Venezuela's economy to shrink 40%, bank says

news.ft.com By Andy Webb-Vidal in Caracas Published: March 10 2003 18:56 | Last Updated: March 10 2003 18:56

Venezuela’s economy will shrink by more than 40 per cent in the first quarter because of the unprecedented collapse in oil production and the resulting dearth of foreign currency, according to forecasts by a top Spanish-owned bank.

Banco Provincial, the local subsidiary of Spanish bank BBVA, predicted the economy of Venezuela, the world’s fifth-largest oil exporter, will shrink by 42 per cent in the first three months of the year, making it the sharpest contraction on record. 

Oil sector activity would drop by 69 per cent, the bank said, while the non-oil sector would contract by 33 per cent. The bank also said the unemployment rate would increase to 25 per cent. The official jobless rate is currently at about 18 per cent.

The grim figures are in line with a similar forecast in January by Spain’s BSCH bank, which predicted a contraction of 40 per cent n the first quarter and 9-30 per cent for the full year, depending on how quickly oil output recovers.

Venezuela produced 3.1m barrels per day in November, before output dropped to as low as 150,000 b/d because of  a strike led by employees at Petroleos de Venezuela, the state oil company, against the government of President Hugo Chavez.

Oil output has since been recovering, despite the government’s dismissal of nearly 16,000 PDVSA employees, including many skilled oil-field and refinery technicians.

Most of PDVSA’s oil traders have also been fired, leaving the company with hundreds of millions of dollars in uncollected receivables from third parties.

Mr Chavez said last week PDVSA had lifted its notice of force majeure, a clause companies can invoke when circumstances beyond its control render it unable to meet obligations to customers. 

Government officials say oil output is currently "near normal" levels, at around 2.6m b/d, but former PDVSA managers claim production is below 2m b/d. 

Venezuela’s economic woes have been compounded by the government’s decision to implement foreign exchange controls.

Regular sales of dollars from the central bank, which receives PDVSA’s foreign currency earnings, were suspended at the end of January due to the rapid decline in international reserves as a result of the strike.

The government has since created an institution to administer dollar sales to businesses requiring hard currency for essential imports, but the agency has yet to begin operations, strangling companies already reeling from the effects of the strike.