Economy and Trade
Venezuela was one of three countries that emerged from the collapse of Gran Colombia in 1830 (the others being Ecuador and New Granada, which became Colombia). For most of the first half of the 20th century, Venezuela was ruled by generally benevolent military strongmen, who promoted the oil industry, and allowed for some social reforms. Democratically elected governments have held sway since 1959. However, with the election of Hugo Chávez in 1999, Venezuela has embarked on a strange course of its own, guided by Chávez’s idea of “21st Century Socialism,” which aims to cure social ills while countering “unhealthy” globalization. With the United States deeply unhappy at Venezuela’s stance and policies, the impact on trade and regional stability has been considerable. Venezuela remains highly dependent on oil revenues, which account for roughly 90% of export earnings, about 50% of the federal budget revenues, and around 30% of GDP. The country’s population of 28 million is young, growing, and urbanized, with around 90% of the population living in urban areas.
Economic Policy over 12 Months
A nationwide strike between December 2002 and February 2003 had far-reaching consequences on the country’s economy. Real GDP declined by around 9% in 2002, and 8% in 2003, but economic output since then has recovered strongly. Fueled by high oil prices, record government spending helped to boost GDP by about 9% in 2006, 8.3% in 2007, and nearly 6% in 2008. This spending, combined with recent minimum-wage hikes, and improved access to domestic credit, has created a consumption boom, but has come at the cost of higher inflation—roughly 20% in 2007, and more than 30% in 2008. Imports also have jumped significantly. Declining oil prices in the latter part of 2008 are expected to undermine the government’s ability to continue the high rate of spending. President Chávez, in 2008, continued efforts to increase the government’s control of the economy, by nationalizing firms in the cement and steel sectors. In 2007, he nationalized firms in the petroleum, communications, and electricity sectors. In July 2008, Chávez issued a series of decrees, which brought in further laws to consolidate and centralize authority over the economy through his plan for “21st Century Socialism.” Chávez’s victory in 1998 reflected considerable anger among poorer Venezuelans about the corruption of his predecessor, President Carlos Andres Perez, who was impeached.
The Venezuelan government dominates the economy. All foreign-exchange requests must be approved by the National Exchange Control Administration (CADIVI), and the Central Bank (BCV) completes all legal purchase and sale of foreign currency. In January 2008, the Venezuelan government adopted the bolívar fuerte as its new currency, effectively redenominating the previous currency, the bolívar, by removing three zeroes (1 bolívar fuerte = 1,000 bolívars). The current exchange control regime rate for US dollar exchange is VEF2.145=US$1. Unofficial exchange rates are far higher. BCV international reserves were at US$38 billion in early December 2008.
The state oil company, PDVSA, controls the petroleum sector. Government companies control the electricity sector, and important parts of the telecommunications and media sectors. In spring 2008, the government announced the nationalization of cement and steel producers, as well as select companies in the milk and meat distribution sectors. The government also unveiled its intention to nationalize Banco de Venezuela, one of the country’s largest private banks, in July 2008. These and previous nationalizations, as well as other threats to property rights, and an uncertain macroeconomic environment characterized by high inflation and foreign-exchange controls, have led to reduced space for the private sector, and low levels of private investment.
There is considerable income inequality. The Gini coefficient (a measure of inequality of income distribution or inequality of wealth, whereby the lower the score between 0 and 1 the better) was 0.42 during 2007. According to government statistics, the percentages of poor and extremely poor citizens among the Venezuelan population were 27.5% and 7.6%, respectively, for the first half of 2007.
Economic Performance over 12 Months
Inflation has been a serious issue in Venezuela. Although real GDP growth was strong in 2007 and 2008, the consumer price index raced away in 2007, increasing by 18.7%. This followed inflation of 13.5% in 2006, and 16% in 2005. However, these were all improvements on 2004, when inflation grew by 21.7%. A combination of the global downturn and Chávez’s high-spending plans are thought likely to drive inflation to above 30% in 2009.
Although economic growth has been impressive, as a result of the oil windfall, many in the Venezuelan business community remain very concerned about President Chávez’ vision for “21st Century Socialism,” and what it portends for the private sector. With oil prices down more than 75% between July and early December 2008, many economists believe the Venezuelan economy will struggle in 2009.
Despite political tensions between the United States and Venezuela, the United States remains Venezuela’s most important trading partner. In 2007, bilateral trade topped US$50 billion. Venezuelan exports to the United States were US$40 billion (accounting for at least 60% of total Venezuelan exports), and US exports to Venezuela were US$10 billion (or 22% of total Venezuelan imports). The United States is the single most important customer for Venezuelan oil. Venezuela shipped an average of approximately 1.4 million barrels of crude oil and petroleum products per day to the United States in 2007, a figure which accounts for at least half of Venezuelan oil exports, and 10% of US oil imports. Bilateral trade is expected to reach US$70 billion in 2008, primarily due to the high oil prices that prevailed for most of the year.
The government of Venezuela has taken a vocal role against the proposed Free Trade Agreement of the Americas (FTAA). Its stated goal is to expand its Bolivarian Alternative for the Americas (ALBA) project, and develop a South American bloc.
Manufacturing contributed an estimated 17% of GDP in 2006. The manufacturing sector has continued its recovery, started in 2004, but remains hindered by a marked lack of private investment. Venezuela manufactures and exports steel, aluminum, textiles, apparel, beverages, and foodstuffs. It produces cement, tires, paper, fertilizer, and assembles cars for both domestic and export markets.
Agriculture accounts for approximately 4% of GDP, 10% of the labor force, and at least one-fourth of Venezuela’s land area. Venezuela exports rice, cigarettes, fish, tropical fruits, coffee, cocoa, and manufactured products. The country is not self-sufficient in most areas of agriculture. Venezuela imports about two-thirds of its food needs. During November 2006, US firms exported US$412 million worth of agricultural products, including wheat, corn, soybeans, soybean meal, cotton, animal fats, vegetable oils, and other items to make Venezuela one of the top two US markets in South America. The United States supplies roughly one-quarter of Venezuela’s food imports.
Support for Inward Investment and Imports
It is extremely difficult for the private sector to invest in a country that is moving rapidly forward down a nationalization path, and where there is no certainty as to what sector will be the subject of nationalization next. Venezuela’s attractiveness to inward investment is at an all-time low at present.
Tax Exemptions
With dividends paid to non-resident individuals subject to a withholding tax of 90% of the gross amount, and 95% for corporations, Venezuela is not a particularly tax-friendly place for investors. A reduced withholding tax of 4.95% applies to interest paid to financial institutions not domiciled in Venezuela.
However, in an effort to reduce reliance on oil, the Chávez government has also worked to promote growth and diversification, by implementing major tax incentives for small and mid-sized enterprises in the manufacturing, commerce, and service sectors, so as to boost employment in the most economically depressed states. In addition, industrial parks throughout the country are being revived, with significant tax breaks to encourage investment in regional areas. President Chávez has also expressed a desire to reinvigorate labor-intensive, non-oil sectors of the economy, in particular tourism, agriculture, and small business (source: Australian Government, www.dfat.gov.au).
Statistics
GDP growth: 5.7%
GDP per capita: US$14,000
CPI: 31%
Key interest rate: 17.11%
Exchange rate versus dollar: bolivars per US dollar—2.147 (note the currency revaluation on 1 January 2008, with 1000 old bolívars equaling 1 new bolívar)
Unemployment: 8.5%
FDI: US$44.31 billion
Current account surplus: US$48.44 billion
Population: 26,814,843
Source: CIA World Factbook except where stated
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