March 23, 2009 / 11:19 PM / 11 years ago

Venezuela economy seen contracting unless oil rises

CARACAS (Reuters) - Without a sustained rise in oil prices, Venezuela’s economy will stall or contract this year, especially after the spending cuts socialist President Hugo Chavez announced at the weekend.

Venezuelan President Hugo Chavez speaks during his weekly broadcast 'Alo Presidente' in Ortiz, in the central state of Guarico, March 22, 2009. REUTERS/Miraflores Palace/Handout

Chavez’s liberal use of soaring oil revenues, soft credits and lower sales tax has endeared him to poorer supporters and fed a consumer boom in recent years.

Despite the socialist president’s usual instinct to spend, on Saturday Chavez cut spending and raised sales taxes rather than risking a costly fiscal stimulus with oil revenues at about half their 2008 level.

Analysts say the decision will likely further slow consumer demand and economic growth.

“When you have a falling off in private demand, its basically government spending that is going to make up for it, or you are going to have the economy shrink,” said Mark Weisbrot, an economist with the Center for Economic and Policy Research.

The government will use increased domestic borrowing to cover the sharp drop in oil income, putting off — for now — a devaluation of the fixed-rate bolivar currency. The budget, already smaller than last year, was trimmed another 7 percent.

Venezuela’s economic growth had already slowed to 4.9 percent in 2008 after years of rapid expansion and many economists forecast it will go negative this year.

“The economy is going to contract given the collapse in oil prices, I have no doubt about it,” said Morgan Stanley economist Boris Segura. “I am expecting a 4 pct drop in 2009 and these announcements don’t change my view.”

The government has forecasts 6 percent growth this year and 15 percent inflation.

Venezuela’s inflation rate, the highest in Latin America, has slowed in recent months as the cost of food imports has dropped, but is still seen as likely to come in higher than the target.

Finance Minister Ali Rodriguez said on Saturday he expected prices to rise “less than 20 percent,” this year.

SPARE AMMUNITION

Still, Chavez has some reason to be optimistic.

At over $53 a barrel, oil prices currently are at their highest in three months.

Over his decade in government, Chavez has reduced the country’s foreign and domestic debt to 14 percent of GDP, not including bonds sold by state oil company PDVSA and outstanding payments for a wave of nationalizations in the last two years.

While the credit crunch and investor nervousness about Chavez’s aggressive stance against business may limit Venezuela’s options for overseas borrowing, high liquidity means there are plenty of options at home.

Despite the slowdown, most economists agree Venezuela will come through 2009 without a catastrophe at the macroeconomic level, with more serious problems developing if the world financial crisis becomes a global depression next year.

As well as considerable foreign reserves, Chavez has political capital to spend after victory in a referendum allowing him to stay in office as long as he keeps winning elections. But he may still chose to devalue or raise gasoline prices if oil does not quickly recover.

“In the end, they want to see what happens with oil prices in the second quarter of the year, and if not, they have some bullets left to use,” said Segura.

The strong local currency makes it hard for Venezuelan companies and farmers to compete with imports, while gasoline subsidized at three cents a liter is a burden on South America’s top oil exporter.

Chavez promises the fat will be trimmed from the budget without affecting popular social programs. He also raised the minimum wage by 20 percent.

Even so, the crisis is starting to be felt.

State oil company PDVSA, which funds half the budget ran up $8 billion in debts to service companies when oil prices started falling, sparking protests from unpaid workers in the sector. Although PDVSA has now started paying those debts some contractors have idled rigs.

Despite his avowed worker credentials, former soldier Chavez is heading toward a showdown with public sector unions, who he calls corrupt for asking for large pay rises.

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