Venezuela economy 'faces greatest collapse'

news.ft.com By Andy Webb-Vidal in Caracas Published: January 14 2003 18:49 | Last Updated: January 14 2003 18:49

Venezuela this year faces the most serious economic collapse in its history because of lost oil output and escalating political tension, bankers and analysts warned on Tuesday.

BSCH, the Spanish bank, said that it expects the economy to contract by 40 per cent in the first quarter and by at least 9 per cent this year. It described the situation as the "biggest [example of] wealth destruction in Venezuelan history".

The contraction could potentially be as deep as 30 per cent, BSCH added, given that for every month that passes without a political solution to reactivate the oil industry the economy will shrink by an additional two percentage points. There is no sign as yet of a settlement between President Hugo Chávez and opposition groups, in particular workers at Petróleos de Venezuela (PDVSA), the state oil company, now in their sixth week of a protest strike against the government.

Oil output in what was the world's fifth-largest exporter dropped from just over 3m b/d at the start of December. By Tuesday, government efforts to restart production with loyal personnel had produced 400,000 b/d, industry sources said.

Alí Rodríguez, the PDVSA chief, said this week that oil production would return to pre-strike levels by the end of February. Most oil industry observers say such a forecast is unrealistic, however. In the most optimistic of scenarios it will take two to four months from the day PDVSA employees return to work to ramp up output to 90 per cent of previous levels.

Bankers said Tobías Nóbrega, the finance minister, offered a more realistic official forecast when he said oil production would recover to 2.5m b/d at the end of April. A severe fiscal adjustment is likely to be accompanied by a sharp depreciation of the bolívar, which has already dropped by 16 per cent against the dollar since January 1.

This year's deep recession follows what preliminary figures suggest was a contraction of 9 per cent last year, a decline already being reflected in rising poverty and a deterioration in other key social indicators.

Datanálisis, a local research firm, estimates that after four years in government, Mr Chávez has presided over an 18 per cent economic contraction, while the percentage of families living in poverty has risen from 60 to 70 per cent.