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Venezuela - Economy (Notes)

ECONOMY Real GDP increased by 10.3% in 2006. The economy recovered strongly in 2004 (17.9%) and 2005 (9.3%) after two consecutive years of deep economic recession (in 2003, Venezuelan GDP contracted 7.7%, after contracting 8.9% in 2002). The economic recovery has been driven by a large increase in government expenditures, based on an oil windfall, which in turn generated higher consumption levels. The Consumer Price Index increase was approximately 17% at the end of 2006, following increases of 14.4% in 2006 and 19.2% in 2004. As of January 23, 2003, 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. The current exchange control regime rates for U.S. dollar exchange rate are: Bs. 2,144.60=U.S. $1.00 for purchase operations, and Bs. 2,150=U.S. $1.00 for sale operations. The national budget for 2007 assumes that the government will not devalue this year. Nontheless, some local economists expect devaluation in 2007 due to the increasing disparity between official and parallel market rates. Central Bank-held international reserves increased to over U.S.$36 billion at the end of 2006. The reserves would have been higher, but the BCV transferred $6 billion to the National Development Fund (FONDEN) during the last quarter 2005, as directed by the Central Bank Law (July 2005) and an additional $4.3 billion in 2006. The level of international reserves is expected to decrease during 2007 after additional transfers of foreign reserves to FONDEN and because the Central Bank Law established that state-owned oil company PDVSA will only transfer the foreign exchange earnings needed for its domestic expenses, taxes, royalties, and dividends to the BCV, and would transfer the rest to FONDEN. Venezuelan sovereign debt, both domestic and foreign, has decreased in recent years in both absolute terms and as a percentage of GDP. Venezuela's external debt/GDP ratio of approximately 16% is low by Latin American standards. Venezuela's Emerging Markets Bond Index investment risk rating, at 202 basis points, dropped somewhat over 2005, but remained higher than many in the region. There is considerable income inequality. The Gini coefficient was 0.45 during 2006. According to government statistics, the percentages of poor and extremely poor among Venezuelan population were 33.9% and 23.2%, respectively, in 2006. These high ratios are due primarily to lower real wages earned by employees, and high rates of un- and underemployment. Although economic growth has been impressive, as a result of the oil windfall, many in the Venezuelan business community remain very concerned about President Chavez' vision for 21st Century Socialism and what it portends for the private sector. Petroleum And Other Resources Economic prospects remain highly dependent on oil prices and the exportation of petroleum. In 2005, the oil sector accounted for roughly 15% of GDP, 90% of export earnings, and about half of the central government's ordinary revenues. Venezuela remains the fourth-leading supplier of imported crude and refined petroleum products to the United States. Even as oil prices increased in 2006, the Venezuelan government sought more income from the petroleum sector. The first example was a unilateral decision in late 2004 to increase the royalty rate on production from the Orinoco heavy crude 'strategic associations' with international oil companies from 1% to 16.67%. The Government of Venezuela had historically opened up much of the hydrocarbon sector to foreign investment, promoting multi-billion dollar investment in heavy oil production, reactivation of old fields, and investment in several petrochemical joint ventures. In the late 1990s almost 60 foreign companies representing 14 different countries participated in one or more aspects of Venezuela's oil sector. On November 13, 2001, under the enabling law authorized by the National Assembly, President Chavez enacted the new Hydrocarbons Law, which came into effect in January 2002. This law replaced the Hydrocarbons Law of 1943 and the Nationalization Law of 1975. Among other things, the new law provided that all oil production and distribution activities were to be the domain of the Venezuelan state, with the exception of the joint ventures targeting extra-heavy crude oil production. Under the new law, private investors cannot own 50% or more of the capital stock in joint ventures involved in upstream activities. The new law also provides that private investors may own up to 100% of the capital stock in ventures concerning downstream activities, in addition to the 100% already allowed for private investors with respect to gas production ventures, as previously promulgated by the National Assembly. During the December 2002-February 2003 general strike, petroleum production and refining by PDVSA, the state-owned oil company, almost ceased. Despite the strike, these activities eventually were substantially restarted. Out of a total workforce of 45,000, over 20,000 PDVSA management and workers were subsequently dismissed because the government asserted they had abandoned their jobs during the strike. Current levels of production remain a subject of debate, with considerable difference between the levels cited by the Venezuelan government and those cited by private sector observers. With world oil prices high, there remains international interest in investing to develop Venezuela's oil resources. However, major new deals announced under the new Hydrocarbons Law have been slow to materialize. Venezuela's Gaseous Hydrocarbons Law provides significantly more liberal terms and two large natural gas projects are in the early stages of development. In early 2005, the government informed companies with operating contracts that they must migrate the contracts to joint ventures that conform to the 2001 Hydrocarbons Law. The government threatened to seize fields operating under the services contracts on December 31, 2005 if oil companies did not sign transition agreements to migrate their contracts. All but three companies ultimately signed joint venture agreements with the government. One company was bought out by its partner while the fields operated by two other companies were ultimately taken over by the government. The government recently announced that it would 'nationalize' the companies with investments in the four heavy-oil 'strategic associations' and is currently demanding majority government ownership of these entities as well. Trade, Manufacturing and Agriculture Thanks to petroleum exports, Venezuela usually posts a trade surplus. The United States is Venezuela's leading trade partner. Through November 2006, the United States exported $8.2 billion in goods to Venezuela, making it the 22nd largest market for the U.S. Including petroleum products, Venezuela exported $34.4 billion in goods to the U.S., over the same period, making it our 9th largest source of goods. 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 (see Foreign Relations). Manufacturing contributed an estimated 17% of GDP in 2006. The manufacturing sector continued its recovery started in 2004, but remained 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 both for domestic and export markets. Agriculture accounts for approximately 3% 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. Through November 2006, U.S. firms exported $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 U.S. markets in South America. The United States supplies roughly one-quarter of Venezuela's food imports. Labor and Infrastructure Official unemployment statistics registered 8.9% unemployment in December 2006. Unofficial estimates are significantly higher. The public sector employs about 13% of the work force, while less than 1% work in the capital-intensive oil industry. About 18% of the labor force is unionized, and unions are particularly strong in the petroleum and public sectors. The 'informal' sector accounts for some 45% of the work force, or 5.5 million people. Labor unions allege the government repeatedly violates International Labor Organization (ILO) agreements on freedom of association and the right to organize and bargain collectively. Specifically, the Constitution and laws permit undue influence in the internal elections of unions. The government has told the ILO it will correct the problem; draft legislation remains pending in the National Assembly. Venezuela has an extensive road system. With the exception of air service, transportation has failed to keep pace with the country's needs. Much of the infrastructure suffers from inadequate maintenance. Caracas has a modern subway but only one functioning rail line serves the rest of the country.