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Oil prices
decline further
In September,
oil prices declined sharply for the second consecutive month. The average
price for the Venezuelan mix of crude oil fell 9.21%, from US$ 109.9 per
barrel in August to US$ 99.8, but still exceeded the average price
registered in the same month last year by 38.8%.
However,
in the first ten days of October, the Venezuelan mix of crude oil fell a
further 16.8%, from US$ 98.3 per barrel in the last week of September to
US$ 81.8. Moreover,
oil output in
Venezuela continues to decline. According to the September report from
the Organization of Petroleum Exporting Countries (OPEC), Venezuelan oil
output averaged 2.334 million barrels per day (mbpd) in August, which was
down from the 2.343 mbpd produced in July. Output is suffering from a
lack of investment, primarily caused by the departure of several foreign
oil companies, which left the country in the wake of the nationalisation
of the Orinoco oil belt last year. Despite OPEC’s reporting of falling
Venezuelan output, the government anticipates oil output to average 3.600
mbpd next year, according to its recently published budget proposal.
However, government data for current output also vary greatly from OPEC
estimates, with government sources claiming average output this year to
already be around 3.600 mbpd.
Economy
heavily exposed to global economic crisis
Sizeable
macroeconomic imbalances such as supply shortages and concomitant soaring
inflation, an oversized public sector and a lack of investment in the
all-important oil sector, have so far been covered up by a steady inflow
of windfall oil revenues. However, the persistent oil price increase
during the last years has made the country even more dependent on oil. In
2007, oil accounted for 90% of total exports and more than a quarter of
GDP. In addition, more than half of total government revenues are
directly dependent on the oil sector. While oil prices rebounded after
the announcement of financial rescue measures on 11/12 October, prices are
unlikely to soon reach the high levels seen in mid-2008. Next to directly
putting a heavy strain on public finances, the decline in oil export
revenues will increase pressures on the government to devaluate the
bolívar fuerte in order to partially compensate for the loss of income
in local currency terms. However, a devaluation of the currency that has
been pegged to the US$ at 2.15 since March 2005 would fuel already soaring
inflation. Currently, the majority of Consensus Forecast participants are
expecting a devaluation not to take place until 2009, but as panellists
are still factoring in the current events, this perspective might be
adjusted in the coming months. The confidence crisis that affected
countries around the globe also reached Venezuela. The Caracas Stock
Exchange (Bolsa de Valores de Caracas, BVC) lost 5.5% of its value
in the first ten days of October, while the perceived risk of Venezuelan
bonds compared to US treasury bonds increased 599 basis points in the
same ten day-period. In addition, the value of the bolívar fuerte
in the parallel exchange market has been falling rapidly to reach
approximately 5.3 bolívares to the US$, thus further fuelling
pressures on the official exchange rate. As a result of the increased
risk perception and generally tighter global credit conditions, Venezuela
will face markedly higher foreign financing costs. However, despite
recent events, a Central Bank official recently assured that the country’s
financial system is well capitalised and in good conditions to weather the
current global financial turmoil. Minister of Planning and Development
Haiman el Troudi stated that liquidity levels in the domestic banking
system are adequate and that the county’s large amount of foreign reserves
would protect the economy against the effects of the global credit
squeeze.
In fact,
el Troudi
said that despite the global financial crisis and falling oil prices, the
government maintains its 6.0% economic growth forecast for this year.
Consensus Forecast participants are slightly less optimistic and expect
economic growth to slow to 5.6% in 2008, which is down 0.1 percentage
points from last month’s forecast. Next year, the Consensus Panel expects
economic growth to moderate notably to 3.7%.
Inflation
shows no signs of moderating
In
September, consumer prices added 2.50% over the previous month. The
result was well above the 1.69% price increase observed in August and also
came in ahead of market expectations, which had prices adding 1.70%.
Although broad-based, the monthly price rise was primarily driven by
higher prices for food and beverages, which added 3.71% over the previous
month. As a result of the pronounced price increase in September, annual
headline inflation jumped more than a full percentage point, from 34.5% in
August to 36.0%, which constitutes the highest level in more than five
years. The core inflation index, which excludes more volatile items such
as fresh food, oil and several other goods for which the government
controls the price level, added 2.44% in September. Consequently, annual
core inflation rose from 25.6% to 26.5%. The government has been trying
to curb inflationary pressures by selling debt in order to soak up
liquidity. However, while trying to contain inflation by decreasing
liquidity and hiking interest rates, the government continues to increase
public spending, thus nullifying the effects of tighter monetary policy.
Moreover, public spending is unlikely to diminish in the remainder of the
year, as the government seeks to broaden public support ahead of the
regional elections in November. Against this backdrop, the government
recently abandoned its previous inflation forecast of 19.5% and now sees
consumer prices rising 27.0% this year. Consensus Forecast participants
are sceptical and anticipate year-end inflation to reach 31.6%, which is
0.5 percentage points up from last month’s forecast. For 2009, Consensus
Forecast Panellists expect inflation to reach 30.0%. |
