The Economic Crisis That Affects Venezuela

The economic crisis that affects Venezuela

The Venezuelan economy, in particular, has not escaped the dissemination of the crisis and during 2009 plunged into a recessive cycle of considerable amplitude, with a fall in the product reported by the central bank of 3.3%. In fact, as we will see later, the fall of the product recorded by the Venezuelan economy is substantially greater than that registered by the whole of emerging economies and developing countries, greater than that registered by the whole of the countries of the Latin American region andrather similar to that reported in mature economies;A fact in itself disturbing when not surprising, because Venezuela was not in the epicenter of the crisis and the political discourse of public policy decisionments was initially oriented in transmitting a sensation of optimism and invulnerability to events

An element that is good to clarify is that from the first quarter of 2010, economic activity in Venezuela has been additionally affected by the sudden appearance of a restriction in the supply of electricity. At the productive level, this restriction has been expressing in a more or less programmed rationing of energy that has led to the partial paralysis of numerous activities. This clash can explain why the Venezuelan economy will most likely continue to fall in 2010 (in contrast to the rest of the countries in the region, which seem to leave the problems generated by the crisis), but it has no value to explain the fallof the product in 2009

One way to evaluate the performance of the Venezuelan economy in this scenario of global contraction is making a simple comparison with it other Latin American countries. We use four basic performance indicators for that purpose for the set of countries in the region and only for 2009, a moment for which the effects of the crisis are concentrated. These indicators are: the growth of the product, the interannual variation of the actual salary index, the change in the unemployment rate and the interannual percentage variation of the total domestic investment. These four indicators place us in a position to evaluate the effects on production, employment, salary capacity and future growth potential.

More severely the crisis in these aspects. Naturally, it can be counteracted by pointing out that the condition of the oil country has placed Venezuela at an initial disadvantage (with respect to its Latin American peers) before the attacks of the crisis. After all, within the commodities, the adjustment of oil prices was very severe and Venezuela is a condition of dependence on the very particular mineral resource, even in the regional context. From this perspective, it would be more pertinent to compare the performance of the Venezuelan economy with that of countries whose economic structure is marked by oil dependence. Figure 11 allows you to make that comparison. There you can observe and contrast the performance (in terms of product growth) of Venezuela with that registered in the oil economies of the Middle East. In all these economies the deceleration of growth was remarkable, but in no product losses were similar to that registered in Venezuela.

Venezuela suffers during the crisis. The trajectory of the price of oil in Figure 12 shows how until July 2008 the prices of crudeThe global economic crisis whose most abrupt trigger was seen with the bankruptcy of Bank Lehman Brothers (in the month of September of that same year). In this context and before the perspective of an even more acute global economic recession than that experienced in the 30s of the last century, the prices of the main basic products (and commodities), mainly oil, accused decreases until the end of the end of the2008 with a speed and depth never seen before. By December 2008, the marker price of the Venezuelan raw basket was at US $/BL 31.55. That way, in just 6 months the price of oil crude oil had fallen 68%. This very low level became the floor on which prices gradually began to recover during 2009

With a drop in oil revenues of almost 40% in 2009, the huge overcoming balances previously accumulated in the current account of the balance of payments were left behind. Unfortunately, the fall in oil revenues could not be compensated for higher non -oil income. On the contrary, the fall in non -oil income has been one of the most unique demonstrations that report Venezuela’s external accounts in 2009

The effects on the Venezuelan economy seem rather to be collected in the very negative evolution that takes the perception of sovereign risk precisely with the advent of the fall in the price of oil, but unlike other Latin American countries that showed a complex mixture of shocks, mostlyRepresented by reductions of credit lines to the private sector, higher interest rates, lower portfolio investments and short -term capital outputs, the repercussions of this enormous increase in the perception of risk were given for Venezuela in two ways: AThrough increasing short -term private capital exits and in a non -seen fall in the net balance of investment in fixed assets from the rest of the world.

Venezuela presented in 2008 a comfortable level of accumulation of reservations, in an average close to 35 billion US $ in the year, in fact the Republic closed 2008 with a historical peak of reservations never seen before (42.299 million US $). The existence of an administered currency control with a high level of reserves, then seemed like a rather deterive combination when considering a contractive adjustment in the foreign exchange assignments towards the rest of the economy.

The truth is that, in an inflationary economy, the decision to cut public spending in nominal terms and to increase taxation, reveals an essentially contractive bias in fiscal policy, whose rather valid position, and in extreme circumstances,amplifies the potentially pernicious effects of external shock. The fall in government spending on the Venezuelan economy not only directly impacts internal aggregate demand, but also promotes, indirect channels, important effects on private consumption. For that reason, the contractive adjustment of public spending should not be ruled out as one of the explanatory elements in the 3.2% drop that records private consumption in Venezuela in 2009. This fall in private consumption is quite important if compared to the average growth rate of 14% that this variable experienced in the five -year period prior to 2009. Private consumption represents 51% of the global demand in Venezuela, which means that its variations have a dominant effect on the behavior of internal aggregate demand and in the evolution of the product.

In Venezuela, salary indexation usually occurs once or twice a year together with each increase announced by the minimum wage government. It is precisely the average percentage increase rate of the minimum wage that frequently governs salary increases at all scales and in most sectors. Venezuela had in 2009 an inflation rate of 27% even with an abrupt and contractive adjustment of public spending and with a quite tight control of monetary aggregates, which indicates that to reduce inflation the gaze deserves to be put into other power sources. In an economy that during 2009 was subject to stricter controls in imports of goods, and prices controls in a wide variety of internal goods and services, the ‘bottlenecks’ are usually inevitable, accentuating the deviations of relative pricesand inflationary pressures.