Significance: Seasonally adjusted third-quarter results showed that private consumption and capital investment decreased when compared with the previous quarter; moreover, consumers and investors are still feeling the effects of local macroeconomic mismanagement.

Implications: Government authorities realised the severity of the imported inputs shortfall and took over the parallel foreign-exchange market earlier this year. However, the disbursement of foreign-exchange continues to be insufficient for local demand, thus injuring the manufacturing and retail sectors.

Outlook: The risk of additional electricity shortfalls is expected to regain force over the next couple of quarters; however the relative stabilisation of oil prices should help the country move slowly towards recovery. If local authorities continue to rely on short-term macroeconomic policies, the risk of a severe economic crisis will continue to be high.

Loosing Steam in Q3

The Venezuelan economy decreased in the third quarter (Q3) of 2010, prolonging the sluggish performance while chipping away a small fraction of the positive result seen in the second quarter of 2010. Seasonally adjusted figures show that total GDP decreased 0.1% quarter-on-quarter (q/q) in the third quarter, down from a 2.0% q/q increase observed in the earlier quarter. With the exception of the utilities, manufacturing, communications, and to a lesser extent the financial services sectors, all other industries showed a negative performance. In addition, unlike in the previous two quarters, the oil sector posted a decline; oil GDP decreased 3.3% quarter-on-quarter (q/q) during the third quarter of 2010. The non-oil sector rose 0.3% q/q during the third quarter. On an annualised basis, Venezuelan GDP decreased 0.4% y/y in the third quarter of 2010.

According to the Central Bank of Venezuela, the year-on-year decline in oil GDP is the result of the international environment and the quotas established in 2009, down 2.1% y/y. In addition, the use of thermoelectricity plants required additional refined oil to be allocated to the domestic market in the third quarter. At the same time, according to data published by the International Energy Agency (IEA), Venezuela's total oil supply decreased, on average, by 1.6% y/y in the third quarter of 2010, while the supply of crude oil decreased by 1.7% y/y over the same period. In seasonally adjusted terms the oil sector shrunk after two consecutive quarters of positive results, down 3.3% with respect to the previous quarter.

When compared with the third quarter of 2009, there were only four sectors that showed a positive performance: communications (posting a recession-proof increase of 9.4% y/y), government services (up 3.2% y/y), transportation and haulage (2.7% y/y), and manufacturing (up 0.1% y/y). However, seasonally adjusted figures posted declines in almost half the sectors; the mining component showed a decline in the past three consecutive quarters. Positive results were posted in communications (up 3.4% q/q), and financial services and insurance (up 0.6% q/q). On the other hand, construction activities posted a negative result, and this can clearly be attributed to lower investment spending within both the public and the private sector in the third quarter. The drop was attributed to lower public enterprise investment in infrastructure. However the negative result was ameliorated by the increase in construction activities related to the national energy company PDVSA. The overall value added of construction activities decreased 2.5% q/q in the third quarter. Meanwhile, the decline in the value added in wholesale and retail activity, down 1.5% q/q came amid a lower supply in imported goods and the electricity savings plan, imposed by the local authorities, which implied fewer hours of operation for the retail sector.

Manufacturing industries registered an overall increase of 1.6% q/q as a result of a recovery in the food, beverages, chemicals, editing and printing, electrical machinery, and apparel sectors. Furthermore, in a year-on-year comparison, private sector food and beverages production increased 15.6% y/y, the production of chemicals rose 7.5% y/y, and clothing and apparel production expanded 17.0% y/y. The data release highlights the positive results seen in the third quarter of 2010 for a select group within the manufacturing sector as a result of the government policy regarding the prioritisation of foreign-exchange disbursements at the official rate. Nonetheless, the private-sector GDP, accounting for 58.9% of the country's total GDP, decreased 0.7% y/y in the third quarter of 2010.

Public-sector consumption was a key driver of the Venezuelan economic performance, as public consumption expenditure expanded 0.6% q/q in July-September. Private domestic demand showed a contraction when compared with the previous quarter, down 0.6% q/q. Meanwhile, gross fixed-capital formation, the most volatile component of Venezuela's aggregate demand, decreased by 4.2% q/q after having expanded 23.6% q/q during the second quarter of 2010, but the breakdown of how much is public and how much is private investment remains unspecified. The central bank data release showed how real imports were affected by the government measures regarding foreign currency, the devaluation of the currency, and the intervention and regulation imposed on the parallel market and the relative stability of the virtually third exchange rate in the country. Indeed, imports posted a 5.1% q/q decline in the third quarter. In addition, the oil sector rise went hand-in-hand with the behavioural trend in the volume of exports; the country's exports decreased 2.5% q/q in the third quarter.

Outlook and Implications

IHS Global Insight forecasts GDP decline for 2010 and a sluggish recovery in 2011 because government spending and fiscal incentives will not be able to carry the economy by themselves over the next few quarters. In addition, the country is still coping with an electricity crisis that prompted drastic measures to avoid a total collapse of the system earlier this year. Furthermore, oil prices in the US$70-80/b (West Texas Intermediate) neighbourhood limit the amount of funds available to continue the government's socialist programme.

Another important factor that will continue to affect economic growth in the short term is manufacturing production. The challenges arising from the excess demand of foreign exchange at the official rate (persistent high inflation rates, growing parallel market for foreign currencies, etc.) prompted the government to declare all U.S.-dollar-denominated bonds a currency and the central bank to be the only agency authorised to deal with bond operations in the private sector. This move has essentially created a third exchange rate, which in mid-November 2010 was 23% higher than the official "oil dollar". The devaluation, the intervention of the parallel market, and the increased disbursements of foreign exchange at the official rate (CADIVI's disbursements rose 3.1% y/y in the first nine months of 2010) have somewhat eased the excess demand for foreign currency and the input shortfalls for the manufacturing sector; thus, we expect some dynamism in the sector in the next few quarters. However, although the socialist agenda aimed at creating public and private-sector partnerships in earlier years, the move towards full government takeover has been evident in the last couple of years. This was clear in the food production and distribution sector. Indeed, the private food production and distribution sectors will continue to be in jeopardy as the scarcity problem will remain among the most urgent issues for the current administration, which is already gearing up for the next presidential election in 2012.