GDP growth slowed sharply from a 5.5% (y-o-y) pace in the second half of 2012 to a mere 0.7% rise in Q1 2013. Activity last year was backed by generous election spending, particularly in housing construction, which helped to paper over some of the cracks stemming from state mismanagement as well as price and currency controls. In Q1 2013, though, construction activity fell by 1.2% (y-o-y). Government controls have created severe distortions in the economy which are now reaching near-breaking point. Eroded profit margins and productive capacity constraints prompted manufacturing to contract by 3.6% (y-o-y) and oil activity to rise by only 0.9% in the March quarter; moreover, the volume of oil barrels produced in the first five months of 2013 fell by 2.3% (y-o-y). While oil remains by far its most important export, Venezuela is forced to import almost everything else that it needs. But because companies have to apply formally to the government to get outside currency – usually US dollars – to pay its foreign suppliers, this has created worrisome shortages. Some states have even resorted to informal rationing of basic goods like milk and toilet paper. Meanwhile, the value of the non-fixed bolivar on the black market has soared sharply. February’s 32% devaluation of the official bolivar, from a fixed rate of Bs4.295/US$ to Bs6.292, was essentially a scramble for dollars and to alleviate pressure on the fiscal deficit. However, the devaluation spurred already-high inflation from 2.7% (m-o-m) in March to 3.9% in April and a massive 6.2% jump in May. Annual inflation in Caracas now stands at 33.7%, up from 27.9% in April, and is expected to reach 35.9% in December. Some economists have even posited a possible return to hyperinflation unless major fiscal and monetary adjustments are made and state controls lifted. Our panel’s 2013 GDP forecast has dipped.
The current account moved back into surplus in Q1, from US$-0.598bn in Q4 2012 to US$+1.747bn, due to import restrictions. The current account was lifted by a reported US$21.4bn gain in oil exports, although weak capacity in the sector, coupled with a 5.6% (y-o-y) decline in oil export volumes, tempered the news. Given the ongoing balance of payments crisis, current account forecasts have weakened.
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