Falling oil prices mean weaker economic growth for Venezuela

Nov 10, 2008 01:00 AM

Thanks to falling oil prices, Venezuela's economy is heading for a major slowdown after five years of strong growth. Next year, Venezuela's GDP will likely expand by a mere 2.0 %, the International Monetary Fund predicts. That compares with 6.0 % this year and an average of 10.7 % in the 2004-08 period. The results next year will be Latin America's second-worst after Mexico and Venezuela's worst performance since 2003.
"In an economy so heavily dependent on oil income -- both from a fiscal and external accounts standpoint -- a decline in oil prices is very bad news," says Alberto Ramos, the senior Latin America economist at US investment bank Goldman Sachs. "Even more so when there are already very large imbalances brewing in the economy and the regime has very little policy flexibility."

All this on top of the fact that a devaluation is in the pipeline, likely sooner rather than later, he adds. The national currency, the Bolivar, has been pegged to the $ at 2.15 bolivares per dollar since early 2005.
Venezuelan economist Jose Luis Cordeiro also sees the falling oil prices hitting Venezuela's economy hard.
"The sudden collapse of oil prices has been a negative shock to the finances of [President Hugo] Chavez, since he quickly became accustomed to the higher oil revenues, which fuelled his higher expenditures," he says. "The drastic revenue contraction will cause devastation in the Venezuelan Petro-State."

Venezuela is not the only country in Latin America seeing a marked slowdown. Mexico, the second-largest, is also being hit hard, thanks to its strong dependence on the United States for its exports, tourism and remittances, and oil, its top export, seeing falling prices.
Ecuador, another oil-producing country, will also see a marked slowdown, as will Argentina. But Venezuela's case is particularly illustrating, as it comes on top of several years of expanding government expenditures at home and abroad while weakening the non-oil private sector.

The model has been heavily dependent on oil revenues, which until recently grew despite falling production. Oil revenues account for some 90 % of Venezuela's export earnings, more than 50 % of the government's budget revenues and around 30 % of gross domestic product, according to Oxford Analytica.
And Venezuela has aggressively used its oil wealth to finance projects throughout Latin America, including the presidential campaign of Argentina's president Cristina Fernandez, according to a recent verdict by a Miami jury.

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