Archive for January, 2010

Venezuela entering “STAGFLATION”

By Jose Orozco and Steven Bodzin

CARACAS, Venezuela (Bloomberg) — Venezuela is entering a period of “stagflation” signaled by a central bank report that the economy in 2009 probably shrank for first time in six years, said Patrick Esteruelas, a Latin America analyst at Eurasia Group.

As other countries in the region including Brazil and Chile recover from a recession, Venezuela is lagging behind and “firmly in stagflation territory” with rising prices and a shrinking gross domestic product, Esteruelas said. A central bank report released said Tuesday the oil-dependent economy probably contracted 2.9 percent this year.

“Venezuela is continuing to post negative quarterly growth rates at a time when most, if not all, its Latin American peers are already beginning to show quarterly positive growth as they leave the worst of the economic contraction behind,” Esteruelas said Wednesday in a telephone interview from New York.

A contraction in the fourth quarter would mark the third straight period of annual decline this year after the economy shrank 4.5 percent in the third quarter. Oil revenue, which accounted for 95 percent of exports excluding services in 2009, fell this year by 35 percent to $57.6 billion, the Central Bank of Venezuela said in its year-end report on the economy.

Annual inflation in Caracas slowed to 28.6 percent through November, according to the central bank. The rate is the highest of 78 economies tracked by Bloomberg.

The central bank’s report shows that increased government borrowing, designed to spur growth, failed to overcome the drop in oil exports by price and volume, said Miguel Octavio, head of research at BBO Financial Services Inc. in Caracas.

“The government was used to having exaggerated resources and those resources are increasingly limited,” Octavio said in a telephone interview. “They had a lot of money accumulating in various funds at a time when the oil price was very high, but they’ve been spending it.”

A recovery in oil prices allowed Venezuela to avoid deeper economic distress. The government, which had originally budgeted oil to average $60 a barrel this year, cut back its expectations to $40 a barrel in March and slashed its spending plan.

The average price for Venezuelan oil exports this year through Dec. 24 was $56.88 a barrel, down 34 percent from the $86.49 average in 2008, and the country held back output to comply with a quota from the Organization of Petroleum Exporting Countries.

Venezuela had $33.6 billion of international reserves on Dec. 28, according to data on the central bank’s Web site. The government and the state oil company sold a combined $11.3 billion of bonds this year.

The economy was also hurt in the year’s final quarter by the government decision to close eight banks over possible misuse of depositor funds, locking up customers’ savings during the holiday shopping season, Octavio said. He estimated holiday sales fell 15 percent to 20 percent in the month of December.

“When you have a crisis like this, banks with money think twice before lending, especially if there’s a chance customers will come to withdraw money,” Octavio said. “Many depositors couldn’t move their money. That affected liquidity and the movement of money in the banking system.”

Consumption probably fell 1.8 percent in 2009, down from a 7 percent gain the previous year, the central bank said. Industrial production fell 7.2 percent compared with an increase of 1.4 percent in 2008.

Venezuela’s current-account surplus fell to $12.4 billion this year from 37.4 billion in 2008, and the combined current, capital and financial account reached a deficit of $11 billion, the central bank report said.

In 2008, the combined current, capital and financial account surplus was $9.3 billion, after posting a $5.7 billion deficit in 2007.

Finance Minister Ali Rodriguez told reporters Dec. 21 that “preliminary results” showed the country’s economy shrank 2 percent in 2009 and inflation would end the year at about 27 percent.