certificates of deposits to domestic banks. Liquidity could continue to grow during the first half of 2004 because of the expected government expenditure increase. MONEY SUPPLY/M2 (4) MONETARY BASE -------------- -------------- End of: (million Bs.) Pct.Chg. (million Bs.) Pct.Chg. 1996 5,493,813 55.4 1,675,799 92.1 1997 8,956,161 63.0 3,004,685 79.3 1998 10,621,645 18.6 3,717,323 23.7 1999 12,740,836 20.0 4,909,822 32.1 2000 16,284,578 27.8 5,790,841 17.9 2001 16,976,364 4.2 6,478,295 11.9 2002 19,573,369 15.3 7,701,120 18.9 2003 30,835,975 57.5 11,274,439 46.4 2004 (5) JAN 30,279,535 (1.8) 10,752,425 (4.6) FEB 31,815,818 5.1 10,762,152 0.1 MAR 32,311,341 1.6 13,219,845 22.8 (4) M2 includes currency, demand deposits, savings and certificates of deposit. (5) Preliminary figures. SOURCE: Central Bank of Venezuela. -------------- CONSUMER PRICE INDEX -------------- ¶6. (U) The Central Bank of Venezuela (BCV) reported that consumer prices for the Caracas metropolitan area rose 21.9 percent from February 2003 to February 2004. Consumer prices lagged producer prices, however, as wholesale prices increased by 36.7 percent during the same period. (Note: The GOV imposed price controls February 11, 2003 on some primary food items, pharmaceuticals, and personal care products as a complement to the exchange control regime.) CONSUMER PRICE INDEX (1997 AVG =100) -------------- END OF PERIOD PCT CHANGE 1992 10.7 31.9 1993 15.6 45.8 1994 26.6 70.5 1995 41.6 56.4 1996 84.6 103.2 1997 116.5 37.6 1998 151.3 29.9 1999 181.6 20.0 2000 206.0 13.4 2001 231.3 12.3 2002 303.5 31.2 2003 385.7 27.1 2004 JAN 395.4 2.5 FEB 401.6 1.6 MAR 410.2 2.1 SOURCE: Central Bank of Venezuela. -------------- INTEREST RATES -------------- ¶7. (U) Interest rates reported by the Central Bank in 2004 continue the downward trend of 2003. Weak credit demand and excess liquidity because of the strict application of exchange controls were the most important causes of this trend. The spread between lending and deposit rates decreased from 6.59 percent in January 2004 to 4.72 percent in March 2004. AVERAGE INTEREST RATES OF THE SIX MOST IMPORTANT COMMERCIAL AND UNIVERSAL BANKS -------------- --- Loans Deposits -------------- -------------- Savings 90 days 1996 37.22 18.36 26.85 1997 22.16 6.84 14.62 1998 45.21 10.25 38.02 1999 31.89 7.05 18.90 2000 23.91 3.35 14.80 2001 25.64 2.40 14.13 2002 37.08 3.90 28.29 2003 24.05 6.17 17.58 2004 JAN 18.38 5.19 11.79 FEB 18.08 4.54 10.84 MAR 17.56 4.56 12.84 SOURCE: Central Bank of Venezuela. -------------- EXCHANGE RATE -------------- ¶8. (U) The exchange control system pegged the bolivar at 1,600/USD on February 5, 2003. One year later, on February 5, 2004, the Ministry of Finance and the Central Bank devalued the Bolivar 20 percent, to 1,920.00. A National Exchange Control Administration (CADIVI) oversees all official foreign exchange transactions. CADIVI's heavy bureaucratic burden on official exchange, Venezuela's dependence on imported food and manufactured goods, and the petroleum sector's need for access to dollars have resulted in the official exchange rate being overvalued again. The parallel market exchange rate closed at around 3,100/USD at the end of March 2004. ANNUAL AND MONTHLY EXCHANGE RATES (SELL RATE) (BS/USD) -------------- AVERAGE END OF PERIOD AVERAGE PCT CHANGE 1996 476.50 417.34 136.1 1997 504.25 488.59 17.0 1998 564.50 547.55 12.1 1999 648.25 605.70 10.6 2000 699.75 679.93 12.3 2001 763.00 723.67 6.4 2002 1,401.25 1,160.95 60.4 2003 1,600.00 1,608.63 38.6 2004 JAN 1,600.00 1,600.00 -0.5 FEB 1,920.00 1,825.88 14.1 MAR 1,920.00 1,920.00 0.0 SOURCE: Central Bank of Venezuela. -------------- MERCHANDISE TRADE BALANCE -------------- ¶9. (U) Non-oil exports decreased 4.0 percent to USD 4.92 billion during 2003 compared with 2002. According to the INE, exports of base metals (aluminum, steel, iron, etc.) accounted for 37.9 percent of total non-oil exports for the period, followed by mineral products (19.5 percent),and chemicals (15.8 percent). The United States was the largest recipient of Venezuela's non-oil exports (40.5 percent), followed by Colombia (11.9 percent),and Mexico (6.4 percent). Imports decreased by 21.4 percent during 2003, largely because of the imposition of exchange controls. MERCHANDISE TRADE BALANCE (USD MILLION) -------------- 2002 2003 (6) OIL EXPORTS (A) 21,530 20,831 NON-OIL EXPORTS (B) 5,126 4,919 TOTAL EXPORTS (C) 26,656 25,750 TOTAL IMPORTS (D) (13,622) (10,707) MERCHANDISE TRADE BALANCE (C)-(D) 13,034 15,043 (6) Preliminary figures. SOURCE: Central Bank of Venezuela. -------------- BALANCE OF PAYMENTS -------------- ¶10. (U) Venezuela's balance of payments registered a surplus of USD 5.44 billion during 2003, compared with a deficit of approximately USD 4.43 billion during 2002. Exchange controls and the resulting fall in imports and capital flight have contributed in Venezuela's shift from net debtor to net creditor. BALANCE OF PAYMENTS SUMMARY (USD MILLION) -------------- - 2002 2003(7) CURRENT ACCOUNT (A) 7,423 9,624 EXPORTS, FOB 26,656 25,750 IMPORTS, FOB (13,622) (10,707) TRADE BALANCE 13,034 15,043 NET SERVICES AND RENT (5,446) (5,417) NET TRANSFERS (165) (2) CAPITAL AND FINANCIAL ACCOUNT (B) (9,365) (3,171) DIRECT INVESTMENT (241) 1,388 PORTFOLIO INVESTMENT (2,304) (1,060) OTHER INVESTMENT (6,820) (3,499) NET ERRORS AND OMISSIONS (C) (2,485) (1,010) OVERALL BALANCE (A)+(B)+(C) (4,427) 5,443 (7) Preliminary figures. SOURCE: Central Bank of Venezuela. -------------- INTERNATIONAL RESERVES -------------- ¶11. (U) BCV-held international reserves have been increasing continuously since the exchange controls were imposed in February 2003. Reserves are currently 53.6 percent above their levels one year ago, as foreign exchange transactions remain suppressed. Of the total amount of reserves (USD 23.3 billion) at the end of March 2004, around USD 4.6 billion (or 19.7 percent) were in monetary gold. INTERNATIONAL RESERVES (USD MILLIONS) -------------- BCV FIEM TOTAL 1996 DEC 15,229 - 15,229 1997 DEC 17,818 - 17,818 1998 DEC 14,849 - 14,849 1999 DEC 15,164 215 15,379 2000 DEC 15,883 4,588 20,471 2001 DEC 12,296 6,227 18,523 2002 DEC 12,003 2,857 14,860 2003 DEC 20,666 700 21,366 2004 JAN 21,588 701 22,289 FEB 21,906 702 22,608 MAR 22,560 702 23,262 SOURCE: Central Bank of Venezuela. -------------- CENTRAL GOVERNMENT FINANCIAL RESULTS -------------- ¶12. (U) The fiscal deficit increased as the government spent more than expected during 2003, particularly in the fourth quarter. The most important sources of non-oil income were the value added tax, the income tax, the Central Bank profits, and the bank debit tax. The economic recession affected the other non-oil incomes such as customs revenues. The 2003 fiscal deficit was mostly financed with domestic debt facilitated by the excess liquidity in the financial sector due to the exchange controls that were imposed in February. CENTRAL GOVERNMENT FINANCIAL RESULTS (as a percentage of GDP) -------------- 2002 2003 TOTAL REVENUES 20.5 22.7 Oil income 10.0 11.1 Non-oil income 10.5 11.6 TOTAL EXPENDITURES 25.3 28.5 FISCAL DEFICIT (4.8) (5.8) Source: BCV -------------- PUBLIC SECTOR DEBT -------------- ¶13. (U) The government was actively refinancing its domestic and external debts during 2003. Domestic bonds and treasury promissory notes dramatically increased both in the share of domestic banks' portfolio holdings and in the share of the GOV's debt. During March 2004, the Ministry of Finance allocated bonds for the equivalent of USD 3.0 billion, of which one third were USD denominated with maturity in six months, while the rest were in local currency with maturities in 2008, 2009, and 2010. PUBLIC SECTOR DEBT (USD BILLION) -------------- 2002 2003(8) FOREIGN DEBT 22.5 22.8 CENTRAL GOVERNMENT 20.8 21.5 RESTRUCTURED DEBT 8.0 8.3 NON-RESTRUCTURED DEBT 12.8 13.2 AGENCIES 1.7 1.3 DOMESTIC DEBT 11.0 14.1 -------------- -------------- TOTAL PUBLIC SECTOR DEBT 33.5 36.9 (8) Preliminary figures. SOURCES: Ministry of Finance, BBVA Banco Provincial, and Embassy's estimates. -------------- BANKING SYSTEM -------------- ¶14. (U) Recession and low consumer confidence have depressed credit demand. The percentage of net loans to total deposits decreased from 54.46 percent in December 2002 to 32.69 in February 2004. The contraction of the economy during 2003 also affected debtors' ability to pay. The percentage of past due loans increased from December 2003 to February ¶2004. This figure is lower than a year before, as banks have been cleaning up their credit portfolios, declaring more of the past due loans as outright losses. BANKING SYSTEM KEY INDICATORS (percentages) DEC 02 DEC 03 FEB 04 Past due loans/ gross loans 6.76 4.47 4.81 Credit portfolio allowance/ past due loans 132.64 179.50 174.61 Equity/total assets 16.08 14.44 14.64 Net financial margin/ average asset 5.32 6.19 7.79 Net financial margin/ average equity 35.65 43.95 55.93 Net loans/ total deposits 54.46 36.33 32.69 Source: SUDEBAN -------------- DIRECT FOREIGN INVESTMENT -------------- ¶15. (U) New direct foreign investment registered during 2003 increased to USD 1,174.2 million. Much of this influx was a result of major foreign investment in Venezuelan telecom giant CANTV. DIRECT FOREIGN INVESTMENT(9) (MILLIONS OF USD) -------------- 1996 1,114.4 1997 690.1 1998 1,583.8 (10) 1999 985.4 2000 642.9 2001 948.1 2002 297.0 2003 1,174.2 (11) (9) Includes investment in the hydrocarbon, petrochemical, mining and natural gas sectors. (10) Privatization of state steel company (SIDOR). (11) This high figure consists largely of investments in former state-owned telecoms giant CANTV, made in 1996, but for technical reasons only registered by the GOV in 2003. SOURCES: SIEX, CONAPRI, and Metroeconomica. -------------- CARACAS STOCK EXCHANGE INDEX -------------- ¶16. (U) The Caracas Stock Exchange (CSE) index closed at a record high of 26,579.69 at the end of March 2004, increasing 19.7 percent from its close in December. The index increased 212.5 percent from its level in March 2003. A primary catalyst in this rise is the use of CSE shares to acquire American Depositary Receipts on the New York Stock Exchange that are then used as foreign exchange vehicles. However, the CSE has also benefited from the lack of other investment opportunities in the broader economy. CARACAS STOCK EXCHANGE CAPITALIZATION INDEX (DECEMBER 1993 = 1,000) -------------- 2002 2003 2004 JANUARY 6,293.89 8,286.65 27,956.14 FEBRUARY 6,958.39 8,509.56 27,348.36 MARCH 6,828.04 8,506.59 26,579.69 APRIL 6,712.57 8,631.60 MAY 7,422.64 12,799.62 JUNE 7,452.09 13,666.40 JULY 7,134.00 14,052.35 AUGUST 6,793.30 14,497.20 SEPTEMBER 7,447.71 16,956.29 OCTOBER 7,741.81 20,413.00 NOVEMBER 8,015.17 21,397.36 DECEMBER (12) 22,203.95 (12) The CSE was closed during December 2002 because of the general strike. SOURCE: Caracas Stock Exchange and Metroeconomica. -------------- INTERNET RESOURCES -------------- ¶17. INTERNET RESOURCES: AMEMBASSY CARACAS WEBSITE: www.embajadausa.org.ve - EXCHANGE RATES AND INTERNATIONAL RESERVES: www.bcv.org.ve - STOCK EXCHANGE: www.caracasstock.com - TRADE AND LABOR FORCE STATISTICS: www.ine.gov.ve - BUSINESS INFORMATION: www.venamcham.org - INVESTMENT OPPORTUNITIES: www.conapri.org - PETROLEUM INFORMATION: www.pdvsa.com, www.mem.gov.ve - PUBLIC FINANCE INFORMATION: www.mf.gov.ve - FINANCIAL INDICATORS: www.sudeban.gov.ve - ECONOMIC PUBLICATIONS: www.metroeconomica.com.ve, www.veneconomy.com, www.bancomercantil.com, www.provincial.com - E NEWSPAPERS: www.eluniversal.com, www.el-nacional.com - LEGAL PUBLICATIONS: www.datalegis.com.ve, www.bpmaw.com, www.traviesoevans.com, www.tpa.com.ve - VENEZUELAN GOVERNMENT: www.venezuela.gov.ve, www.platino.gov.ve Shapiro NNNN 2004CARACA01479 - UNCLASSIFIED