August 21, 2009 / 1:31 AM / in 10 years

UPDATE 4-Venezuela economy shrinks for first time in 5 years

* Venezuela economy shrinks 2.4 percent in 2nd qtr

* Finance minister warns of more unemployment

* Current, capital accounts show surplus (Adds finance minister comment, byline)

By Frank Jack Daniel

CARACAS, Aug 20 (Reuters) - Venezuela’s economy shrunk for the first time in over five years in the second quarter, after a government-driven consumer boom petered out and the global recession finally bit South America’s biggest oil exporter.

High public spending by President Hugo Chavez during an oil bonanza meant even the poor had some money to burn, spurring a long shopping spree defined by double-digit growth. But the boom ended abruptly in the April-June period.

Venezuela’s finances were hard hit when oil prices started a free fall late last year, while a string of nationalizations has dampened the private sector’s appetite for investment.

Growth had already slowed late last year and the economy expanded a slim 0.3 percent in the first quarter.

The OPEC nation’s gross domestic product contracted 2.4 percent in the three-month period, with most of the fall in the oil sector, which was down 4.2 percent.

The downturn will aggravate the impact of Venezuela’s inflation, which at 13 percent so far this year is one of the highest in the world.

On the upside, Venezuela’s current account showed a surplus of $2.2 billion in the quarter, after two periods of deficit. The capital account also showed a surplus, of $1.2 billion.

Finance Minister Ali Rodriguez warned that higher unemployment was likely on the horizon but said that with world oil prices gradually ticking up, economic growth was “perfectly recoverable.” He did not give a time frame.

“We have had much harder falls and we have recovered,” he said on state television.

Clearly expecting a contraction, the government said last week it has prepared an economic stimulus that is waiting for Chavez’s approval and is expected to tackle a weakening local currency and encourage investment. It will be the second attempt to kick-start the economy this year.

Rodriguez said the government should “drastically restructure” public administration and hinted the measures could affect the already tightly controlled banking sector, which he accused of speculation.

OUT OF STEAM

Since 2007, Chavez has radicalized his program, embracing socialism and nationalizing most of the nation’s industry including huge oil projects owned by foreign companies.

The economy grew 8.4 percent in 2007, but in a sign his spend-and-nationalize model was running out of steam, it slowed to 4.8 percent last year despite an average oil price of $87 per barrel for Venezuelan crude and a global peak of $147.

Prices tumbled to about $30 this year, but are now at $70.

Analyst Alvise Marino of IDEAglobal said Venezuela appeared to be entering recession at a time when other countries in the region were recovering. In Venezuela, a recession is considered to start after two successive quarters of contraction.

Venezuela’s fall has not so far been so hard as that of countries such as Mexico, whose economy was 10.3 percent smaller in the second quarter, after shrinking 8 percent in the first quarter.

“(The data) confirms expectations that Venezuela is suffering from what’s going on abroad, and that the government is very concerned that the model is not sustainable in the long term, but at the same time it is relatively modest,” said Maya Hernandez, an economist with HSBC.

In February, Chavez cut Venezuela’s budget, reduced the average oil price estimated in the budget, raised sales tax and authorized more borrowing to avoid a fiscal deficit.

“What they need is a stronger fiscal stimulus. This is especially true with inflation falling, in Venezuela and world wide,” said Mark Weisbrot, an economist with the Washington-based Center for Economic and Policy Research.

In 2008, Venezuela’s inflation reached 17 percent by July and was 31 percent at the end of the year. (Reporting by Caracas Newsroom; Writing by Frank Jack Daniel; Editing by Gary Hill)

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