By Jeremy Morgan
Latin American Herald Tribune staff

CARACAS -- Venezuela's oil-based economy contracted again during the third quarter of this year, with gross domestic product (GDP) shrinking by 4.5% compared with a year before and following a decline of 2.5% in the second quarter, according to figures from the Venezuelan Central Bank (BCV). The figures were sufficient to prompt some economists to declare that the economy was now technically in a recession after five years of growth.

In the wake of the figures, Finance Minister Ali Rodriguez Araque abandoned the government's claims up to now that the economy would emerge more or less unscathed from the global slump with zero growth in national output this year as a whole. Instead, he warned that GDP could fall by between one and 2.2 percentage points in 2009.

"Our objective was zero, but that hasn't been possible," the minister said in an interview on state television. However, he eschewed the opportunity similarly to curtail his forecast for next year, reiterating a previous forecast of a modest 0.5 percent upturn in GDP during 2010. "Our optimism is prudent, moderate," he declared. "I believe that this can be achieved. It could be bigger."

The third quarter fall was the largest seen in that period since 1994, when Venezuela was in the throws of a severe financial crisis, and the downswing hit key sectors across the economy. Output in the all-important oil sector, which is reckoned to account for around half overall GDP and provides Venezuela with roughly four-fifths of its hard currency export earnings, was down 9.5 percent on a year earlier. It was the third successive quarter to see contraction in the oil industry.

The overall value of Venezuelan exports fell, taking the balance of trade current account surplus with it, down a thumping 70.6% over the year to a fraction over $5 billion. Any hope that the rest of the economy would come to the rescue and fill in the gaps created by the fall in oil output and exports looked to be wide of the mark.

While the average price fetched by Venezuelan oil fell during the third quarter to an average $64 a barrel -- which was still historically high -- compared with $110 a year earlier, the value of non-oil exports was estimated to have dropped to its lowest level since 1997.

As to production in the non-oil economy, the downturn was less pronounced than in oil, with third quarter non-oil GDP down three percent on the comparable period of 2008. But that included a 9.2 percent slide in output in manufacturing -- still an important source of employment in Venezuela, despite massive closures at the depth of the last Venezuelan recession early this decade.

Activity in construction, another "locomotive sector" driving the economy and jobs, also decelerated. However, building output remained 4.3 percent higher compared with the third quarter of last year.

Mining, a sector that is deemed never to have realized its potential in Venezuela and which is now a target of President Hugo Chavez's policy of nationalizing "strategic" parts of the economy, recorded an 18.3 percent slide in third quarter output. This was mainly attributed to the decline in world demand for minerals, of which Venezuela has a wealth ranging from gold and diamonds to iron ore and bauxite.

Compared with a year earlier, commerce also contracted, by 11.5 percent, partly in response to a 4.8 percent drop in consumption during the third quarter. Officials at the BCV noted that the money simply wasn't around any more, and that consumers were buying less imported goods. The Foreign Exchange Administration Commission (Cadivi) authorized 47 percent less in hard currency permits for importers during the first nine months of this year.

The central bank warned that Venezuela continued to struggle with the highest rate of inflation of any country in Latin America. Last year, the official consumer price index rose by just short of 31 percent, after 25.5 percent in 2007 and 17.1 percent in 2006. Rodriguez Araque has forecast a slight decline this year to 26 or 28 percent, but other estimates suggest a repitation of 2008, or perhaps a bit more.

Doomsters who question the accuracy of the official figures (which use food prices from government subsidized Mercal shops) have pitched their inflation forecasts for this year at around 35%. They argue that as far as the inflation front is concerned, the Fat Lady won't have sung the full tune until the country is through the annual bout of price gouging in the festive season that's already under way for upper income and middle class Venezuelans.

The National Economic Council (CEN) rang alarm bells about inflation, warning that government plans to boost public spending via the BCV threatened to fuel price rises. It said recent changes in central banking law allowed for "monetary financing" that would have "inevitable consequences" for inflation and financial instability in the future.

Opinion about the outlook for the economy as a whole next year varies. Aberlado Daza, an economist at Venezuela's leading graduate management school IESA, the Institute of Economic and Social Administration Studies, felt that Venezuela was now through the worst. He thought liquidity in the economy would continue and that sales would turn upwards again, perhaps as people made greater resort to buying on credit. He thought there would be a return to net zero growth as early as the fourth quarter of this year.

But other analysts pointed out that Rodriguez Araque had emphasized that currency controls would remain in force, with no change in the official exchange rate of BsF2.15 to the dollar. Jose Guerra, an economist and former head of research at the BCV, said the recession was taking place in Venezuela while other countries were climbing out.

Guerra maintained that the reason for this was that the official exchange rate had been over-valued this year, and that foreign exchange controls worked against efforts to control inflation while nationalizations discouraged investment. The BCV said private sector investment fell in the third quarter this year by 14.5% compared with the same period of 2008 and by 19% on 2007.

Against the downward trend in the economy as a whole, output in the state sector statistically jumped in the third quarter by 24.8 percent on a year before. However, this was seen less as a reflection of real growth than the fact that Chavez's takeover policy means significantly more of the economy is now under state ownership.

The entire oil industry is now under majority 60% state control, and 100% at some fields. The three biggest cement companies and two largest coffee companies in the country have been nationalized, along with steelmaker Sidor, the Cantv telecommunications company, Electricidad de Caracas and a growing list of other formerly private sector concerns.

An estimated 30.1% of the means of production in the country is now under state ownership, compared with 26% at the end of last year. Pavel Gomez, one of Daza's colleagues at ISEA, warned that the shift towards greater state ownership could have serious consequences for the economy.

The structural change in the pattern of ownership "compromises productivity and competitivity in the future," Gomez argued. "The objective of these companies which have passed to the public sector is going to be political and not economic, above all at the door to an electoral year." Elections for all 167 seats at the National Assembly are scheduled for September 26 of next year.

Gomez drew a gloomy picture of the outlook for newly nationalized or re-nationalized companies. He thought they would become a heavy charge on the state finances, and the government would be under pressure to fund investment which might otherwise ave come from the former owners and shareholders. "Without investment, more public spending is going to be needed every time to ensure that GDP grows," he said.

Another factor behind continued expansion in the state sector would appear to be that it largely continues to import goods, and apparently without encountering serious obstacles at Cadivi. The BCV figures showed that while private sector imports fell in value during the third quarter by 35.5 percent on 2008 levels, public sector imports declined by only 2.7 percent on the same comparison. A significant proportion of these imports is thought to have been food, upon which Venezuela depends for at least half its needs.

The state sector is thought to be fuelling a trend towards a growing dependency on imports in the country. For state companies with easy access to hard currency, but faced with pressure to ease persistent outbreaks of shortages, there's "every incentive to import," says an economist who works in the state sector and asks to remain nameless.

According to the BCV, imports represented the equivalent of 32 percent of the economy at the end of last year, compared with 20 percent in 2004. This in turn was reflected in the declining trade surplus -- even with oil still at relatively high levels, albeit by now a shadow of their former selves at the middle of last year.

Amid speculation about next year's economic prospects, officials at the Finance Ministry and their colleagues at Planning and Development are said to be trying to "coordinate" the last two years of an ongoing economic blueprint for the five years up to 2013. Their objective, it's said, is to pull things together in place of the "confusion" that was deemed by one observer, apparently somewhat laconically, "to rein in lack of coordination in the conduct of the forward-looking management of the economy."

The officials apparently have until December 10 to deliver at least an outline of their latest ideas about implementing the rest of the Simon Bolivar National Project to the president. They are said to be focusing on action plans in five specific areas: food, energy, housing, residential natural gas, and state financing -- all of which are deemed areas where the government's track record is under question.

Food in particular is seen as a key issue, not least because imported foodstuffs are seen to be a major factor in fuelling inflation. The national housing shortage is now unofficially estimated at 2.5 million homes, up a million on a few years ago. Officials calculate that the shortfall could be resolved if housing construction starts were running at between 100,000 and 120,000 a year -- but targets have been repeatedly missed in the past.



Veneconomy: Venezuela in Recession