Last year, in August and September 2018, socialist leader Nicolás Maduro launched the Economic Recovery, Growth and Prosperity Plan of Venezuela. The Plan’s most significant policies were a monetary reconversion (removing five zeroes form the currency to create the “Sovereign Bolivar”); a salary increase, for which the regime promised to cover the salary differential of small and medium enterprises within 90 days; a savings plan based on the sale of gold and silver bullion to the general public; and the restoration of exchange operations between banks. The plan was to intended to stabilize prices and reactivate the productive apparatus of Venezuela, which at that time already had fallen 36.9% between 2013 and 2017, while experience inflation of 10,025.5% over the same period(1).
Now, more than a year after the plan’s introduction, the Venezuelan economy does not show signs of recovery. Although the hyperinflationary process has slowed down (inflation in September was 23.5%, a steep decline from August’s inflation of 65.2%) (2), economic activity has continued to decline, now registering a drop of 49.3% since 2013(3). This result is mostly explained by declines in the construction sector (52.3%), financial and insurance institutions (45.2%), and the manufacturing sector (39.3%). Regarding aggregate demand, fixed gross investment in Venezuela fell by 64.8% compared to 2017; while private consumption expenditure and government consumption expenditure declined at rates of 9.1% and 20.1%, respectively.
Gross domestic product continues to decline
For the first quarter of 2019, the Venezuelan economy registered a decrease of 26.8% compared to the same period of 2018. The construction sector was the most affected, with a decrease of 74.1%, followed by the manufacturing sector (56.3%), and then by the social service provider sector with a drop of 47.4%. Among the reasons for this poor economic performance are the difficulties in accessing internal financing due to the strict marginal reserve requirement, delays in the allocation of foreign exchange, and the negative expectations of the private sector regarding the short- and medium-term economic outlook (4).
Figure 1. Quarterly YoY Real GDP Growth and the Potential GDP of Venezuela (%)
The long term trend (potential) Venezuelan growth has also fallen significantly, falling for 25 consecutive quarters, a cumulative drop of 52.9% since the fourth quarter of 2014. To recover the levels of growth achieved in 2013, the Venezuelan economy would need to grow at a rate of 1.6% for 43 consecutive years.
Imports, net oil exports, and external assets
Imports registered an annualized decrease of 12.6% in the first quarter of 2019. This is due to declining oil imports, which after four consecutive quarters of annualized growth recorded a 23% decrease for the first three months of 2019. Since January 2019 the United States has imposed sanctions on PDVSDA prohibiting the importing of oil and oil-derived products for the refining of crude oil and production gasoline
Figure 2. Imports (US$ Million)
Net exports of oil have experienced a progressive decline since the third quarter of 2012, when one of Venezuela’s most important refineries experienced collapsed, causing more than 40 deaths, 120 injuries, and substantial material losses. Since then Venezuelan oil production has also been affected by blackouts and electrical rations due to droughts, attrition of personnel due to poor working conditions, non-payment to transport service providers, and US sanctions, falling by approximately 72.4% between September 2012 and September 2019(5).
Figure 3. Net oil exports (US$ Millions)
International reserves stood at US$8,234 million in the first quarter of 2019, which represents a decrease of 7% compared to the end of 2018. Reserves in monetary gold were US$4,751, a decrease of 219% since the same period in 2014, the result of the sale of gold by the Maduro regime to obtain financing due to the impossibility of accessing international markets(6).
Figure 4. International reserves (percentage of total)
- Source: BCV, own calculations.
- This brings inflation in the past 12 months to 50,100 percent, which is significantly lower than the close to 2,700,000 percent in January 2019. Source: Venezuelan National Assembly.
- Source: BCV, own calculations.
- See: Qualitative industrial situation survey for I quarter of 2019. Conindustria. May 2019.
- Source: OPEC, Thomson-Reuters Eikon, own calculations.
- The legality of such sales are in question. Article 150 of the Constitution says that public interest contracts with foreign companies or foreign entities cannot be entered into or transferred without prior authorization from the National Assembly.