Venezuela, Broke?


The majority of analyses about the current situation of the Venezuelan economy is based on three ideas: 1. That the Chávez administration received a dollar rain during the past years, as a result of high oil prices. 2. That the Chávez government doesn’t know how to invest these huge resources to stimulate diversification of production, practicing a disastrous economic policy based on handouts, via the Social Missions, and 3. That now, with the oil price at a low, Venezuela and state oil company PdVSA are “broke.”

We will try to demonstrate in this article that these three allegations are quite incorrect.

Between 1999 and 2008, the Venezuelan economy went through five stages: 1. Chávez’ political ascent, in February 1999, facing an adverse economic, political and institutional scenario (the country was choking on the heritage of periods of disinvestment and de-industrialization of the 1980s and 1990s, and the price of oil was on its lowest level since 1973); 2. The adoption of interventionist measures and more development-oriented policies, beginning in the second half of 1999; 3. The coup and “economic sabotage” applied by the opposition, between the fourth quarter of 2001 and the third quarter of 2003, as a reaction to the increase of state intervention in the economy; 4. The economic recovery starting in the fourth quarter of 2003, from a base already quite above the previous situation. The state began to interfere in a more decisive way in economic questions (particularly PdVSA); 5. The “sowing oil” policy and advance towards “Bolivarian Socialism,” the effort for productive diversification, for a new industrialization process, for the payment of the high social debt accumulated during decades, and the expansion of state and people power into strategic economic sectors.

A study performed by the ministry of finance in 2004 shows that the per capita dollar value of oil exports was, at least until mid-2005, lower than during previous administrations: 26 percent that of the value received during the first administration of Andrés Pérez (1974-79), 35 percent of that received by Herrera Campins (1979-84), 56 percent of that received by Lusinchi (1984-89), 49 percent that during the second mandate of Pérez (1989-93), and 85 percent of that received during the second mandate of Caldera (1994-98). It is necessary to take into account two factors: 1. That the comparison prices must be expressed in constant values, and 2. That the population of Venezuela more than doubled between 1973 and 2005. For that reason, the study concluded that the Chávez government did not enjoy a petrodollar “rain” — quite the contrary. In spite of that, social spending — according to a 2008 study by Mark Weisbrot and Luis Sandoval — rose from 8.2 percent of GDP in 1998 to 13.6 percent of GDP in 2006. Taking into account the contributions made by PdVSA, social spending reached 20.9 percent of GDP. In per-capita terms, it quadrupled since 1998.

The dynamism of the Venezuelan economy has been a direct — but not exclusive — result of the rise of oil prices to a record $135.2 per barrel Brent in July 2008 (as of December, prices plummeted to $43.3; currently it is back up to $59). Oil is and will continue for a long time to be the base of the Venezuelan economy. In the meantime, there are two pieces of news: 1. In 2003, the Venezuelan state recovered control over the oil industry, reducing the drain of resources leaving the country and the domestic concentration of income; and 2. Since then, the country has been depositing increasing installments of oil revenues in productive sectors, in the structuring and strengthening of the domestic market, in a process of sovereign industrialization (with majoritarily Venezuelan capital, acquisition of technology, local workforce training, and increasing incorporation of national Gross Value Added). Therefore, the notion that Venezuela has adopted an artificial and miserably subsidized economy is mistaken.

The main mechanisms used by the Venezuelan government to stimulate economic growth and productive diversification were, among others: 1. The rescue of PdVSA under state control, because since its creation in 1976, the company functioned like a state within a state. This first action enabled in great measure the application of others; 2. Currency exchange, capital and price controls, which have been effective in slowing the deterioration of the national currency and capital flight, be that via international speculation with the Bolívar, profit transfer abroad, or superfluous imports; 3. The nationalization, via indemnization payments, of strategic companies in the communications, electricity, food production and construction sectors, in addition to financial institutions; and 4. The reform of the Central Bank of Venezuela Law, which established an annual ceiling for international reserves; the amounts that exceed the fixed ceiling must be transferred to a National Development Fund — Fonden — whose objective it is to finance sectors such as heavy industry, transformational industry, agriculture, petrochemical industry, gas, infrastructure, transportation and housing, among others. Since its creation in 2005, just PdVSA transferred close to $21.8 billion to Fonden, according to the Venezuelan government.

Venezuela not only designed and put into practice initiatives to “seed oil,” it even turned into one of the countries in the world that invest most: The share of Gross Fixed Capital Formation of GDP comes close to 30 percent; according to the United Nations’ Economic Commission of Latin America and the Caribbean (ECLAC), the Latin American average is 20 percent. There are currently several large-scale projects under construction: New oil refineries, cement factories, aluminum laminate plants, paper and cellulose plants, specialized steel mills, oil pipeline tube manufacturing, rail and wagon plants, iron ore processing plants, appliance manufacturing, automobile and tractor assembly, dairy processing plants, saw mills, agricultural supply production, as well as infrastructure megaprojects: Ports, airports, bridges, subway lines, railroads, roads, thermoelectric plants, hydroelectric plants, gas pipelines, fiberoptic networks, water distribution networks, to mention just a few.

These initiatives are geographically distributed throughout all states, with the objective of decentralizing the population that lives essentially along the Caribbean coast and occupying other areas of the national territory. The companies created as part of this effort are financed both by public and private capital, both Venezuelan and foreign (especially from China, India, Russia, Belorus, Iran, Cuba and Brazil, but also from the United States and Japan, among others).

In most of these undertakings, the state maintains at least 51 percent of the shares. Despite the fall of the oil price, the government has reaffirmed its commitment for the continuation of some of these projects, as well as for social programs, of low unemployment (close to 7.3 percent in March), and of workers’ salaries. We will see whether this is possible.

Some liberal “analysts”, flaunting a supposed concern with fiscal performance, have suggested in recent years that the increase of public spending in Venezuela represents an “unsustainable” tendency. The reality shows the opposite. While public spending grew from 21.4 percent of GDP in 1998 to 30 percent in 2006, the increase of state receipts was even higher: from 17.4 percent to 30 percent of GDP. This means that, despite the occurrence of fiscal deficits, income rose faster than expenses; which, in turn, guarantees fiscal sustainability.

The decisive factor in reaching these results was the application of the Hydrocarbons Law (which increased state taxation of foreign oil companies), and the role of the National Integrated Customs and Revenue Administration (SENIAT) has been important. In addition, the annual budgets were calculated using as base an oil price much below the actual price. For example, in 2005 a price of $23 per barrel was used, when the actual price was $41. In 2007, a base of $29 was used, when the real price was $65. In 2008, despite high prices, it was estimated at $35. In 2009, a base of $60 was used and later, reacting to the crises, it was re-set at $40. This way, a considerable amount of special receipts were accumulated, that were used to feed international reserves, and successively Fonden.

Therefore, the bases used to predict the “bankruptcy of PdVSA” and the “breakdown of the Venezuelan economy” are exceedingly simplistic. These analyses arise from two true observations, but they reach two mistaken conclusions: It’s true that 1. Venezuela depends on oil exports, responsible for more than 90 percent of total sales abroad, and that 2. International oil prices dropped from nearly $140 to less than $40, within just five months. However, these facts have no relation with the conclusions: 1. That Venezuela wasted again, as it had done in the 1970s, the chance to diversify its economy and to break its excessive dependency on oil, and 2. That it won’t have sufficient dollars to maintain the commitments assumed with the Social Missions, the only measure of the “populist” government.

It’s crucial to take into account that the country obtained elevated trade surpluses with the world between 2004 and 2008, totaling more than $155 billion. At the same time, the current-account balance also accumulated a surplus of more than $100 billion in the past three years. While international reserves dropped during the “oil sabotage” of 2002-03 to come close to $13 billion, currently they exceed $80 billion (including official reserves of the Banco Central de Venezuela — $30 billion — and resources of Fonden, PdVSA, the national treasury and the China-Venezuela Heavy Fund).

In recent years, Venezuela built up a cushion of resources and adopted measures to protect the economy from international financial speculation, such as currency exchange and capital controls. These measures will be very important to confront the current international situation. The government’s actual orientation is to face the crisis by increasing spending, investments, and public debt. That’s possible thanks to the fact that public debt, both foreign and domestic, were quite small as a percentage of GDP in 1998, when they represented 25.5 percent and 5 percent, respectively. In 2003, at the height of the political and economic crisis produced by the opposition, they reached stratospheric levels: 29.7 percent and 17.9 percent, respectively. In 2007, both were already reduced: External debt (of nearly $52.9 billion, according to ECLAC) represented 12 percent, and internal debt 7.3 percent of GDP. In 2008, the public debt total represented 14.3 percent of GDP, quite below the levels of 1989 (83.6 percent), 1995 (69.2 percent), 1999 (29.5 percent) and 2003 (47.6 percent). The current level is the lowest of the past 30 years, and one of the lowest in the region.

Between the fourth quarter of 2003 and the fourth quarter 2008, the GDP grew 94.7 percent: The Venezuelan economy aggregated 21 consecutive quarters of growth, at an average rate of 13.5 percent. Since 2004, the non-petroleum GDP has been growing at rates significantly above the petroleum GDP. Equally significant was the acceleration of the manufacturing GDP between 2004 and 2008, as tracked by electricity consumption, and sales of vehicles, cement, construction equipment, steel, iron and aluminum, among others. Within manufacturing, the areas that grew most were food and drinks, tobacco, leather and footwear, editing and print, nonmetal minerals, rubber and plastic products, automotive assembly, and production of machines and equipment. This performance must improve even more when the impact of important government measures aimed at stimulating domestic private enterprise are fully felt. According to a study published by Weisbrot in February 2009, “in spite of the expansion of government during the Chávez years, the private sector has grown faster than the public sector.” The current oil price level has triggered a reduction in economic growth of approximately 8 to 4 percent — recently ECLAC forecasted a GDP rise of 1 percent for 2009, still above the regional median of -0.3 percent. According to Weisbrot and Sandoval (2008), at a price below $45 per barrel for Venezuelan oil, the country would begin to register current-account deficits. However, given that Venezuela has approximately $82 billion in reserves, it could finance a modest current-account deficit for some time — even if the oil price would remain at the current low levels during the next two years. Both authors sustain that the negative forecasts about the Venezuelan economy are based on quite fragile arguments.

In the case of PdVSA, many “analysts” don’t recognize or forget that in 2007, the company finished the year as the most solid oil company in Latin America. At that moment, it counted with $107 billion worth of total assets, and consolidated global equity of $53.8 billion, guaranteeing a debt/asset ratio of 14.96 percent and a debt/ equity ratio of 29.72 percent. Until September 2008 (before the crisis), the financial indicators of the company had improved, according to PdVSA figures: Total assets grew 32.7 percent, consolidated global equity rose 29.9 percent, and debt dropped by 7.4 percent. With that, the debt/asset ratio diminished to 10.45 percent, and the debt/equity ratio dropped to 20.36 percent. The numbers for the fourth quarter 2008 have not been published; but while they must indicate a worsening of the situation, there is no “bankruptcy” of the company. It is important to de-mistify the idea spread by big media — closely related to oil multinationals, private banks and the corrupt meritocracy that managed PdVSA until 2003 — that the Chávez government weakened the company. Quite the contrary, beyond Pd- VSA having been put to the service of the interests of Venezuela and Venezuelans, it has been made more robust since then. The current negotiations with domestic and foreign suppliers, so insistingly reported over the past weeks, reflect neither a “bankruptcy” nor a major weakness of the state company, but the utilitzation of the crisis as an opportunity to do what all companies in the world are trying to do: Renegotiate their debt.

In addition to striving to deposit oil resources into productive diversification, the Venezuelan government has invested in the “Social Missions.” According to data from the National Institute of Statistics (INE) and ECLAC, poverty continues to decline in Venezuela, one of the countries that stand out most in compliance with the “Millenium Goals.” The Human Development Index (HDI) improved a lot over the 10 years of the Chávez government. The last data published by the United Nations Development Program, regarding the year 2006, shows that in Venezuela, the HDI reached 0.826, while in 2004 it was 0.810, and in 2000 it was 0.776. It is interesting to observe that Venezuela’s HDI grew considerably more than that of other oil exporting countries with similar HDI. More relevant information: The UNPD Human Development Report for 2007-08 shows that between 1975 and 1980 — a period of high oil prices — Venezuela’s HDI grew only from 0.723 to 0.737. In other words, the current results are telling: More than 2.3 million Venezuelans emerged from poverty. On the other hand, the Gini coefficient dropped from 0.4865 in 1998 to 0.4200 in 2007, as a result of diminishing disparities in the concentration of income in the Venezuelan society.

Let’s conclude with a statement from the current minister of economy and finance of Venezuela, Alí Rodríguez Araque: “The Bolivarian Revolution neither emerged because oil prices were very high, nor did it maintain itself mainly because they were high. Precisely, the government of President Hugo Chávez began at a moment of profound depression for oil prices. So, the Bolivarian Revolution doesn’t begin with high oil prices, and it won’t end because oil prices drop.”

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