“Formula for success: Rise early, work hard, strike oil.” (John Paul Getty)
This is the first of a two part look at aspects of the Venezuelan economy. Your author would like to point out that this is not a case of criticizing just for the sake of it, as we have been among the first to applaud the positive changes the present administration has made. This note (and part 2 to follow) is simply an attempt to recognize potential economic problems that might upset the good progress made these last few years. Today’s point is this; despite rumours to the contrary Venezuela is still a petrodollar junkie and other parts of the economy are as lacklustre as ever.
In a recent publication from the Center for Economic and Policy Research (CEPR), “The Venezuelan Economy in the Chávez Years”, Mark Weisbrot and Luis Sandoval present the case that Venezuela is not simply in the upside phase of its oft-repeated oil boom/ bust scenario. To quote from their executive summary;
“The most commonly held view of the current economic expansion is that it is an “oil boom” driven by high oil prices, as in the past, and is headed for a “bust”…//…There is much evidence to contradict this conventional wisdom.”
Weisbrot and Sandoval highlight the various strengths of the Venezuelan economy away from oil (as well as making fair mention of shortcomings). They rightly point out that although government spending has risen strongly (from 17.4% to 30% of an ever expanding GDP), said spending is still less than revenues received; i.e. Venezuela runs a balanced budget. They emphasize the tradition of planning annual state budgets conservatively (example, the 2007 budget is based on oil at U$29/bbl), which then allows spending increases if oil brings in more than budgeted revenues. They point to the impressive GDP growth in the last few years. They also argue that the cushion of reserves accrued coupled with low foreign debt will allow the economy to weather any future storm more successfully than in previous downturns. Their implication is clear: Venezuela’s fate is not just in the hands of WTI spot.
It is somewhat unfair to condense Weisbrot and Sandoval’s well-presented argument into a few short lines as the report should be read as stands. It also contains a lot of information about the significant improvements the Chávez administration has brought to Venezuela as a whole. They are absolutely right when they argue that headline statistics are not enough to understand the Venezuela of today, as the rise in living standards via “invisible” social policies, particularly for the poorer sectors, must also be taken into consideration. But as well as the present administration might distribute the bonanza oil revenues, we must argue that when it comes to the boom/bust oil question conventional wisdom is correct and that Venezuelan good times do still depend on continuing high oil prices. In other words, it really is about oil. Sorry guys.
First some background. Below are two charts showing Venezuela historical oil production and oil prices. In the last 3 years, oil exports have fluctuated around the figure of 2.2mbbl/d once local consumption is subtracted.
Source: BP statistical review.
When one considers that the tax burden has increased from the peppercorn rates of the early 1990’s to 83% today (including all fiscal and state demands on production), it’s easy to see how oil has added considerably to government coffers. In fact state company PdVSA contributed $40.7Bn to state coffers in 2006 (for context, Venezuela’s 2006 GDP is estimated at U$180Bn). This is aside from any taxes paid by other oil companies operating in the country.
Source: BP statistical review
To add a little more flesh, below is a chart showing Venezuela’s imports and exports over the last decade. Looking at exports, we see a figure that fluctuates around U$6bn per quarter until 2003, and then takes off with the advent of higher oil prices. In 2q07, exports were U$16.8Bn….a pretty penny indeed. We also see that Venezuela is still running a very healthy trade surplus even though imports have risen sharply in recent times. 2q07 imports were worth U$10.9Bn (more on imports later).
So how much of those exports is oil? Answer; a lot. In 2q07, hydrocarbons exports accounted for U$15.1Bn, 90% of total exports (a pretty typical percentage historically). If this doesn’t make it clear that Venezuela is an oil revenues junkie, let’s look at a detail or two.
This next chart breaks down imports and exports a little further. We clearly see that imports are generated by private sector demand, whilst exports are public sector driven. Private sector imports make up around 90% of historical demand, while private sector exports have languished for the last 10 years at a stubbornly static U$1bn per quarter.
Thus foreign trade can be summed up as “Venezuela supplies oil, population demands goods”. But what of the internal economy? Here we have a chart showing wholesale and retail combined sales in Venezuela. It’s easy to spot the slump caused by the attempted coup d’etat and subsequent oil strike in the 2002 to 2003 period, but since then the internal economy has been in full party mode.
Imports feed this rise in sales. In fact, the inertia shown in non-oil industrial sectors of Venezuela is not confined to the sectors that export (as seen above). This is not an academic paper (and your author is not an academic by nature) and in a medium such as this there’s no place for deep, detailed industry-wide examinations, but a tried and tested benchmark of LatAm economic activity is the auto sector, and in that Venezuela is no exception.
According to sector watchdogs CAVENEZ, way back in July 1997 Venezuelans bought 15,329 vehicles, of which 14.205 (93%) were manufactured locally. Fast forward a full ten years, and in July 2007 the number of units sold had nearly tripled to an impressive 43,007, but only 13,971 (32%) of those were manufactured locally. In other words, sales nearly tripled, but local sales have actually dropped in absolute terms! There are many reasons to explain the stagnant smell around Venezuelan manufacturing, but the bottom line is that Venezuela has a nasty case of Dutch disease, the lack of growth in non-oil sectors leaving the country rather exposed to any future downturn in crude prices.
So to recap, we have an economy that depends on government spending and retail sales for continued growth. Retail sales are largely fed by a rise in imports. The imports are paid for by rising exports. Export revenues are almost totally oil revenues. Oil revenues are also directly responsible for the rise in government spending. And as much lip-service the government pays to promoting investment and growth of the manufacturing base in Venezuela, the lack of growth in the sector is plain to see.
The consequences are simple: If the price of oil suffers significant world decline, the retail sector will not be able to support the current level of imports without the country sliding into immediate trade deficit. The U$25Bn central bank reserves would not last long under such pressure, and recession would be a real threat to the economy as well as the administration running it.
As a matter of opinion, I believe that oil prices are not about to fall through the floor and the present range will be sustained into the indefinite future, thus ensuring Venezuela’s prosperity for the time being. Then again, I’m not the one betting the future of an entire country’s economy on that outcome (with power comes responsibility, and there are plenty of advantages in being insignificant). On that thought, part one of this look at Venezuela comes to a close. Part two will expand on the “oil base” put down here and will also try to answer this reader’s question from a previous post:
“How is the foreign exchange rate policy the greatest problem facing Venezuela’s economy? Can you flesh out this point? Not clear to me.”
A good question. It remains to be seen if we can cobble together a half-decent answer.