Venezuela at a Glance: 2001-02

COUNTRY REPORT

Venezuela At a glance: 2001-02

OVERVIEW The government of Hugo Chávez Frías is likely to face mounting social protests about the lack of progress on crime reduction and employment generation—important issues to the electorate—as well as greater resistance to its reforms. As the legislative opposition remains weak, protests are increasingly spilling out onto the streets. The Movimiento a Socialismo (MAS), a partner in the ruling Polo Patriótico (PP) alliance, has distanced itself from the government, potentially depriving Mr Chávez’s Movimiento Quinta República (MVR), also a member of the PP, of its legislative majority. Developments in Colombia are a cause of growing concern in Caracas. The economy will expand by 4% on average per year in 2001-02, driven by fixed investment and private consumption, both powered by public spending. Oil production will remain stable, given weaker global growth, indicating decelerating export growth in 2001. However, provided that oil prices do not fall below US$20/barrel, the budget assumptions on which the government is basing its domestic expansion plans remain credible. Based on these assumptions, the exchange rate will once again appreciate in real terms and inflation will be restrained below 15%. External surpluses are expected to halve owing to softening oil prices and rising import spending. Key changes from last month Political outlook • A second teachers’ strike in 2001 is indicative of the growing impatience with the government’s reform programme. Economic policy outlook • The government’s intention to use Bs1.9trn (US$2.7bn) of FIEM funds in a year of relatively firm oil prices will undermine the credibility of the stabilisation fund to act as a countercyclical mechanism in the event of a sharp downturn in oil prices. Economic forecast • Although Venezuela managed to issue a ¤300m (US$279m) bond recently, access to international capital markets is likely to remain restricted until a more consistent economic policy is developed.

March 2001

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ISSN 1350-7133

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Venezuela 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

19 Economic policy

21 The domestic economy 21 Economic trends 24 Oil and gas 25 Industry 25 Agriculture 26 Infrastructure 26 Financial and other services

27 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 19 Central government balance 21 Demand growth, 2000 22 Gross domestic product growth by sector, 2000 23 Consumer price inflation 28 Non-traditional exports, Jan-Nov 28 Current-account balance, 2000

List of figures

12 Gross domestic product 12 Bolívar real exchange rates 21 Gross domestic product and fixed investment

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 2 Venezuela

23 Cost of living index 24 Oil prices 26 International tourism

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 Venezuela 3

Summary

March 2001

Outlook for 2001-02 The government of Hugo Chávez Frías is likely to face mounting social protests as resistance to government reforms builds. The Movimiento al Socialismo (MAS), a partner in the ruling Polo Patriótico (PP) alliance, has distanced itself from the administration, which could potentially deprive the president’s Movimiento Quinta República (MVR), also a member of the PP, of its legislative majority. Divisions between military and civilian sections within the MVR have become increasingly pronounced. In 2001 public spending will be the main driver of the economy, but such spending will only be sustainable if oil prices remain above US$20/barrel. Based on this assumption, inflation will come in below 15% and the exchange rate will once again appreciate in real terms.

The political scene There is mounting frustration about the lack of progress on crime reduction and employment generation—important issues to the electorate—and the government’s reform programme. As the political opposition remains weak, protests are increasingly spilling out on to the streets. Protests are rising over reforms affecting education, the unions and land tenure. The appointment of the foreign minister, José Vicente Rangel, to the position of defence minister, the first time a civilian has held the post since the 1929, was particularly striking. His appointment followed the so-called panty affair, which embar- rassed the outgoing defence minister, General Eliécer Hurtado Sucre, and re- opened existing divisions within the armed forces. Developments in Colombia are of growing concern.

Economic policy Tax collection disappointed in 2000, despite stronger than expected economic growth. However, efforts to improve tax collection levels will not succeed until the root causes are tackled. The Banco Central de Venezuela (the Central Bank) again threatened to regulate interest-rate spreads.

The domestic economy GDP growth reached 3.2% in 2000, led by oil, gas and telecommunications. In- vestment growth was surprisingly weak. Although inflation appeared subdued in 2000, at 13.4%, in the context of depressed domestic demand and the overvalued bolívar it was not low. Unemployment is slowly declining. Telecoms are set to be the main target for foreign investment. Although agricultural output rose, important obstacles to growth remain. Post-mudslide reconstruction needs further boosting as little was done in 2000. Banking consolidation continues.

Foreign trade and The trade surplus reached US$18bn in 2000, supporting a surge in the current- payments account surplus to US$12.9bn. Despite a recent Eurobond issue, access to new external credit is likely to remain limited. Foreign reserves are rising steadily.

Editors: Ondine Smulders (editor); Justine Thody (consulting editor) Editorial closing date: February 26th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report March 2001 © The Economist Intelligence Unit Limited 2001 4 Venezuela

Political structure

Official name The Bolivarian Republic of Venezuela

Form of government Federal republic comprising 72 federal dependencies, 23 states, two federal territories and one federal district

The executive The president is elected for a renewable six-year term and appoints a Council of Ministers; Hugo Chávez Frías began a fresh six-year term following elections in July 2000 to relegitimise public posts under the new 1999 constitution

National legislature 165-member unicameral National Assembly, headed by the president, which replaced the bicameral Congress abolished by the new constitution in December 1999

Legal system Supreme Court at the apex of the court system; appoints judges and magistrates

National elections Presidential, legislative and state government were held in July 2000 and municipal authorities on December 3rd; next presidential election likely in 2005; , legislative elections due in 2005

Main political organisations Government: the president’s party, the Movimiento Quinta República (MVR), forms part of the ruling Polo Patriótico (PP) alliance, which also includes the Movimiento al Socialismo (MAS); Proyecto Venezuela (PV) also currently supports the PP Opposition parties: Acción Democrática (AD); the Comité de Organización Política Electoral Independiente (COPEI); Primer Justicia (PJ); La Causa Radical (LCR); Convergencia Nacional (CN); Nueva Alianza Democrática (NAD); Integración, Renovación y Nueva Esperanza (Irene)

President Hugo Chávez Frías Vice-president Adina Bastidas

Presidential secretary Francisco Rangel Gómez

Key ministers Defence José Vicente Rangel Education, culture & sport Héctor Navarro Díaz Energy & mines Alvaro Silva Calderón Environment & natural resources Ana Lisa Osorio Finance José Rojas Foreign affairs Luís Alfonso Dávila Health & social development vacant Infrastructure (transport, communications & urban development) General Eliécer Hurtado Sucre Interior & justice Luís Miquelina Labour Blancanieves Portocarrero Planning & development Jorge Giordani Production & trade Luisa Romero Privatisation Antonio Giner Science & technology Carlos Genatio

Central Bank governor Diego Luís Castellanos Escalona

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Economic structure

Annual indicators

1996a 1997a 1998a 1999a 2000b GDP at market prices (Bs bn) 29.4 43.3 52.3 61.9 70.6 GDP (US$ bn) 0.1 0.1 0.1 0.1 0.1 Real GDP growth (%) –0.2 6.4 0.2 –6.1 3.2a Consumer price inflation (av; %) 99.9 50.0 35.7 23.6 16.2a Population (m) 22.3 22.8 23.4 23.7 24.2 Exports of goods fob (US$ m) 23,707.0 23,703.0 17,576.0 20,819.0 34,038.0a Imports of goods fob (US$ m) 9,937.0 13,678.0 15,105.0 13,213.0 16,073.0a Current-account balance (US$ m) 8,914.0 3,467.0 –3,253.0 3,689.0 12,930.4 Foreign-exchange reserves excl gold (US$ m) 11,788.0 14,378.0 11,920.0 12,277.0 13,089.0 Total external debt (US$ bn) 35.4 35.6 37.0 35.7b 34.1 Debt-service ratio, paid (%) 16.8 31.6 27.6 25.1b 17.4 Exchange rate (av; Bs:US$) 417.3 488.6 547.6 605.7 680.0a

February 23rd 2001 Bs704.00:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Petroleum 16.5 Private consumption 70.2 Manufacturing 10.0 Government consumption 7.6 Construction 5.3 Investment incl change in stocks 15.6 Agriculture 4.8 Exports of goods & services 22.0 Services 57.7 Imports of goods & services –15.4 GDP at factor cost incl others 100.0 GDP at market prices 100.0

Principal exports 1999c US$ m Principal imports cif 1999 US$ m Oil 17,055 Goods purchased by private sector 10,966 Base metals 1,471 Goods purchased by public sector 1,908 Chemicals 550 Services purchased by private householders 1,819 Plastics & manufactures 349 Total incl others 15,706 Agricultural produce 305 Minerals 257 Food, beverages & tobacco 232 Total incl others 21,058

Main origins of exports 1999 % of total Main origins of imports 1999 % of total US 50.4 US 42.0 Colombia 7.3 Colombia 6.7 Brazil 3.7 Italy 5.5 Germany 1.4 Germany 4.8 Japan 1.4 Brazil 3.9 a Actual. b EIU estimates c Customs basis.

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Quarterly indicators 1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (Bs bn) Ordinary revenue 1,760.1 2,064.0 2,888.2 3,183.3 3,212.2 3,199.5 3,332.2 n/a Ordinary expenditure 2,253.9 2,248.9 2,958.0 3,760.7 4,137.7 3,563.6 4,118.4 n/a Balance –493.8 –184.9 –69.8 –577.4 –925.5 –364.1 –786.2 n/a Net extraordinary revenue 453.0 84.1 314.9 547.9 1,606.4 1.2 353.7 n/a Output GDP (Bs m, constant 1984 market prices) 137,627 142,187 141,564 144,510 139,196 146,030 146,309 152,539 % change, year on year –8.5 –7.4 –4.3 –4.1 1.1 2.7 3.4 5.6 Employment & prices Unemployment rate (% of labour force) 15.3 15.3 14.5 14.5 14.6 14.6 n/a n/a Consumer prices (1997=100) 157.0 163.9 171.5 178.7 185.7 191.9 198.1 204.1 % change, year on year 29.1 23.9 22.2 20.1 18.3 17.1 15.5 14.2 Wholesale prices (1997=100) 134.5 137.5 140.3 143.1 147.2 151.5 154.8 158.4 % change, year on year 19.3 15.4 12.5 10.1 9.4 10.2 10.3 10.7 Venezuelan crude basket (US$/barrel; spot) 9.55 13.88 18.31 21.84 25.30 25.09 27.92 27.58 % change, year on year –25.8 24.6 72.9 128.7 164.9 80.8 52.5 26.3 Financial indicators Exchange rate Bs:US$ (av) 575.11 595.10 616.75 635.90 659.04 677.36 688.06 695.37 Bs:US$ (end-period) 583.50 606.00 628.00 648.25 669.50 682.00 690.75 699.75 Interest rates (av; %) Deposit 31.80 21.99 14.65 16.67 16.97 19.22 13.16 n/a Lending 39.63 32.41 30.08 26.39 26.20 23.75 24.91 n/a Money market 11.70 5.80 5.10 7.30 6.57 10.40 6.90 8.70 M1 (end-period; Bs bn) 4,254 4,445 4,628 6,096 5,644 5,772 6,037 n/a % change, year on year –1.6 3.1 10.4 23.4 32.7 29.9 30.4 n/a M2 (end-period; Bs bn) 10,110 10,426 10,606 12,741 12,524 12,926 13,410 n/a % change, year on year 16.0 15.8 17.9 19.9 23.9 24.0 26.4 n/a BVCa Caracas stockmarket index (end-period; Dec 1993=1,000) 4,134 5,367 5,818 5,418 5,496 7,033 6,864 6,825 % change, year on year –46.2 11.8 49.4 13.1 32.9 31.0 18.0 26.0 Sectoral trends Production Crude oil (m barrels/day) 2.93 2.74 2.73 2.75 2.80 2.87 2.92 2.99 % change, year on year –12.8 –13.8 –8.1 –7.7 –4.4 4.7 7.0 8.7 Aluminium (‘ 000 tonnes) 138,950 144,918 145,004 141,334 138,480 143,406 144,076 144,654 % change, year on year –9.9 –0.6 0.8 –0.8 –0.3 –1.0 –0.6 2.3 Iron ore (m tonnes) 3,635 3,847 3,620 5,000 5,466 5,662 4,610 4,312 % change, year on year –35.0 –32.6 –25.4 35.5 50.4 47.2 27.3 –13.8 Foreign tradeb & payments (US$ m) Exports fobc 3,525 4,751 5,991 6,552 7,733 8,182 8,544 9,583 Petroleum & products 2,596 3,789 4,919 5,393 6,500 6,864 7,276 8,076 Imports fobc –2,647 –3,142 –3,741 –3,683 –3,346 –4,182 –4,234 –4,297 Merchandise trade balancec 878 1,609 2,250 2,869 4,387 4,000 4,310 5,286 Servicesc –760 –539 –649 –521 –688 –756 –834 –953 Income balancec –392 –456 –269 –401 –236 –327 –252 –350 Current-account balancec –274 638 1,334 1,991 3,481 2,862 3,206 3,946 Reserves excl gold (end-period) 10,526 11,456 11,135 12,277 11,412 12,153 13,686 13,089 a Bolsa de Valores de Caracas (Caracas Stock Exchange). b Balance-of-payments basis. c Banco Central de Venezuela data. Sources: International Energy Agency, Monthly Oil Market Report; IMF, International Financial Statistics; Banco Central de Venezuela, Indicadores Econúmicos; VenEconomía Group.

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Outlook for 2001-02

Political outlook

Domestic politics Signs of waning support for the president, Hugo Chávez Frías, heighten the risk of an increase in political conflict at a time when the government needs to concentrate on economic policymaking in order to consolidate the recovery begun in 2000. Although Mr Chávez remains popular with an overwhelming majority of the population, a recent opinion poll rating of 60% represents a marked decline from his earlier popularity levels of 80%. Moreover, according to the polls, popular confidence in his administration has fallen from 66% in 1999 to 40% in early 2001. Lacklustre turnout in early December 2000 for a referendum on the president’s proposal to replace the country’s largest trade union confederation, the Confederación de Trabajadores Venezolanos (CTV, the Venezuelan Workers’ Confederation), with an alternative union organisation, the Fuerza Bolivariana de Trabajadores (FBT, the Bolivarian Worker’s Front), and a backlash from teachers against education reforms decreed at the end of 2000 are further indications that policymakers lack an effective grasp of popular sentiment. Although the Movimiento al Socialismo (MAS) had always been regarded as the least reliable party in the ruling Polo Patriótico (PP) coalition, having demonstrated a tendency towards constructive opposition during its alliance with Mr Chávez’s predecessor, Rafael Caldera, the party’s decision in January 2001 to distance itself from the president’s Movimiento Quinta República (MVR) is also indicative of Mr Chávez’s waning popularity.

The president’s refusal to accept the legitimacy of his critics in effect rules out consultation on policy with all but a small group of close advisers. Equipped with wide-ranging discretionary powers granted by the November 2000 Ley Habilitante (Enabling Law), Mr Chávez is able to rule by decree on a wide range of economic and social issues. His unwillingness to delegate and the inexper- ience of many of the deputies in his party magnify his personal influence on policy. The uncertainty created by the lack of debate is compounded by the absence of clarity in his policy announcements. Mr Chávez’s characteristic rabble- rousing rhetoric has raised a great deal of concern about a land reform proposal recently submitted to the National Assembly. Although the bill enshrines respect for private property, the president has hinted that he could use his enabling powers to redistribute land by force. Mr Chávez’s confrontational approach towards his critics, combined with the ineffectiveness of most of the par- liamentary opposition, which has proved incapable of exerting any influence over policy in the National Assembly, will force opponents of his government to continue to take to the streets to demonstrate their discontent, fomenting a rise in potentially heated and disruptive social mobilisation. Many groups, from the Roman Catholic Church to the labour movement, have demonstrated in recent weeks to express their discontent with government policy.

Industrial relations, in particular with the trade unions and the education sector, will remain fractious. Although the unions are protesting against government plans to democratise the labour movement, action by teachers was provoked in late 2000 by the issue of a decree on education reform, at the heart

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of which is the creation of a team of inspectors opposed both by public teaching unions and supporters of private education on grounds that the inspectors, hand-picked by the administration, would not be required to possess teaching experience.

International relations The Chávez government’s foreign policy has been geared towards the development of closer relations with other oil-producing nations, the creation a bloc of allied states in Latin America to counterbalance the power of the US and an emphasis on the sovereign autonomy of nations. The appointment in early February 2001 of Luís Alfonso Dávila as foreign minister appears to presage the transition to a less ideological and more pragmatic foreign policy centred on developing warmer relations with Venezuela’s two main trading partners, the US and Colombia.

Economic policy outlook

Policy trends Mr Chávez’s declared economic objectives are the diversification of the economy away from oil, the promotion of rural repopulation through the development of agriculture and an increase in skills standards through improvements to the education system.

The government must also carry out a major programme of infrastructure reconstruction following the devastating floods of December 1999. Issues considered critical by the electorate are the reduction both of crime and unemployment. Having achieved limited advances on these fronts since it took office in February 1999 and more particularly following its re-election in mid- 2000, the Chávez government will face high expectations that it can deliver tangible progress in 2001. But the government’s provocative approach to land and education reform has reinforced fears that the president’s policy priorities will remain biased towards political objectives and more worrying in the medium term, the administration has as yet given no indication that it plans to undertake the difficult structural reforms needed to reduce macroeconomic vol- atility and to promote more sustainable growth. In addition, although the government continues to state its openness to foreign investors, a lack of policy coherence and poor public relations remain evident.

Little has been achieved so far on the flood reconstruction programme init- iated over a year ago. In addition, a 100-day so-called economic overdrive programme of intensive social investment launched in September 2000 and financed by over US$1bn in foreign-exchange gains accumulated by the Banco Central de Venezuela (the Central Bank) is by official admission well behind schedule. Part of the problem is administrative inefficiency, which has ham- pered the implementation of initiatives promoted by successive governments, but the delay is in part also attributable—as evident in the delays to the flood reconstruction programmes—to the unwillingness of the Chávez government to devolve spending responsibilities to decentralised authorities such as regional governments where these are opposition-controlled.

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Fiscal policy The 2001 budget envisages total income of Bs23.2trn (US$32bn), which rests on a relatively realistic oil price assumption of US$20/barrel for Brent oil. The EIU forecasts that Brent will fetch an average of US$23/b in 2001-02, implying an average price for Venezuelan crude of just over US$20/b for the period. However, the tax income assumptions in the budget are less credible as they imply a nominal increase of more than 50% in non-oil income tax and an increase of more than 40% in value-added tax (VAT). A further Bs8.3trn is budgeted to come from extraordinary revenue, including Bs1.9trn in planned withdrawals from the Fondo de Inversión para la Estabilización Macroeconomica (FIEM, the Macroeconomic Stabilisation Investment Fund) and Bs508bn in fresh debt. However, the intention to use FIEM funds in a year of relatively firm oil prices undermines the credibility of the stabilisation fund, which is supposed to act as a countercyclical mechanism in the event of a sharp downturn in fiscal oil revenue. Unwarranted withdrawals would deplete the resources available to be drawn down in years when oil prices fall below budget.

Despite new rules introduced in the 1999 constitution in an effort to enforce medium-term planning, budget projections suffer from a persistent lack of credibility owing to the practice—entrenched under previous governments and continued by Mr Chávez in 2000—of requesting additional credits from the legislature throughout the year. Provided these credits can be financed, approval is rarely denied. As a result, the expenditure outturn is generally well above the budget projection. In 2000, above-budget oil earnings and a rapid accumulation of domestic debt financed a 45% nominal expansion of expenditure. With economic recovery likely to stimulate greater credit demand from the private sector, the potential for the further issue of public domestic debt will be constrained by the limitations of the shallow local capital markets. As the conditions for issuing external bond are likely to remain difficult for Venezuela in 2001, further withdrawals from the FIEM may be made if the government requires additional funds.

Economic forecast

International assumptions Venezuela’s economic fortunes are tightly linked to developments in the US, which purchases more than one-half of Venezuela’s exports, as well as to trends in oil prices. It has become clear since the start of 2001 that the US economy will be close to recession in the first half of the year. We have cut our US growth forecast for 2001 accordingly, but on the assumption of a second-half recovery as we expect US growth to pick up to 2.9% in 2002.

In the emerging world the most direct impact of the US slowdown will be felt in Asia. A drop in Asian demand will compound the negative impact on prices for oil and other commodities. We have cut our forecast for oil prices in 2001, but our estimate for 2002 remains broadly unchanged. Although we expect monetary easing in the US to allow growth there to accelerate again in late 2001 and into 2002, the risk that the US will enter a prolonged and deep downturn has now increased. The outcome hinges on the ability of the US Federal Reserve Board (the Fed, the US central bank) to support private consumption through lower interest rates. If household confidence continues to

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decline and falling asset prices further weaken household balance sheets, we could easily see a sharp fall in spending as consumers begin to save again after years of profligacy.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growtha World 3.5 4.8 3.3 3.9 OECD 3.0 4.0 1.9 2.7 EU 2.4 3.3 2.6 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 119.5 120.0 US$:¤ 1.07 0.92 1.00 1.09 SDR:US$ 0.731 0.758 0.755 0.731 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.50 0.50 US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39 Commodity prices Oil (Brent; US$/barrel) 17.9 28.4 23.9 23.0 Gold (US$/troy oz) 278.8 279.3 258.8 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 9.0 16.1 Industrial raw materials (% change in US$ terms) –4.2 14.6 0.7 12.6

a Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates.

Economic growth The economy will expand by an average of 4% per year in 2001-02, driven by fixed investment and private consumption, both of which are powered by public spending. Provided oil prices do not fall below the levels we are currently forecasting, the budget assumptions on which the government is basing its expansion plans remain credible (see Fiscal policy). The pace of investment growth in the forecast period will depend on the government’s capacity to drive forward both the reconstruction programme required to repair flood-damaged infrastructure and the so-called economic overdrive programme, which had been due to take place in September-December 2000. Private consumption, which represents over 70% of aggregate demand, should also stimulate GDP growth as new jobs are created, albeit mostly in cyclical industries such as construction, with publicly financed investment. However, the stimulus to growth from private consumption will be reduced by a double- digit rise in imports. Export volume growth will be marginal in 2001, before picking up in 2002. The slowdown in global growth will severely limit oil production and export increases in 2001. In addition, slower demand growth in the region’s other economies will compound the problems of non-oil exporters, who are uncompetitive on account of the overvaluation of the bolívar and who face the likelihood of increased import competition in the US as that economy slows.

Inflation With a further real appreciation of the exchange rate expected in 2001-02, the government should be able to restrain average inflation to below 15% per year, a rate that is nevertheless above government expectations of 10-12%. The

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acceleration in the rate of growth of narrow monetary aggregates evident in the third and fourth quarters of 2000, rising public spending and the continuing economic recovery in 2001 are likely to increase price pressures in coming months. The comparatively low rate—0.9%—of monthly inflation posted in January 2001 indicates that the strength of the bolívar is helping to offset these pressures. Above-budget expenditure could also generate additional inflationary pressures in 2001. The government’s stand-off with the unions, particularly with the CTV, which is demanding a 39% rise in the minimum wage, will test the government’s resolution in respect of its goal of holding down public-sector wage increases to 10%.

Forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth –6.1 3.2 3.9 4.1 Gross agricultural growth –2.1 1.4 2.5 3.0 Unemployment rate (av) 14.9 12.2 10.6 9.8 Consumer price inflation Average 23.6 16.2 13.3 14.8 Year-end 20.0 13.4 13.8 15.4 Short-term interbank rate 32.1 25.0 c 23.5 23.0 Central government balance (% of GDP) –2.3 –2.2 c –2.4 –1.1 Exports of goods fob (US$ bn) 20.8 34.0 27.7 28.5 Imports of goods fob (US$ bn) 13.2 16.1 18.0 19.6 Current-account balance (US$ bn) 3.7 12.9 c 3.5 2.5 % of GDP 3.6 12.5 c 3.0 2.0 External debt (year-end; US$ bn) 35.7 c 34.1 c 36.3 38.8 Exchange rates Bs:US$ (av) 605.7 680.0 726.9 791.6 Bs:¥100 (av) 531.8 631.0 608.2 659.7 Bs:¤ (year-end) 651.2 657.0 788.9 935.0 Bs:SDR (year-end) 889.7 911.7 1,012.7 1,149.1

a Actual. b EIU forecasts. c EIU estimate.

Exchange rates In December 2000 the Central Bank decided to adjust downwards the planned rate of nominal depreciation of the bolívar to 7% in 2001, but to maintain the limits of the band at 7.5% on either side of this figure. This change implies a further real appreciation of the exchange rate in the context of an official inflation target of 10-12%. A strong bolívar has been a cornerstone of policy as it is the only way to control inflation in the absence of structural public-sector reform or the political will to hold down labour costs. However, without large productivity gains or fiscal reform, more appreciation in real terms in the forecast period will entail the risk of a sharper correction in future. At some point the government will also have to respond to demands for relief from the non-oil productive sector with increased trade protectionism or a devaluation.

External sector Having posted a large surplus in both 1999 and 2000 on the back of the huge oil windfall, the current-account surplus will narrow from 2001 as softening oil prices and rising imports associated with a strengthening of the economic

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recovery cause the trade surplus to shrink. From 2002 the impact on the current account will be exacerbated by a growing invisibles deficit, driven by rising interest payments on the external debt, most of which is contracted at variable rate and which will therefore be sensitive to the forecast rise in US interest rates from 2002.

The political scene

The honeymoon period is Despite opposition from a range of actors, including the domestic media, the waning Roman Catholic Church and the private sector, Hugo Chávez Frías has until recently faced little organised or party opposition to the radical programme of institutional and constitutional reform he has pursued since assuming power in early 1999. The president’s unprecedented power is attributable both to his success at the ballot box, which has enabled his ruling Polo Patriótico (PP) alliance to assume majority control of the National Assembly, the state govern- orships and 40% of municipal councils, and to his willingness to resort to acts considered unconstitutional by his opponents. Although not always in accordance with his new constitution, Mr Chávez has nevertheless ensured that his political allies occupy senior positions in the state administration, including posts in the Supreme Court and in the offices of the attorney-general and ombudsman. The government’s critics and the international community have repeatedly raised concerns about the limited checks and balances on the executive. But Mr Chávez’s continued popularity amongst the poorest sectors of society and the legitimacy he acquired following his majority victory in the 2000 presidential election have allowed him to brush off any criticism of his democratic credentials. His commanding political position, his populist appeal, his authoritarian role within the Movimiento Quinta República (MVR) and the disarray of the opposition have accorded the president an extended honeymoon period.

Centralised policymaking However, although Mr Chávez appears outwardly unassailable, the political environment is undergoing significant transformation. It was hoped that the government would adopt a more consensual approach to policymaking after

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the introduction of a new constitution in 1999 and elections in July 2000, but the administration’s inflammatory rhetoric has not moderated. Mr Chávez’s re- course to enabling legislation, approved in November 2000, has allowed him to introduce policies by decree without consulting with interest groups and the affected sectors. The policymaking capacity of the government remains questionable and the selection of initiatives is largely determined by the relative influence of two competing factions around the president, one headed by the planning and development minister, Jorge Giordani, the other led by Luís Miquilena, a close adviser to Mr Chávez who was promoted to the position of interior minister in February 2001. As the highly centralised government grapples with the intricacies of policymaking in the absence of technically competent advisors and broad debate, policy has been characterised by reversals, as in the case of decentralisation, delay, including that affecting new social security legislation, which will not now be introduced until July 2001, and ad hoc responses.

Weakening popular The lack of a well-defined policy programme and little progress on critical support issues such as crime reduction and unemployment have led to a falling off of support for the government. Recent opinion polls conducted by Datos demonstrate that although Mr Chávez remains popular with 60% of those surveyed, his rating has slipped from the 80% recorded in 1999. More importantly, popular confidence in the administration has begun to deteriorate, declining from 66% in 1999 to 40%. A year-end poll by a business lobby group, the Venezuelan-American Chamber, underlined heightened concern in the private sector. In a survey of 400 businessmen, 91% expressed fears that democracy was under threat, 90% felt that the government’s economic policies needed urgent modification and 52% were of the opinion that the judicial reform process had not resulted in any significant improvements to the legal environment.

The centralisation of power around the executive is increasingly constraining qualitative improvements in policy output. The reluctance of the government to consult with groups outside the MVR has further increased the isolation of the administration and undermined its ability to anticipate popular responses to its legislative initiatives at a time when opposition forces are becoming increasingly mobilised. The rise in antigovernment mobilisation is running parallel with evidence of mounting political fatigue among the president’s supporters and the emergence of divisions within the MVR.

The government’s first A low turnout in the December 2000 municipal elections, partly attributable to major setback election fatigue following two years of almost continuous electoral mobilisation, was an important turning point for the government. The elections were held in conjunction with a referendum on trade union reform. Democratis- ation and unification of the trade union movement has been a priority for Mr Chávez since a crippling four-day strike was held by oil workers in October 2000. The strike by members of the Federacíon de Empleados Petroleros (Fedepetrol, the oil workers’ union) was supported by the country’s main union confederation, the Confederacíon de Trabajadores de Venezuela (CTV, the Venezuelan Workers’ Confederation). Mr Chávez has been deeply hostile towards the CTV on account of its close links with the formerly dominant

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political party, Acción Democratica (AD). The CTV has long been viewed as a corrupt and unrepresentative organisation, but following the October strike the confederation has become an important forum for resistance to the government in the absence of significant legislative opposition. The surprise resur- rection of the CTV has prompted Mr Chávez to devote considerable attention to the creation of an alternative union organisation affiliated to the government, the Frente Bolivariana de Trabajadores (FBT, the Bolivarian Workers’ Front). As a means of undercutting the influence of the CTV and promoting the FBT, a bill on trade union liberties was introduced by the government and approved by the MVR-dominated National Assembly in November 2000. The legislation called for a popular referendum in December to allow voters to decide if a system of democratic elections should be introduced in a new unified union movement, the FBT. The measure was condemned by the CTV and the International Labour Organisation (ILO) as unconstitutional state interference in the internal affairs of a private body.

Few voters turn up at the The majority of the electorate—78%—abstained from the referendum. The ballot box measure was approved by 13.9% of the total electorate, that is by 63% of the 22% of the electorate that voted. Even so, the government was quick to reject opposition claims that the low turnout undermined the legitimacy of the union reform programme. The government proceeded to establish a forum for dialogue, bringing together the CTV, the FBT and a range of smaller inde- pendent union organisations to prepare for internal democratic elections. Although no date has been set for the elections, they must take place within 180 days of the referendum and will be overseen by the Consejo Nacional Electoral (CNE, the National Electoral Council). In accordance with ILO recommendations, voting will be limited to union members only. Collating union membership information from the 2,740 trade unions, 25 national unions, 24 regional federations and four confederations has proved a complex task for the CNE, but more worrying for the government is the lack of support among workers for the FBT, which has yet to develop a grassroots movement.

Unions may unite against The government’s attempts to eliminate the CTV as the main representative of the government organised labour has backfired and industrial relations are set to remain fractious in the medium term. Workers have become more politicised as a result of the referendum and there is no guarantee that the FBT will perform well in the internal elections. Concern remains that the government will attempt to build support for the FBT through populist spending and that attempts to pursue structural reform will be impeded as the administration will be reluctant to introduce any measures likely to increase unemployment. A strong showing in the elections by opposition unions cannot be discounted and the Nuevo Sindicalismo (NS, New Unionism) movement, which was originally formed to protest against the corruption in the CTV, may be the main beneficiary of the FBT’s weakness.

Problems of centralised The government’s failure to anticipate a potentially hostile response to its decision-making union reform proposals underlines its limited ability to gauge popular reaction to its initiatives. Its majority in the National Assembly and the use of executive decrees to drive its policy programme forward has limited the opportunities

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available for groups to lobby and to advise the government. This weakness has undermined the quality and legitimacy of legislation, while increasing frustration at the government’s inability to tackle acknowledged deep-seated in- equalities and institutionalised corruption. Relations between the administration and its opponents remain characterised by mutual suspicion, boding ill for political stability. Debate in Venezuela has been supplanted by the introduction of executive decrees or legislation, which are then followed by strikes and demonstrations by the government’s opponents.

Education system is a The education sector, which is in dire need of reform, has suffered a similar fate quagmire to that of the unions. Education spending is below average for South America, having fallen from 7.4% of GDP in 1983 to 3.8% in 1998. Dropout rates are high and absenteeism is widespread, with 75% of children at secondary-school level failing to attend school. Public education is in crisis owing to severe financial constraints and 8,000 teaching posts in classes for children of between five and 13 years remain unfilled. The private school sector is bur- geoning as parents who can afford it prefer to pay for better-quality education.

Reform attempts trigger In an attempt to improve the quality of education, the government introduced teachers’ strike a presidential decree at the end of 2000 amending the existing Education Act. The amendment ends the traditional practice of state payment for teachers of religious education and creates school inspectors empowered to visit educ- ational institutions both in the public and private sectors. The decree has been criticised by the Roman Catholic Church as an attempt to import Cuba’s atheistic education model, while teachers’ unions have condemned the creation of the inspectorate, members of which will not be required to hold a teaching qualification. The appointment of inspectors will be controlled by the Ministry of Education, raising concerns that the government will politicise school inspections and reduce the role of the local community in the super- vision of education. The decree has also been condemned by the Cámara Venezolana de la Educación Privada (CVEP, the Venezuelan Chamber of Private Education), which argued that it will be used by the government to close down private schools out of ideological hostility towards private provision. The main teaching unions have drawn up an alternative education bill and an appeal lodged against the decree will be heard by the Supreme Court in February 2001. The six main teaching unions led a 24-hour strike at the end of January in protest against the decree. An estimated 140,000 public school teachers took part in the industrial action, which led to the closure of 15,000 schools and affected 6m pupils. A further 48-hour stoppage took place in late February. The strikes were also called in support of new labour contracts and demands for the back payment of wages agreed in negotiations with the government in 2000. The education minister condemned the strikes as illegal and a politically mot- ivated defence of teaching union privileges. Teachers have so far received 56% of the staggered increase negotiated in 2000.

Proposed land reform Particular concern surrounds both the government’s approach and the likely worries investors popular response to its next major initiative, land reform. The National Assembly is considering the first draft of changes to existing land reform law. The bill aims to reverse the decline of agricultural production and the excessive

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concentration of land ownership. Venezuela has the second highest rate of concentrated land ownership in Latin America, with 70% of agricultural land in the hands of 3% of agricultural proprietors. Although respect for private property has been emphasised in the bill, Mr Chávez has caused controversy by claiming that he may use enabling powers to redistribute land to the poor, while property owners who do not make sufficient use of their land must place it at the disposal of the nation.

Party political opposition Despite an increase in social protest, there has not been a general strengthening remains weak of the opposition parties, which remain weak and incapable either of capturing supporters lost by the government or winning the backing of voters who have become disaffected with Mr Chávez since he assumed power. AD, the country’s largest opposition group and historically its most dominant political party, holds 33 of 165 seats in the National Assembly and has been undergoing a process of internal reform in an attempt to revive its fortunes. But the restructuring has generated conflict within the party and seven of AD’s National Assembly members have split to form the Nueva Alianza Democrática (NAD). As the presidencies of the National Assembly’s permanent commissions are distributed in proportion to the number of seats held by different political groups, AD will now lose control of three such commissions.

The MAS becomes more Debate about the future direction and electoral positioning of political parties assertive within the PP has also affected the Movimiento al Socialismo (MAS), a partner with the MVR in the ruling PP coalition. The MAS, which has a strong presence in regional government, has become increasingly critical of government policy. It objected to proposals put forward in October 2000 to alter funding mechanisms for decentralised services, plans which the government subsequently withdrew. The MAS was also concerned by the government’s decision to appoint MVR sympathisers to the posts of attorney-general and ombudsman and in addition has voiced criticism of the administration’s handling of the trade union reform process. The MVR relies on the MAS for its majority in the National Assembly, but despite the MAS’s important role in the coalition, the party has not been rewarded with cabinet positions. This outcome has generated frustration in the MAS, especially as it disputed the promotion of military figures to the cabinet, echoing similar complaints that led a former PP member, Patria Para Todos (PPT), to withdraw from the coalition.

At the MAS’s anniversary convention in January 2001, which was attended neither by any senior MVR figures nor by Mr Chávez, activists raised concerns about the limited influence the party has had on government policy and criticised the administration for failing to build dialogue with the middle class and the private sector. Under the direction of the MAS secretary-general and first vice-president of the National Assembly, Leopoldo Puchi, the party has adopted a position of autonomy within the PP, implying a more assertive relationship with the MVR and the government. Luís Miquilena, the interior minister and head of the MVR, characterised the MAS’s position as incoherent and in a move that exacerbated the strain between the two parties, called on grassroots members of the MAS to oppose the decision taken by its leadership. The re- definition of the MAS’s role within the PP reflects growing tension between the

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MAS and the MVR, which may lead to the break-up of the coalition. Any break- up would compound delays in the packed legislative timetable as 83 pieces of legislation are currently under scrutiny in the 15 permanent commissions.

Ideological divisions The increasing fragmentation of the ruling coalition underlines a growing ideo- emerge within the MVR logical division amongst Mr Chávez’s formerly unified political bloc. Pressure is mounting on the government from the left of the MVR to press ahead with reform and to close itself off from influences that may dilute its radical programme. Mr Miquilena and civilian activists who joined the MVR from a range of minor left-wing parties and guerrilla groups have articulated this position. A more moderate stand, similar to the position of the MAS, has been adopted by an emerging right-wing faction around the foreign minister, Luís Alfonso Dávila, which incorporates the military section of the MVR. The success of either group and the future direction of the government will be determined by Mr Chávez at the cost of alienating one of the competing factions and under- mining the unity of the MVR.

New minister for energy Leaving office on January 1st 2001 to take up his position as the secretary- and mines appointed general of OPEC, Alí Rodríguez Araque was replaced by Alvaro Silva Calderón as minister for energy and mines. The selection of Mr Silva was not unexpected as media reports in late 2000 had already suggested that he was a possible can- didate. There are early signs that his appointment will bring no major shifts in policy. Mr Silva is committed to Venezuela’s position in OPEC, which is likely to be strengthened by Mr Rodríguez’s position as secretary-general. Mr Silva has expressed support for the latest round of OPEC production cuts, stating that the 173,000 barrels/day cut handed down at the OPEC meeting in Vienna have neither a negative impact on oil revenue nor on the investment programme of the state oil company, Petróleos de Venezuela (PDVSA).

Cabinet reshuffle A cabinet reshuffle in February 2001 heightened speculation that Mr Chávez is leaning increasingly towards the civilian faction within the MVR. Mr Divila, an ex-general who had been criticised for the lack of progress on crime reduction, was moved from the Ministry of the Interior to the Ministry of Foreign Affairs, while Mr Miquilena was brought back into the cabinet to take over at the home affairs. It had been widely expected that Mr Miquelina would be brought back into the cabinet after his guiding role in the constituent assembly and the Congresillo in 2000.

The most controversial appointment was that of José Vicente Rangel as defence minister. Mr Rangel, the first civilian to hold the post since the 1920s, replaced General Eliécer Hurtado Sucre in a move that caused speculation that relations between Mr Chávez and the military had reached a low point and that the president lacked confidence in the military hierarchy. Mr Rangel, who has been a journalist for 25 years, is not a popular figure with the military establishment owing to a number of investigations he led into corruption in the armed forces. Mr Chávez cited Mr Rangel’s promotion as a step forward for democracy and claimed that the Ministry of Defence should be viewed as political rather than military in nature.

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Under the new National Armed Forces Law, a new military post of chief of the armed forces will be created, with a mandate to ensure their unity. Mr Chávez is considering an army commander or an admiral for the position.

Mr Chávez made the first high profile cabinet appointment of a woman when he named Adina Bastidas, a former Venezuelan representative to the Inter- American Development Bank, as vice-president. Ms Bastidas replaces Isaías Rodríguez, following his controversial appointment to the position of attorney- general. The health and social development minister, Gilberto Rodríguez Ochoa, announced that he would resign from his post at the end of February on personal grounds, but no replacement has yet been found.

Unfavourable attention for General Hurtado’s demotion to the position of infrastructure minister, the the military third military officer to hold the post in the current administration, followed an embarrassing scandal that refocused attention on the military. There have been a number of provocative attempts to encourage the armed forces to over- throw Mr Chávez. In January 2001 a university professor arrested on the orders of General Hurtado was tried for instigating sedition among the military authorities, having alledgedly sent high ranking officials a video tape calling for a coup, along with 140 packs of women’s underwear as a symbol of their coward- ice. The so-called panty affair has been linked to a campaign by the Comité de Resistencia Civil (CRC, the Committee for Civilian Resistance), which has also included leaving chicken feed outside the houses of military figures. General Hurtado came under fire from human rights organisations for trying the professor in a military court and was ridiculed in the domestic media for holding up the underwear on live national television.

Mr Chávez has had a divisive influence on the military and conservative elements within the armed forces remain deeply opposed to his presidency, but their hostility has remained covert. There is mounting evidence that military involvement in areas considered to be civilian matters, including the appointment of cabinet members and the development of infrastructure schemes under the auspices of Plan Bolívar, has had a damaging effect on morale within the armed forces and has led to corruption, specifically in the unchecked distribution of Plan Bolívar funds.

Growing concern about The National Guard opened an investigation into allegations of arms- developments in Colombia trafficking following the seizure of 25 semiautomatic rifles and the arrest of three Colombian and three Venezuelan nationals at the border between the two countries in mid-January 2001. It is believed that the rifles, which are standard issue in the Venezuelan army, were to be distributed to a Colombian guerrilla group, the Fuerzas Armadas Revolucionaria de Colombia (FARC). Venezuela has repeatedly refuted allegations that it has financed and supplied weapons to either the FARC or the Ejercito de Liberación Nacional (ELN), Colombia’s other main guerrilla organisation.

Relations between Mr Chávez and his Colombian counterpart, Andrés Pastrana, have been strained in recent months, with Mr Pastrana calling on Mr Chávez to desist from perceived interference in the peace negotiations between the Colombian government and the left-wing guerrillas opposed to it.

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Mr Chávez has followed a policy of drawing closer to both the FARC and the ELN in an attempt to facilitate the peace process and has offered to mediate future talks between the Colombian government and the rebels. Venezuela remains deeply concerned about the involvement of the US with and its funding of Colombia’s antidrug policy, Plan Colombia. Venezuela’s opposition to the plan has focused on the potential displacement both of refugees and drug production into Venezuela, and the military imbalance that will result from US aid totalling the US$800m for the Colombian military. After a souring of diplomatic relations between Venezuela and the US administration under Bill Clinton, Mr Chávez has adopted a more constructive approach to the new US government led by George W Bush, emphasising the importance of strengthening bilateral links. This more conciliatory and pragmatic foreign policy tone contrasts with the Venezuelan president’s earlier controversial pro- nouncements. Mr Chávez’s Bolivarian foreign policy vision—building a bloc of states in Latin America to counterbalance the US—has been coolly received by his continental neighbours, while the deepening of links with Cuba and Iraq has proved extremely contentious both in the domestic media and within the international community.

Economic policy

Tax collection again Tax collection fell short of expectations in 2000, despite higher than predicted disappoints in 2000 GDP growth. Although overall tax revenue rose by 35% in 2000, about 85% of the rise came from the oil sector, where higher oil prices ensured that 2000 was an excellent year. A sharp increase in expenditure (up by 46%) was financed by above-budget oil earnings and a rapid accumulation of domestic debt, the stock of which rose from Bs4.2trn (US$6.5bn) at the end of 1999 to some Bs7trn at the end of 2000.

Central government balance (Bs bn) 1999 2000a % change Total revenue 10,213 15,522 52.0 of which: tax revenue 7,151 9,624 34.6 oil sector 1,736 3,827 120.5 non-oil sector 5,415 5,797 7.1 Total spending 11,624 16,984 46.1 of which: operational costs 9,574 13,926 45.5 transfers to FIEMb 0 1,414 n/a Central government balance –1,411 –1,461 3.5 % of GDP 2.3c 2.1c n/a

a Preliminary figures. b Fondo de Inversión para la Estabilización Macroeconómica (Macroeconomic Stabilisation Investment Fund). c EIU estimate. Source: Ministerio de Finanzas.

Subdued growth in investment spending demonstrates that most of the expansion in outgoings was accounted for by a sharp rise in current spending. The fact that the central government accounts recorded a deficit despite revenue growth of 52%, only one-quarter of which was absorbed by transfers to the Fondo de Inversión para la Estabilización Macroeconómica (FIEM, the Macroeconomic Stabilisation Investment Fund), indicates the deep imbalances in the public finances.

Improved tax collection Tax evasion remains a major problem. In December 2000 the Servicio Nacional remains idealistic Integrado de Administración Aduanera y Tributaria (Seniat, the internal revenue service) and the Ministry of Finance announced plans to audit shops and restaurants to ensure that they comply with legislation on both value- added tax (VAT) and income tax. Establishments that are not adequately com- pliant will be fined up to Bs2.3m (US$3,200). Seniat has also been negotiating with companies that run storage facilities at the port of La Guaira, which allegedly owe the government Bs.2.2bn (US$3.1m) in back payments for the use of their premises. In addition, Seniat’s director, Trino Alcaides Díaz, who was appointed in late 2000, announced plans to launch a campaign to collect VAT from buhoneros (informal street sellers), although this move seems likely to prove impractical. Although high profile announcements and attempts to improve tax collection, including the personal participation of the president, Hugo Chávez Frías, in some raids, are made recurrently, there is unlikely to be any fundamental improvement in compliance until the government carries out in-depth reform of the tax department. Seniat’s lack of autonomy and primary corruption at all levels of collection and distribution will continue to hinder the pace of improvement in tax administration.

The Central Bank targets The Banco Central de Venezuela (BCV, the Central Bank) has again been con- interest-rate spreads sidering measures to limit the spread between lending and deposit rates. Currently the BCV can regulate ceilings and floors, but cannot fix margins. The BCV argues that banks have not done enough either to reduce lending rates in line with falling inflation or to raise deposit rates. But banks contest that the wide spread is necessary to cover their operating costs. In January 2001 a Central Bank director, Domingo Maza Zavala, informed reporters that the monetary authority is considering moving ahead with the proposed measure. He reassured the financial community that any regulation would be carried out with negotiation and that the BCV would prefer to regulate the spread rather than the absolute value of interest rates. But should negotiations with banks fail to yield a compromise spread, the BCV appears ready to impose one. If this policy were to be implemented, it is likely that consolidation in the financial sector would proceed more rapidly, as banks would be forced to seek economies of scale in order to cut costs. Although consolidation should help to improve efficiency, it is likely that government intervention in the banking sector would damage investor confidence and could well deter more foreign entrants. But some improvement was seen in 2000 as average spreads narrowed to 8.2 points in December 2000, from 10.9 points in the year-earlier period. The average lending rate of the six major banks stood at 21.98% in December 2000, a 6.2- percentage-point fall on the average rate for December 1999, while the average savings rate stood at 13.74 points, a 3.5-percentage-point fall on the year-earlier

period. However, the low deposit rate, negative in real terms, does little to discourage capital flight. Consumer lending rates remain close to 40%. Disappointing take-up of The government has continued its restructuring of state-owned financial instit- new credit utions. An Enabling Law passed in late 2000 allows Mr Chávez to merge existing institutions and to create new ones. The creation of the Banco de la Mujer in January 2001 represents another move to provide the population with access to cheap credit. The bank will offer cheap loans to women running small businesses. However, the experience of similar popular banks, namely the Banco del Pueblo, suggests that the new bank will have only a limited impact on its target audience or on the economy as a whole. In a televised speech in January Mr Chávez admitted that the government has fallen short on pro- viding sufficient support for small businesses as since its inception the Banco del Pueblo has lent out only 2.9% of its capital, investing the remainder in bonos de deuda pública (DPNs, Treasury-issued public debt bonds).

In January 2001 the planning minister, Jorge Giordani, was named the new president of the Fondo de Inversiones de Venezuela (FIV, the state investment fund), indicating that Mr Chávez is unlikely to make substantial changes to his economic team any time soon.

The domestic economy

Economic trends

Investment growth One of the most striking features of the GDP figures for 2000 published by the surprisingly weak in 2000 Banco Central de Venezuela (BCV, the Central Bank) is the weakness of the level of fixed investment growth, which rose by a mere 2% during the year as a whole, despite the oil bonanza, following an accumulated contraction of 18.5% in 1998-99. Inflows of foreign direct investment held up relatively well in 2000, reflecting ongoing investment in telecommunications and oil, particularly in the Orinoco belt. Most of the growth in oil is likely to have been accounted for by private investment in the hydrocarbons industry. The bulk of the huge oil-backed increase in public spending thus appears to have been channelled into current expenditure (see Economic policy), a trend reflected in a rebound of private consumption (up by 4.6% in 2000), a surge in government consumption (up by 5.6%) and strong imports growth (up by 19.5%).

Demand growth, 2000 % change, year on year GDP 3.2 Private consumption 4.6 Government consumption 5.6 Gross fixed investment 2.0 Changes in stocks 1.4 Exports of goods & services 5.8 Imports of goods & services 19.5 Source: Banco Central de Venezuela.

Recovery continues, driven On the supply side, growth was led by a 3.4% expansion in oil, which was by oil and telecoms mostly attributable to higher fixed investment as a result of improved conditions and a 2.7% expansion in the non-oil sector. In the non-oil economy, output was driven by communications, which expanded by almost 15%, and by mining, which grew by 8%, recovering well from a 10% contraction in 1999. Construction, an important source of employment, shrank for the third consecutive year as output fell by nearly 5%, despite expectations in early 2000 that the damage from the devastating mudslides in Vargas state in December 1999 would provide ample reconstruction work. However, the sector appears to have bottomed out and there were signs of recovery towards the end of 2000, with fourth-quarter construction output expanding by 6.9% year on year.

Gross domestic product growth by sector, 2000 % change, year on year Total 3.2 Oil sector 3.4 Non-oil sector 2.7 of which: mining 8.4 manufacturing 3.6 electricity & water 2.1 construction –4.9 commerce 5.1 transport & storage 4.9 communications 14.7 finance 1.6 Source: Banco Central de Venezuela.

Vehicle sales soar sharply, Vehicle sales increased by 39% in 2000. In December, traditionally a good but home sales plunge month as workers receive their Christmas bonuses, sales reached 16,457, representing a 51% increase on the year-earlier period. Vehicle sales have been helped to a large extent by the government’s family car programme, which provides cheap credit on certain vehicles. But housing sales fared badly in 2000. According to the Real Estate Chamber, sales of new homes fell by 48%. Part of the reason seems to lie in the fact that credit for home buyers remains centred on the política habitacional (home policy) programme, which targets low-income groups. But there is a shortage of homes available under the home policy scheme. In addition, those people who might have been able to acquire housing through it are those who have been hardest hit by the recession and unemployment in the past two years.

Subdued inflation The rate of inflation fell to 13.4% in 2000, the lowest level recorded since 1986. However, in the context of the overvaluation of the exchange rate and depressed domestic demand for much of the year, it was not especially low. The consumer price index rose by 0.9% in January 2001, marginally down from the 1% registered in December 2000, yielding a 12-month inflation rate of 12.6%. The comparatively low monthly inflation rate for January 2001, the lowest January rate since 1988, indicates that the strength of the bolívar is helping to offset any budding price pressures. In January home services costs, which rose

by 5.3% during the month, recorded the largest increase of any sector, mainly owing to increases in electricity, gas, water and sanitation tariffs. Prices for healthcare, food and non-alcoholic drinks also rose by more than the general consumer price index. However, prices for home rental (up by 0.6%) and home equipment (up by 0.7%) rose at below average rates.

Consumer price inflation (% change; Caracas metropolitan area price index) 1999 2000 Monthly Year on year Cumulative Monthly Year on year Cumulative Jan 2.2 30.2 2.2 1.7 19.4 1.5 Feb 1.7 29.5 3.9 0.4 17.9 1.9 Mar 1.3 27.6 5.2 0.9 17.5 2.9 Apr 1.2 24.9 6.4 1.5 17.9 4.4 May 2.0 23.4 8.5 1.0 16.8 5.4 Jun 1.5 23.7 10.1 1.1 16.3 6.6 Jul 1.6 23.0 11.9 1.0 15.6 7.7 Aug 1.5 22.3 13.6 0.8 14.8 8.5 Sep 0.9 21.2 14.6 1.7 15.8 10.4 Oct 1.6 20.2 16.4 0.8 14.8 12.5 Nov 1.5 20.2 18.2 0.6 14.2 12.3 Dec 1.7 20.2 20.2 1.0 13.4 13.4 Source: Banco Central de Venezuela.

Cost of living estimates A study by the Union of Swiss Banks published in February 2001 showed that Caracas is the most expensive city in Latin America and the eighth most expensive city in the world. Since the previous report, issued in 1998, prices have increased by 60% in US dollar terms. These findings are partially borne out by a separate study, the EIU’s Worldwide Cost of Living Survey. Our study shows that although Caracas is the eighth most expensive city in the world, on a regional basis it comes third after Buenos Aires and Mexico City, which are respectively in third and fourth place globally.

Unemployment drops According to the Oficina Central de Estadística e Informática (OCEI, the Central slowly Office of Statistics and Informatics), the economic recovery started to generate a fall in unemployment in 2000. The year-end national unemployment rate dropped to 10.2% in 2000, 2.8 percentage points less than at the end of the third quarter and 4.6 percentage points less than at the end of the second. How- ever, it is only marginally below the 10.6% registered in the year-earlier period. The level of unemployment remains high in construction (21.4%) and manufacturing (10.5%), although both sectors registered a decline in unemployment in 2000. The slow fall in unemployment is partly the result of the slower pace of economic recovery in 2000 and partly attributable to less progress being made on reconstruction than expected in the wake of the December 1999 mudslides. These unemployment figures only refer to the formal sector. According to OCEI, at the end of 2000 53.2% of the workforce was employed in the informal sector, up from 52% at the end of the third quarter, but down from the 55% recorded at the end of 1999. This distribution is unlikely to change in the medium term as an overvalued exchange rate, a general lack of competitiveness and a rigid labour market continue to constrain manufacturing growth. The most pro- mising prospect for employment creation in the short term is construction, but such employment is cyclical and will struggle to provide 100,000 new jobs, less than 10% of open unemployment.

Oil and gas

PDVSA to invest US$5.8bn According to the budget approved by shareholders in December 2000, the state-owned oil monopoly, Petróleos de Venezuela (PDVSA), is scheduled to invest a total of US$5.8bn in 2001, representing an increase of 22.2% on the year-earlier budget. This sum includes investment in fields governed by operating agreements between PDVSA and other oil companies. Investment will be concentrated in exploration, production and upgrading. The target for production capacity in 2001 is 4.2m barrels/day. According to the budget, operational costs will remain at 2000 levels, at US$7.1bn.

Industry

Telecoms main target for The telecommunications sector was opened up on November 27th 2000 and foreign private investment rapidly became a primary destination for foreign investment. Competition for licences has been strong and the Comisión Nacional de Telecomunicaciones (Conatel, the National Telecommunications Commission), has been praised for its handling of the bidding process. Only one company, Netsat, which beat Telcel-BellSouth to the band A licence for region three, was unsuccessful with its financing. Netsat failed to raise the US$10.5m bid for the licence and was consequently banned from doing business in Venezuela for five years. An important issue still to be resolved is how Conatel will oversee any inter- connection disputes. The first such potential dispute could arise between the Compañía Autónoma Nacional Teléfonos de Venezuela (CANTV, the state-run telecoms company) and Telcel-BellSouth. In accordance with existing inter- connection regulation, Conatel has given the two sides 60 days to reach agreement, after which time Conatel will impose a settlement.

Two food giants set Venezuela’s biggest beer producer and manufacturer of cornflour, rice and other to merge food products, Empresas Polar, has reached agreement with a listed company, Mavesa, for a friendly tender offer. Mavesa owns a broad range of 60 branded products, including margarine, mayonnaise and cleaning products. Under the term of the deal, Empresas Polar will try to buy 65-100% of Mavesa’s shares for 14 US cents per share, valuing the total deal at US$510m. Although most shareholders are expected to take up the offer, rival bids cannot be excluded.

Mixed reports from the The privatised steel manufacturer, Sidor, reported strong year-end results for steel sector 2000. At US$400m, the company’s exports reached their highest ever level, helped by a strong recovery in world prices. However, fellow steel producer Sivensa registered a US$97.7m loss in 2000.

Agriculture

Improved harvest in 2000 The production of a number of staple crops increased in 2000. According to figures released by the Ministry of Agriculture, the output of several products improved, including corn (up by 35.7%), coffee (up by 5.1%) and sugar cane (up by 3.6%), but rice production fell by 2%. Despite the positive production figures, many local producers have complained that the government has not kept its promise to help to secure new markets, which has resulted, for example, in 300,000 quintals (one quintal=46 kg). of coffee being left unsold. The ministry defended its performance by stating that its aim for the year was to create a solid platform for the future growth of the sector, rather than to increase agricultural production per se.

Important obstacles to However, agriculture does face a number of barriers to growth. The overvalued growth remain bolívar and the scarcity of state-of-the-art technology undermine the competitiveness of Venezuela’s agricultural exports. The use of credit remains limited, despite the implementation of targeted programmes, and few producers are taking advantage of the credit available, owing to the cumbersome procedures

involved. In addition, uncertainty about land ownership, given continued land invasions and the perceived threat of expropriation associated with the government’s land reform proposals, remains an obstacle that prevents landowners turning their property to productive use.

Infrastructure

Reconstruction The replacement of Alberto Esqueda as infrastructure minister with the former post-mudslides needs boost defence minister, General Eliécer Hurtado Sucre, is a tacit acknowledgement by the president, Hugo Chávez Frías, that the reconstruction process in the wake of the December 1999 landslides has not proceeded as fast as anticipated. Mr Esqueda claimed early on in his tenure that he would step down if his ministry did not meet its homebuilding targets. Although a number of rudi- mentary projects have been carried out in Vargas state, including clearing debris and replacing damaged water and sanitation services, the expected construction boom has failed to materialise. Political infighting and an inability on the part of local and national government to implement development plans have stalled the rebuilding process.

Tourism gets another The vice-minister for tourism has also been replaced in the wake of criticism makeover that the much-heralded opening of the sector had yet to take place. The number of overseas visitors to Margarita Island, Venezuela’s major tourist destination, declined by 31% in 2000 according to the group that manages the island’s international airport. The decline appears to be related both to the uncertainty generated by the international press coverage of the 1999 landslides and to fear of the growing crime rate.

The Ministry of Production and Trade has drawn up a plan for 2001 pledging the sale of a number of state-owned tourism assets. The ministry hopes to attract national and international investors through the sale of hotels and land for development. However, a lack of infrastructure in many areas identified as prime tourism locations could prove an inhibiting factor for investment. Venezuelan companies have also increased their presence at a number of international trade and tourism fairs.

Financial and other services

Wave of banking mergers The wave of banking mergers continued in the fourth quarter of 2000, during in full swing which Fondo Común merged with Banco República to form Fondo Común Banco Universal, while Banco Noroco and Valencia EAP joined Norval Bank. Mi Casa EAP took over La Primogénita.

In another attempt to cut costs, the banking sector reached an agreement with the Consejo Nacional del Comercio y los Servicios (Consecomercio, a trade group representing private-sector companies) to restrict authorisation of cheques to those above Bs20,000 (US$28). Initially, the banking sector had in- sisted that it would only authorise cheques above Bs50,000, but this amount was reduced after pressure from retailers. The new measure came into effect on February 15th 2001.

Further pressure for banking consolidation came in December 2000, when the Ministry of Finance forced universal and commercial banks to increase their minimum paid-in capital. Under the terms of ministry’s decree, the minimum paid- in capital for commercial banks rises from US$1.7m to US$19.9m and that for universal banks from US$4.3m to US$49.7m. Banks have been given 18 months to comply with the ruling. As of November 2000, only 23.8% of banking institutions and ten of the top 15 banks had fulfilled these capital requirements. Those banks needing to increase their paid-in capital represent 55.9% of total assets and 66.6% of the sector’s total capital. The immediate result of this measure will be that larger banks will be obliged to offer stock dividends or to take over smaller institutions, while smaller institutions will be forced to enter into mergers with each other or to be absorbed by larger banks. Although these changes will cause short-term uncertainty, they will ultimately hasten much- needed consolidation of the overpopulated and undercapitalised banking sector.

Stockmarket consolidation The acquisition of Electricidad de Caracas (EDC) by the US giant, AES, and the continues possibility that the Polar-Mavesa bid will go ahead (see Industry), have fuelled rumours about the future of other major companies listed on the Caracas Stock Exchange. Such rumours are particularly significant given that each delisting squeezes locally traded volumes, further diminishing the attractiveness of the market to international investors. Trading volumes on the local stock exchange have fallen since 1997’s peak owing to a variety of factors. The Caracas Stock Exchange was never a wide and deep market and the choice of some of Venezuela’s largest companies to expand their access to international investors via the listing of US-traded American depository receipts has allowed foreign investors to buy Venezuelan stock abroad as they are no longer forced to deal locally. The government’s financial transaction tax, temporarily imposed for a short time in early 1999, also deterred international investors from trading local stocks. In addition, an unfavourable environment for emerging markets and the less pro-market stance of the Chávez government are compounding Venezuela’s equity market troubles.

Two of the country’s major paper producers, Venepal and Manpa, may also be the subject of takeover bids. Venepal, which has been struggling for the past two years, had been negotiating a deal with the Mexican giant, Copamex, which had been managing the company for the past 12 months. Copamex has now pulled out the negotiations and talks with Smurfit-Stone Container are taking place. Manpa is currently negotiating the sale of 80% of its stock to an outside buyer. In January 2001 Tabacalera Nacional withdrew from the Caracas Stock Exchange in a move that will have only a limited effect on trading volumes because the company’s shares were already illiquid as Phillip Morris. owned a 90% stake in it. CANTV remains a target for takeover speculation.

Foreign trade and payments

Both exports and imports According to the Banco Central de Venezuela (the Central Bank), non- grew in 2000 traditional exports grew by 29% in 2000, despite a strong exchange rate and a lack of competitiveness caused by low productivity and high labour costs. A

breakdown of non-traditional exports for the year to November 2000 reveals earnings growth of 27%. Part of the increase appears to reflect higher exports to the region, in particular to Colombia, as a recovery in the Andean market got under way. Almost one-half of the increase is attributable to the inclusion of private-sector oil output in the mineral products category, which increased by 200%. Other categories performing well included chemicals and vehicles.

Non-traditional exports, Jan-Nov (US$ m) 1999 2000 % change Crops 285 250 –12.3 Food industry 218 185 –15.1 Mineral products 230 691a 200.4 Chemical products 513 646 25.9 Plastics & manufacturing 319 340 6.6 Base metals 1,370 1,693 23.6 Electrical products 112 116 3.6 Vehicles 167 206 23.4 Others 273 314 15.0 Total 3,487 4,441 27.4

a Includes private-sector oil exports. Source: Oficina Central de Estadística e Informática.

Current-account balance (US$ m) 1999 2000 % change Current-account balance 3,689 13,365 262 Exports fob 20,819 34,038 63 Oil 16,697 28,716 72 Non-oil 4,122 5,322 29 Imports fob –13,213 –16,073 22 Oil –1,648 –2,036 24 Non-oil –11,565 –14,037 21 Trade balance 7,606 17,965 136 Services balance –2,469 –3,309 34 Transport –1,049 –1,413 35 Travel –932 –1,206 29 Communications –30 –70 133 Insurance –57 –77 35 Government –24 –6 –94 Other –377 –549 46 Income balance –1,518 –1,152 –24 Goods, services & income balance 3,619 13,504 273 Current transfers 70 –139 n/a Source: Banco Central de Venezuela.

According to Central Bank figures, import spending grew by 21.7% in 2000, reflecting increased domestic demand. Private-sector spending on imports repre- sented 82.3% of total import spending. Significantly, non-oil related public- sector import spending rose by 39.5% year on year. Imports also received a

boost from rising demand for capital and intermediate goods in the private oil and telecommunications sectors. Preliminary balance-of-payments figures published by the Central Bank suggest that the current account registered a surplus of US$13.4bn in 2000, the highest surplus since 1980, up from US$3.7bn in 1999. The increase is almost entirely the result of the extraordinary oil windfall gain, which totalled US$34bn, an increase of 63% on the year-earlier period. A widening of the services deficit was driven by increased outgoings on the transport account, which is largely a function of rising imports. Rising travel expenditure added to the expansion of the services deficit.

Access to external credit In February 2001 Venezuela made its first foray into the international capital likely to remain limited markets since the sale at a significant premium of a five-year ¤500m (US$475m) global bond in March 2000. The issue, which raised ¤300m, has a seven-year maturity and was sold at a stiff premium. The proceeds will be used to pay off and to roll over external debt. Although Venezuela announced that it was planning to make further ventures into the capital markets to raise more funds, the lack of economic policy coherence signals that access will remain limited in the medium term. A threat by the president, Hugo Chávez Frías, to sue ratings agencies for defamation owing to their alleged portrayal of Venezuela in an unfavourable light will not advance his cause.

Foreign reserves rise According to the Central Bank, international reserves rose by US$700m at end- steadily 2000, reaching almost US$15.9bn. But foreign reserves for 2000 as a whole rose by US$5.1bn, taking into account funds allocated to the Fondo de Inversión para la Estabilización Macroeconómica (FIEM, the Macroeconomic Stabilisation Investment Fund). As of mid-February 2001, international reserves stood at US$16.4bn, with FIEM funds at US$4.6bn, making a total of US$21bn.