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Country Profile 2007

Venezuela This Country Profile is a reference work, analysing the country's history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit's Country Reports analyse current trends and provide a two-year forecast.

The full publishing schedule for Country Profiles is now available on our website at www.eiu.com/schedule The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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ISSN 1352-0954

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Comparative economic indicators, 2006

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


0 200 400 600 800 1,000

Paraguay

Bolivia

Uruguay

Ecuador

Peru

Colombia

Chile

Venezuela

Argentina

Mexico

Brazil

0.0 2.0 4.0 6.0 8.0 10.0 12.0

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Peru

Argentina

Venezuela

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Venezuela

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Colombia

Ecuador

Peru

Brazil

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Uruguay

Venezuela

Mexico

Chile

Venezuela 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

Venezuela

3 Basic data

4 Politics 4 Political background 5 Recent political developments 10 Constitution, institutions and administration 11 Political forces 13 International relations and defence

17 Resources and infrastructure 17 Population 19 Education 19 Health 21 Natural resources and the environment 22 Transport, communications and the Internet 25 Energy provision

27 The economy 27 Economic structure 28 Economic policy 32 Economic performance 33 Regional trends

34 Economic sectors 34 Agriculture 35 Mining and semi-processing 40 Manufacturing 40 Construction 40 Financial services 45 Other services

46 The external sector 46 Trade in goods 47 Invisibles and the current account 48 Capital flows and foreign debt 49 Foreign reserves and the exchange rate

51 Regional overview 51 Membership of organisations

52 Appendices 52 Sources of information 53 Reference tables 53 Population and labour force 53 Central government finances 53 Interest rates 54 Money supply

2 Venezuela


54 Gross domestic product 54 Nominal gross domestic product by expenditure 55 Real gross domestic product by expenditure 55 Real gross domestic product by sector 56 Prices and earnings 56 Mineral production 56 Domestic cement sales 56 Selected electricity statistics 56 Main composition of trade 57 Main trading partners 57 Balance of payments, IMF series 58 External debt, World Bank series 58 Foreign reserves 58 Exchange rates

Venezuela 3


Venezuela

Basic data

912,050 sq km, of which land area, 882,050 sq km; inland waters, 30,000 sq km

23m (2001 census)

Population (m), 2001 census

Caracas (capital) 1.8 Zulia 2.9 Carabobo 1.9

Tropical, cooler in highlands; the rainy season lasts from May to November

Hottest months, May-September, 18-32°C (average daily minimum and maximum); coldest month, January, 2-13°C; driest months, January-April, 8 mm average rainfall; wettest months, August-October, 145 mm average rainfall

Spanish; Indian dialects spoken by 200,000 Amerindians in the remote interior

Metric system; local measures used in agriculture include 1 arroba=11.5 kg

Bolívar (Bs1=100 céntimos); the annual average exchange rate for 2006 was Bs2,147:US$1; on January 29th 2007 the official exchange rate was Bs2,147:US$1, and the informal parallel exchange rate was estimated at Bs4,300:US$1

Four hours behind GMT

January 1st; Thursday-Saturday of Holy Week; May 1st; June 24th; July 5th and 24th; October 12th; December 25th; there are other holidays for bank employees and those in certain other occupations, as well as local holidays

Total area

Population

Main towns

Climate

Weather in Caracas (altitude 1,035 metres)

Language

Measures

Currency

Time

Public holidays

4 Venezuela


Politics

The president, Hugo Chávez of the Movimiento Quinta República (MVR), a leftist populist, has been in power since February 1999. He has been re-elected twice, in 2000 and 2006. He has also survived an attempted coup (in early 2002) and a revocatory referendum (in August 2004). In the wake of an opposition boycott of the December 2005 legislative election, Mr Chávez!s party has total control of the 167-seat unicameral National Assembly (parliament).

Political background

Until the discovery of oil at the end of the 19th century, Venezuela was dependent on coffee and cocoa exports. Originally inhabited by the Carib and Arawak Amerindian peoples, the country was conquered by Spain in the 16th century, ushering in 300 years of Spanish rule. Simón Bolívar, a national hero in Venezuela, led the struggle for independence in the Andean region, which was achieved in 1819. Bolívar sought to promote the integration of South American states, perceiving regional unity as an essential counterweight to US power on the continent. This goal proved elusive, and having initially joined with Colombia and Ecuador to form the República de Gran Colombia, Venezuela became fully independent in 1830.

Throughout most of its post-independence history, Venezuela has been regarded as an exceptional case within the region. Post-independence caudillismo (strong-man politics) and military rule ended later than in many other countries in Latin America. Subsequently, a form of civilian democracy that was installed in 1958 endured for three decades, while a wave of authoritarianism and brutal military dictatorships swept through many other countries in the region.

Military rule lasted from independence until a brief democratic experiment, the trienio, launched in 1945. This was brought to an end in 1948, after a coup against a radical and reformist Acción Democrática (AD) government, which had alienated the economic elite. Oppression under the military regime prompted former political enemies to bury their differences, and in 1957 AD and a rival party, the conservative Comité de Organización Política Electoral Independiente (COPEI), devised a political pact, the pact of Punto Fijo, which took effect with the removal of the military government and the transition to the Fourth Republic in 1958. Between 1958 and 1988 the country was politically stable, with AD and COPEI dominating national elections.

The pact of Punto Fijo was credited with ensuring this democratic continuity, as it guaranteed the sharing of positions in the state administration between AD and COPEI and institutionalised a centrist policy consensus. The "Punto Fijo state" was characterised by a limited form of democracy and a highly centralised political system, which restricted independent social organisation. All political organisations, including union and private-sector groups, were controlled by AD or COPEI. Although political participation was circumscribed, distribution of patronage to their clientele underpinned the parties! support. Oil export revenue filtered down through the network of organisations affiliated to

Independence

Dictatorship, democracy and the Punto Fijo pact

Venezuela 5


the two movements, and consent for restricted political participation was obtained through these distributive policies.

Recent political developments

Management of Venezuela!s petroleum wealth has been the dominant political and economic issue for most of the past century. Political disaffection rose as cycles of oil-led boom and bust became more pronounced following the oil price shocks of the 1970s. Frequent economic crises and endemic corruption eroded support for AD and COPEI, culminating in a crisis of legitimacy for the Punto Fijo system a decade later. Despite mounting fiscal difficulties, successive COPEI and AD administrations eschewed reform of the country!s development model, centred on sembrando el petróleo ("sowing the oil"), as political support was dependent on clientelistic distributive policies. Instead, the state bureaucracy became unsustainably large, inefficient and costly. Government and opposition politicians alike encouraged a populist model founded on oil wealth, which undermined popular support for economic reform. Carlos Andrés Pérez of the AD was elected president in 1988 on the promise of a return to the "good old days" of his first presidency (1974-78), which had coincided with an oil windfall. His decision immediately upon retaking office to adopt stabilisation and structural adjustment measures to address chronic fiscal problems quickly left him isolated. Austerity policies were opposed by his own party and seen as a betrayal by the population. In February 1989 hundreds of people were killed in riots, known as the Caracazo, following sudden increases in public transport fares implemented as part of "shock" adjustment therapy.

After the Caracazo, Mr Pérez sought to defuse rising alienation through political change and introduced a programme of decentralisation and electoral reform. However, deteriorating economic conditions fuelled an intensification of popular resentment. The population!s faith in the potential of "trickle-down", which had underpinned the legitimacy of the traditional political system from the 1950s to the 1970s, had all but vanished. In February 1992 six junior officers, including Mr Chávez, attempted a military coup. The coup leaders were imprisoned, but the fact that Mr Chávez achieved folk-hero status illustrated the public!s deep disaffection with the political system.

The founder of COPEI and a former president in 1968-73, Rafael Caldera, capitalised on the popular rejection of Mr Pérez by refashioning himself as a political outsider. Having been rejected as COPEI!s presidential candidate, he founded a new political vehicle, Convergencia Nacional (CN), and won the election on a populist platform, marking the first time since 1958 that a party other than the AD or COPEI had won the presidency. However, Mr Caldera was forced to negotiate with AD in order to secure the passage of legislation. This association with the discredited AD reduced popular support for his government, as did Mr Caldera!s attempt to roll back the decentralisation and other political reforms introduced by Mr Pérez in 1989. Disaffection with the administration mounted after Mr Caldera adopted an IMF-backed adjustment programme in April 1996.

Mainstream politics becomes discredited

Anti-system sentimentsupports rise of Mr Chávez

6 Venezuela


Mr Caldera!s term ultimately served to intensify anti-system sentiment. Mr Chávez, who had been released from prison by Mr Caldera in 1994, became the beneficiary of this mass political disaffection. His Polo Patriótico (PP) alliance, which grouped his own MVR with the Patria Para Todos (PPT) and Movimiento al Socialismo (MAS) parties, campaigned on a platform of radical reform of both the economy and the political system. Mr Chávez pledged to replace the discredited Punto Fijo state and lead the country to a new phase, the "Fifth Republic". Drawing support from across the social classes, but predominantly from among the poor, Mr Chávez won the presidency in the December 1998 election with 56% of the vote, the largest majority in Venezuela!s democratic history, in an election that was regarded as fair. However, a stubbornly high level of voter abstention (36.5%) showed that the alienation created by the decline of the two main traditional parties, AD and COPEI, had played a significant role in Mr Chávez!s victory. These two parties, which had virtually alternated in power for more than two decades, had become so internally divided that neither fielded a candidate.

Mr Chávez assumed the presidency in February 1999. On the day of his inauguration, he decreed a popular referendum on the convocation of a constituent assembly, in order to rewrite the constitution. The referendum approved the assembly, and a new constitution was drafted in just three months. Fresh elections were held in July 2000 to relegitimise all elective posts. Mr Chávez was returned with an enhanced landslide, winning 60% of the vote, although abstention reached an unprecedented 43.5%.

Abstention in presidential elections (% of electorate)

1978 12.4

1983 12.31988 18.11993 39.8

1998 36.52000 43.5

2006 25.9

Source: Consejo Nacional Electoral.

The poor standing and demoralised state of the mainstream parties helped to assure Mr Chávez a protracted honeymoon period. However, by 2001 many middle-class voters who had supported Mr Chávez in 1998 and 2000 became alienated by his inflammatory style and radicalisation of the economic policy agenda, and impatient with the government!s failure to deliver on promises to improve personal security, create employment and reform institutions. The credibility of new institutions created by the 1999 constitution was rapidly undermined by political appointments and by Mr Chávez!s proclivity for bypassing constitutional procedure in order to accelerate the passage of legislation. Amid accusations of increasing authoritarianism and extremism on the part of the Chávez administration, anti-government sentiment broadened.

As a result of the prevailing distrust of the impartiality of political institutions, anti-government sentiment was channelled into street demonstrations. In an

Mr Chávez institutes "popular democracy�

Mr Chávez's "revolution" erodes the middle ground

Efforts to remove Mr Chávezend in failure

Venezuela 7


increasingly bitter standoff, government policy initiatives were regularly met with protest action, with business groups playing a ever-more proactive role. Anti-government protests climaxed in an abortive coup on April 12th 2002. Mr Chávez was removed from power, and the president of the main business association, Fedecámaras, Pedro Carmona, was appointed by the military to replace him. Two days later, a counter-coup, led by elements within the army that remained loyal to Mr Chávez, restored him to the presidency. The refusal by the Organisation of American States (OAS) to recognise Mr Carmona!s regime was also instrumental in its downfall, as was a series of mass protests in favour of Mr Chávez.

Important recent events

2002

An abortive coup attempt in April briefly unseats the president, Hugo Chávez. The opposition seeks to regroup around an indefinite general strike from November, aimed at forcing Mr Chávez to resign. The unsuccessful strike lasts for two months.

2003

In February the government imposes draconian exchange controls as a means of halting the loss of reserves and stabilising the economy, following the strike-induced collapse. In December the opposition holds a campaign to collect the 2.5m signatures needed to demand a revocatory referendum on Mr Chávez!s tenure.

2004

The electoral authority validates opposition-gathered signatures in favour of a recall referendum, which is scheduled for August 15th. In the referendum, more votes are recorded in support of Mr Chávez than against, confirming Mr Chávez!s tenure. The opposition disputes the results, but independent observers accept them. Violent demonstrations subside.

2005

Perceptions of bias in the electoral authority among a large segment of the population persist. Faced with growing pressure to abstain and the prospect of a poor showing, the opposition withdraws from the legislative election held on December 4th. Pro-Chávez candidates sweep an election marked by abstention.

2006

The governor of Zulia state, Manuel Rosales, manages to unify a fractured opposition around his candidacy and to discredit some of the more extremist and abstentionist elements within its ranks. However, on the back of a massive oil-fuelled fiscal stimulus, Mr Chávez gains a comfortable victory in the presidential election on December 3rd. Abstention is reduced to 25.9% of voters.

2007

Just weeks after his election victory, Mr Chávez sets about trying to accelerate the drive towards "21st-century socialism", announcing the nationalisation of a private telecommunications company, CANTV, and suggesting that others will follow. A proposed enabling law, which would allow Mr Chávez to rule by decree for 18 months, raises fears of growing authoritarianism.

8 Venezuela


Recent election results (no. of seats in the National Assembly)

2000 2006Movimiento Quinta República (MVR) 76 117Podemos n/a 19

Patria Para Todos (PPT) 1 11Partido Comunista de Venezuela n/a 7Acción Democrática (AD) 29 0

Movimiento al Socialismo (MAS) 21 0Comité de Organización Política Electoral

Independiente (COPEI) 5 0Primero Justicia 5 0

Others 28 13Total 165 167

Source: Economist Intelligence Unit.

Conciliation efforts following Mr Chávez!s restoration to the presidency rapidly gave way to renewed polarisation and intransigence, with both sides accusing each other of bad faith. A nationwide general stoppage convened by opposition groups in November 2002 sought to force Mr Chávez to resign. Although it dragged on for two months, it failed in its objective and persuaded important opposition groups to shift their efforts towards securing a revocatory referendum, under a clause introduced in the 1999 constitution. Opposition groups successfully mounted a campaign to secure the necessary 2.5m signatures, and a recall referendum was scheduled for August 15th 2004. The results, which were disputed by the opposition, but ratified as free and fair by independent electoral observers, confirmed Mr Chávez in his post until the end of his tenure in 2007.

Mr Chávez!s success in the revocatory referendum was aided by the expansion of his core support base in 2004, following a rapid acceleration of spending on social programmes in marginalised neighbourhoods, financed by windfall oil revenue. He also benefited from a rapid and large-scale government voter registration drive targeted at the poor urban communities most likely to support the president. By the time the electoral list was closed to referendum participants in July, it totalled slightly over 14m. This compared with 12.3m in November 2003, when the initial signature-gathering efforts of the opposition required to trigger the referendum took place. Mr Chávez!s victory was also a reflection of the weakness of the opposition, which remained plagued by internal divisions and failed to broaden its popular appeal among the large bloc of voters (estimated at the time as accounting for 40% of the electorate) that supported neither the government nor the opposition.

In the wake of the referendum, popular support for an opposition movement perceived as divided and ineffective fell drastically. Pro-Chávez candidates made sweeping gains in state and local elections, held at the end of 2004 and in mid-2005 respectively. As an election for the 167-seat national legislature approached at the end of 2005, the main opposition parties were forced to confront the demands of anti-government organisations urging voters not to participate in the election, on the basis that this would legitimise a political

The opposition weakens, asdoes voter participation

Venezuela 9


system that they perceived as authoritarian and an electoral system that they believed to be fraudulent. The major opposition parties decided to boycott the legislative election just days before the December 4th vote, citing a lack of confidence in the Consejo Nacional de Elecciones (CNE, the electoral authority), and in particular, in the electoral register and the electronic voting system. The withdrawal of the opposition came despite a last-minute agree-ment by the CNE, brokered by election observers from the EU and the OAS, not to use controversial fingerprinting machines. The government dismissed the opposition!s decision as a ploy to avoid an embarrassing defeat and urged its supporters to vote. Nonetheless, abstention rates (officially put at 75%, although the opposition claims that they exceeded 80%) were high. Moreover, although EU and OAS election observers noted only minor irregularities in the vote (including an extension of voting hours coinciding with efforts to mobilise the Chavista vote), they commented that broad sectors of society had no confidence in the electoral authority.

For potential opposition presidential candidates, much of the year leading up to the presidential election on December 3rd 2006 was spent trying to agree a unity candidate and persuade a reluctant opposition to vote. In August, after months of negotiation and just before a planned primary, Manuel Rosales, governor of the populous western border state of Zulia, received the backing of his competitors within the opposition. Agreement on Mr Rosales!s candidacy marked something of a milestone for the opposition, which had lacked direction and impetus since failing to dislodge Mr Chávez in the 2004 recall referendum. The return of politicians to centre stage, after years in which business groups, trade union leaders, media bosses and non-governmental organisations (NGOs) had been the focus of attention, with frequently disastrous results, was also significant. However, Mr Chávez nonetheless gained a comfortable victory over Mr Rosales in December, with a margin of victory of 63% to 37% and a lower abstention rate than in past elections of 26%. Mr Chávez reaped the benefits of high global oil prices, which had permitted a sustained expansion of public spending to record levels and a broadening of the redistributive programmes that had benefited previously marginalised poor voters. Meanwhile, notwithstanding an effective campaign by Mr Rosales, the persistent perception remained among much of the electorate that the opposition was ineffectual, elitist, corrupt or out of touch with ordinary voters.

The president evidently sees this clear victory as a strong mandate for a programme that combines high public spending on social investment with a much more controversial drive towards "21st-century socialism". On the eve of his swearing-in ceremony in January 2007, Mr Chávez announced his intention to nationalise Venezuela!s largest private company and dominant fixed-line telecoms monopoly, CANTV. Going further, Mr Chávez stated that all sectors of strategic significance should be nationalised. Complete control of the legislature and strong influence over weak and politicised institutions should facilitate this agenda. However, there are major challenges to policymaking. Perhaps most important, it is unclear whether a majority of voters support the shift to socialism. Opinion polls consistently show that Mr Chávez!s support is based

Mr Chavez signals radicalisation

10 Venezuela


on his pro-poor policies and the rise in real incomes in recent years, rather than solid ideological support for socialism.

Meanwhile, weaknesses in the bureaucracy, growing signs of mismanagement and corruption, and pressures on fiscal revenue from falling oil prices will all complicate policy delivery. Failure to deliver on issues such as crime, corruption, housing and inflation could eventually erode support for the government. The opposition has raised fears that the government will respond by repressing dissenters, pointing to the government!s decision at the end of 2006 not to renew the licence of a major privately owned television station as a further check on press freedom. A proposed enabling law, which would allow Mr Chávez to rule by decree for 18 months, is raising concerns over increasing authoritarianism and the concentration of power in the executive. Mr Chávez has stated further that he would like to reform the 1999 constitution (drawn up when he first took office), although there are as yet few details of the reforms.

Constitution, institutions and administration

Venezuela is a federal republic composed of 22 states, one federal district and 72 island dependencies. Venezuela!s 27th constitution (the Bolivarian Constitution) was adopted in December 1999, having been hurriedly drafted in just three months. The 1999 constitution concentrates power in the executive, which dominates the four other branches of government (the legislature, the judiciary, the electoral authority and a new citizens! rights council). The constitution provides for a six-year presidential term (with re-election to one more consecutive term permissible) and a new unicameral legislature, the National Assembly. The National Assembly!s 167 members serve for five years, with seats determined by direct universal suffrage by each state and, in the federal district, by proportional representation. Several seats are reserved for indigenous community representatives. The old Supreme Court is replaced by the Tribunal Supremo de Justicia (TSJ"the Supreme Justice Tribunal). Three new court chambers, handling constitutional, electoral and social affairs, are added to the three existing chambers, which have responsibility for political/administrative, civil and penal matters.

The 1999 constitution sought to reform political institutions long considered politicised and corrupt, but new institutions have been rapidly weakened by the centralisation of power in the hands of the executive. The Chávez administration has frequently bypassed its own constitution and weakened mechanisms designed to act as checks and balances on the executive. Credibility of institutions has also suffered from a politicised appointments system. Nowhere have reforms and appointments been more controversial than in the judicial system. During 2003 the Chávez government took the controversial step of dissolving the Corte Primera de lo Contencioso Administrativo (CPCA, the First Administrative Court), which handled cases brought by citizens against the state. In the judicial hierarchy, the CPCA had been second in importance only to the TSJ. The government justified its action on the grounds that the CPCA had taken a number of decisions that were clearly biased in favour of the political opposition. During 2004 the introduction of the Ley Orgánica del Tribunal Supremo de Justicia (Supreme

New constitution in 1999 enshrines a strong executive

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Court law) controversially increased the number of Supreme Court judges from 20 to 32. It also allowed appointments to be decided by a simple congressional majority (previously a two-thirds majority had been required). The government argues that the legislation, which was pushed through with a simple majority rather than the two-thirds majority stipulated in the constitution, will democratise access to the justice system, but there are concerns that the measure will increase government leverage over judicial authorities.

Political forces

The president created the MVR in 1994 as a vehicle for his presidential ambitions, but has in office sought support from a much broader range of political organisations, including two existing and more politically experienced left-wing groups, PPT and Podemos. Community organisations, interest groups and labour movements also identify with the government and form part of the Chavista network. Small community organisations such as the Círculos Bolivarianos have been encouraged by Mr Chávez to develop outside the organisational framework of the party system, with the aim of stimulating new types of political participation. In December 2006, in the wake of his third presidential election victory, Mr Chávez announced his intention to unite these various elements into a single party, the Partido Socialista Unido de Venezuela (PSUV). The aim is to unite the various groups into a more ideologically coherent whole, focused on the government!s still-developing project of "21st-century socialism". Along the way, leading members of some traditional left-wing minority parties could become sidelined in favour of other political forces. This is likely to lead to some tensions, as politicians wrangle for position.

The MVR is a relatively young party. It was formed in 1994 as the electoral arm of the Movimiento Bolivariana Revolucionaria 200 (MBR-200), a military movement established in the 1980s by a group of junior army officers, including Mr Chávez. A decade of covert activity by MBR-200 culminated in a failed coup attempt in February 1992. Although MBR-200 was conceived as a military movement, Mr Chávez sought alliances with parties from the left through contacts fostered by his brother, Adán Chávez, a veteran left-wing activist. Sections of the left participated in the 1992 coup attempt, but their failure to convene a general strike in support of the uprising reinforced Mr Chávez!s sceptical view of civilian politicians.

Organisationally, the MVR is weak. Its representatives in elective office owe their positions to Mr Chávez!s personal popularity. The MVR has failed to build links with the grassroots of Venezuelan society, where the party has been effectively displaced by Círculos Bolivarianos, independently organised groups of Mr Chávez!s supporters. Ideological differences between moderates and radicals have caused several splits.

MAS was founded in 1969 by former communist guerrillas who fought in a failed insurgency against the Venezuelan state in the 1960s. It did not become a significant political force until the early 1990s, when its shift to the political centre enabled it to capitalise on the opportunities created by decentralisation

The MVR

MAS and Podemos

12 Venezuela


to win power at the regional level. Amid deep internal disagreement, the party decided to support Mr Chávez!s 1998 election campaign. However, MAS was not awarded any cabinet positions, and tensions quickly surfaced, as the party became critical of the government!s refusal to negotiate with its opponents. Mr Chávez expelled MAS from the ruling alliance in 2001. In 2002 the party formally split, with one faction (Podemos) opting to support the government in the legislature and another (MAS MAS) forming part of the opposition.

Key political figures

Hugo Chávez

A former army lieutenant-colonel. A charismatic populist, in December 1998 Mr Chávez won the presidential election with widespread support from the middle class and from the most marginalised members of society on a platform of radical reform. His victory transformed the political landscape and inflicted a humiliating defeat on the historically dominant parties, Acción Democrática (AD) and the Comité de Organización Política Electoral Independiente (COPEI). In 2000, having reformed the constitution, he won again, extending his base among the most excluded section of the population, but losing much middle-class support. Notwithstanding the number of attempts to remove him from office, Mr Chávez is still the country!s most popular politician. His enduring appeal owes as much to the opposition!s discredit as to Mr Chávez!s ability to connect with society!s poorest and to implement social programmes that directly address their needs. The constitution gives significant political power to the executive. In practice, Mr Chávez retains even more influence than stipulated under the constitution. There are few major political figures in their own right in the cabinet. This is particularly the case since a long-serving politician, Alí Rodríguez, took on a less high-profile role as ambassador to Cuba, having previously headed the Ministries of Energy and Foreign Affairs, and since José Vicente Rangel was replaced as vice-president at the beginning of 2007. However, some ministers in the new administration are likely to be more influential than others.

Adán Chávez

The president!s older brother and new minister for education, Adán Chávez is a long-time left-wing activist and also something of a troubleshooter for the president in his most recent role of secretary of the presidency (before which he was ambassador to Cuba). Adán!s appointment may be viewed as an attempt to eliminate dissent among cabinet ministers. His challenge will be to merge the education misiones (see Resources and infrastructure), which are funded by the executive, with the normal budget of the Ministry of Education. Adán!s appointment has raised concern among the opposition over the introduction of an ideological element to the school syllabus.

Jorge Rodríguez

Mr Rodríguez replaced the long-serving vice-president, Jose Vicente Rangel, in January 2007. Before this, he was president of the Consejo Nacional Electoral (CNE, the electoral authority) during a politically charged period, in which the institution faced repeated accusations of bias by the opposition. Mr Rodríguez stepped down in early 2006 in the wake of an opposition boycott of the December 2005 legislative poll.

Rafael Ramírez

The minister of energy and oil and president of Petróleos de Venezuela (PDVSA, the state oil company). Mr Ramírez has presided over a programme of sweeping changes to private oil contracts, designed to increase the government!s tax take. Mr Ramírez is considered a government hardliner; a secretly filmed video released by the opposition in late 2006 showed him stating to managers that no-one who was not fully identified with the "revolution" had a place in PDVSA.

Manuel Rosales

By virtue of being the unity opposition presidential candidate in 2006 and one of the few opposition figures with any real public influence (he is governor of Zulia state), Mr Rosales is currently the most noteworthy figure in the opposition movement. However, there are as yet few signs that he has gained much momentum from the presidential campaign.

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The PPT was formed in 1998 as a breakaway group of La Causa Radical (LCR). In common with MAS, Causa Radical had its origins in the Venezuelan communist party. Following its formation in the early 1970s, Causa Radical concentrated its organisational activities on the slum areas of Caracas and the industrial sector in Bolívar state, in the east of the country. The party capitalised on growing disaffection with AD and COPEI, and in the 1993 presidential election, its candidate, Andrés Velásquez, a union leader, was only narrowly defeated in a contest marred by allegations of fraud. Causa Radical split in advance of the 1998 presidential election, owing to disagreement over whether or not to support Mr Chávez!s presidential candidacy. PPT, the pro-Chávez faction of Causa Radical, entered the ruling alliance with MVR and MAS.

The opposition is made up of a number of heterogeneous groupings: the two historically dominant parties, the social-democratic AD and COPEI; breakaway groups from these two parties formed in the 1990s, following the failure of AD and COPEI to implement organisational and programmatic reforms; and break-away groups from the government alliance, mainly moderate centrist or centre-left groups in disagreement with policy radicalisation under the Chávez govern-ment. Primero Justicia (PJ), Proyecto Venezuela (PV) and Convergencia Nacional were created by former COPEI members, while Alianza Brava Pueblo was set up by disaffected AD politicians. Solidaridad was created by Luis Miquilena, a former mentor of Mr Chávez who left the government in 2001; it joined Causa Radical and MAS among the leftist groups opposing the government.

During 2002-04 all of these parties belonged to a broad opposition coalition, the Coordinadora Democratica (CD), which was created in 2002 to unite the heterogeneous political parties in the campaign to remove Mr Chávez from the presidency. They were joined by non-party groups, such as the main trade union and the business chambers, which had also taken a leading role in rallying opposition activity. However, factionalism persisted within the opposition movement, leading eventually to the break-up of the CD soon after the revocatory referendum in August 2004. Individually, the two traditional parties, AD and COPEI, have the largest national recognition and established organisational structures. However, they suffer from their continued identification with the discredited corrupt political system of the pre-Chávez era. The largest of the newer opposition parties, the PJ and the PV, have not yet developed a significant national presence. More recently, Un Nuevo Tiempo, the political party founded by Mr Rosales, the opposition!s losing presidential candidate in the December 2006 election, has come to some prominence. However, this is also centred in the opposition stronghold of Zulia, where Mr Rosales has been governor since 2000.

International relations and defence

Venezuela has no history of armed conflict with its neighbours, although there are longstanding territorial disputes with Colombia and Guyana. Mr Chávez has developed his foreign policy in accordance with the main tenets of "Bolivarianism". This claims inspiration from the ideas of the 19th-century independence leader, Simón Bolívar, who sought to integrate Latin American

Mr Chávez makes a bid for regional leadership

AD, COPEI and new opposition forces

The PPT

14 Venezuela


countries to counterbalance the power of the US. The Venezuelan government is highly critical of what it sees as US interference in its domestic politics. Relations with the US have been particularly fragile since the short-lived coup of 2002, which the Chávez administration believes was backed by the US. Anti-US sentiment is frequently presented as defensive, with Mr Chávez often referring to the threat of US military action in Venezuela. However, particularly in the absence of a strong domestic opposition, strident hostility to the US also provides a useful means of translating nationalist sentiment into support for the government. To emphasise his position, Mr Chávez has increasingly taken a provocatively close stance to some traditional US adversaries, such as North Korea and Iran. He also campaigned unsuccessfully in 2006 for a non-permanent seat on the UN Security Council on an essentially anti-US platform, which garnered significant attention, but insufficient votes. This failure is unlikely to result in any softening of Venezuela!s diplomatic stance towards the US for as long as Mr Chávez is in power. However, in the wake of Mr Chávez!s third presidential victory in December 2006, there were signs that the US was changing tack, with a counterproductive policy of confrontation with the Chávez government replaced by a more neutral tone (combined with attempts to engage more positively with the rest of the region).

Mr Chávez!s foreign-policy vision initially met with a sceptical response among neighbouring countries, but since the revocatory referendum in 2004, the Chávez government!s attempts to extend its influence in the region through economic integration have achieved greater success, particularly in poorer countries, as a result of Mr Chávez!s more solid political position and the country!s oil-driven economic boom, which has increased interest in joint-investment projects and oil co-operation accords. Recent elections in Bolivia, Nicaragua and Ecuador have brought to power leaders who are strengthening their ties to Venezuela. However, Venezuela!s increasingly radical international agenda has also given rise to unease in the region (relations with Mexico and Peru remain strained after disputes in 2006). In 2006 Bolivia!s nationalisation of its gas industry (which Venezuela was viewed to have influenced) and Venezuela!s decision to leave the Comunidad Andina (CAN) trade area in mid-2006 in favour of deepening ties with members of the Mercado Común del Sur (Mercosur, the Southern Cone customs union) both created regional tensions.

Relations with Colombia have been fragile since 1999 as a result of Mr Chávez!s criticisms of the US-financed anti-narcotics strategy, Plan Colombia, as well as Colombian allegations that Mr Chávez is sympathetic to left-wing Colombian guerrilla groups and has been providing guerrillas with a haven within Venezuelan territory.

Economic and diplomatic ties between Venezuela and Cuba have been strengthened since Mr Chávez assumed power. Commercial and social agreements include the provision by Cuba of medical and educational personnel, sports instructors and other technical assistance to Venezuela in exchange for discounted oil supplies.

Elsewhere in the Caribbean, the Chávez government has developed an energy co-operation accord with 13 countries belonging to the Caribbean Community (Caricom). Under the terms of the deal, Venezuela will provide

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crude oil and petroleum products on concessional terms, improving on those previously offered through the 2000 Caracas Energy Accord. The new accord consists of a series of sliding scales, to allow importers of oil from Venezuela to defray the cost of oil price spikes, to be financed with soft loans repayable over 15-25 years, depending on the oil price, with a two-year grace period. The programme also involves upgrading storage, refining and distribution facilities in the recipient countries.

In 1999 the four branches of the military were merged into a single national armed force. At the same time, the 1961 constitutional stipulation that insisted on a "non-deliberative" role in national affairs for the military was removed, and serving personnel were accorded the right to vote. The politicisation of the armed forces is not a new phenomenon. The major novelty under Mr Chávez stems from his undisguised ambition to forge a joint civil-military revolutionary project. This has found expression in the appointment of military figures to high public office and the deployment of the military in infrastructure renewal and social development projects.

Mr Chávez!s redefinition of corporate identity eroded unity and authority within the armed forces. Although many among the junior ranks remained loyal to Mr Chávez, many active and retired senior officers expressed their opposition. Hostility towards Mr Chávez was particularly pronounced among senior personnel appointed by previous governments. Critics argued that Mr Chávez had eroded the military!s monopoly of force by distributing weapons to the estimated 10,000 members of the Círculos Bolivarianos. They also alleged that his government had undermined the territorial integrity of the country by permitting crossborder activities by left-wing Colombian guerrillas. The depth of the fractures within the armed forces was exposed by the abortive coup of April 2002. Since then, personnel changes and alterations to the lines of accountability have been undertaken to diminish the possibility of a coup by anti-government elements within the armed forces.

The government embarked on an intensive round of military spending in 2005. According to a 2007 US Defense Department report, military spending in Venezuela totalled US$4.3bn in 2005-06, higher than in China or Iran. The government is also creating a structure of military "reserves" and "territorial guards", intended to reach 2m in number. This is ostensibly aimed at resisting a possible US invasion, but the opposition claims that the political militia will also serve to defend the regime against internal dissent.

Military forces TotalArmy 34,000 Conscripts 27,000

Navy 18,300 Marines 7,800Air force 7,000

National Guard 23,000Total armed forces 82,300Reserves 8,000

Source: International Institute for Strategic Studies, The Military Balance, 2005/2006.

Politicisation of military andexpansion of reserves

16 Venezuela


Security risk in Venezuela

Armed conflict

Political polarisation, accompanied by the emergence within both pro- and anti-government groups of radical factions supportive of political violence, heightens the risk of armed conflict. Violent confrontations have subsided with the resolution of the political crisis in 2004, but with the political environment still highly polarised, violent conflict, particularly during election periods, remains a risk.

Civil unrest

Public protests, a regular feature of recent years, have subsided with the decline in political tensions. During the political stand-off of 2001-04, protests"often involving clashes between demonstrators, pro-government groups and the police"had become large and violent. Politically motivated labour unrest, which caused significant disruption to foreign-owned activities, especially in oil, has also subsided with the resolution of political crisis and the weakening of the opposition-controlled unions.

Violent crime

Violent crime has become a major problem, fuelled by impunity, political polarisation and policing problems. A period of rapid economic growth in recent years has reduced property theft, but this remains high compared with a decade ago. Moreover, the homicide rate has not declined in recent years and has multiplied over the past decade. According to a respected local human-rights organisation, Provea, there were 9,964 murders in 2005 (37 per 100,000 population), almost five times the 2,000 recorded in 1991. Violent crime is a particular problem in the largest cities; the murder rate in the capital, Caracas, was more than double the national average, at almost 90 per 100,000 in 2005. Most killings occur in poor neighbourhoods, with males aged 15-30 the most common victims. For foreigners, robbery and general lawlessness are the main worries. Car theft has been on an upward trend during the past decade. There has been an increasing reliance on private security firms to protect foreign businesses and expatriate staff, in particular in the oil sector.

Organised crime

The US State Department classes Venezuela as a major transit country for cocaine and heroin. The implementation of the US-sponsored Plan Colombia drug-control programme may displace more trafficking activities to Venezuela. Drug-trafficking rarely impinges directly on foreign business, but it contributes to a deterioration of the security environment by fuelling corruption, gang warfare and drug addiction. However, drug-trafficking and possession is one of the few areas in which available data suggest that crime has fallen since 1998.

Kidnapping

Kidnapping has long been a problem in the Colombian border area; although abductions mostly affect local ranchers, foreign citizens (mainly oil workers) have fallen victim with increasing frequency. Most recently, there have been a number of high-profile kidnappings for ransom in urban areas, a development that has raised growing concerns over corruption and mismanagement of the police force. The phenomenon of "express kidnapping", whereby victims are forced to withdraw money from cash machines, is also on the rise in Venezuela. Robberies and express kidnappings are reportedly a particular problem at Caracas!s international airport.

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Venezuela!s policing levels (505 police officers per 100,000 inhabitants) com-pare relatively well with other developing countries, but confidence in the police is generally low. Decentralisation of police forces during the 1990s led to their proliferation from 24 (one per state) to over 300, and resources are distributed extremely unevenly. The prosperous Caracas municipality of Chacao has one of the highest densities of police officers (over 1,000 per 100,000 inhabitants), while poorer districts have only a fraction of that coverage (Libertador municipality in Caracas has less than 100 police offers per 100,000 population). Extra-judicial killings are a serious problem, with Provea, a respected local human-rights organisation, estimating that 169 people (mostly males aged under 18) died at the hands of police between October 2005 and September 2006.

Resources and infrastructure

Population

The most recent five-yearly national census, conducted in 2001, estimated the Venezuelan population at 23.2m, although this revised figure (which is lower than the previous estimate of 24.6m) has yet to be incorporated into the official back-series. Ethnicity is not classified by the census, but it is estimated that 67% of the population is mestizo (mixed race), 21% Caucasian, 10% black and 2% indigenous. There are 38 indigenous ethnic groups. Colombians form the largest expatriate community (1.6m). Population density is low, at 25.5 persons per sq km, but the population is highly urbanised: the 2005 UN Human Development Report (UNHDR) estimates that the urban population rose from 75.8% of the total in 1975 to 93% in 2004 and projects that it will rise to 96% by 2015.

Although the population is growing older, the age structure is still heavily skewed towards the young. In 2004 just under one-third of the population was estimated to be under 15 years of age. This was similar to levels in Mexico, Colombia and Peru, but higher than in Argentina, Brazil and Chile. The fertility rate was estimated at 2.7 per 100 population in 2000-05 by the UNHDR. This was down from 4.9 in 1970-75, but still higher than in Mexico (2.5), Chile (2.4), Argentina (2.4) and Brazil (2.2). The total population is projected to reach 31.3m in 2015, at which point 27.8% of the population will be below the age of 15. The UNHDR projects that between 2004 and 2015 the proportion of the population aged 65 or over will rise from 4.9% to 6.8%.

Population by age (% of total)

1990 census 2001 census0-14 years 37.3 33.115-64 years 58.7 62.0

Over 65 4.0 4.9

Source: Instituto Nacional de Estadística.

A young and highly urbanised population

Uneven policing

18 Venezuela


Poverty and the misiones

The anti-poverty strategy of the government of the president, Hugo Chávez, was focused initially on Plan Bolívar, which envisaged a joint civil-military programme of infrastructure and social development, financed by windfall oil revenue. This has since been supplanted by a series of social investment programmes, called misiones (missions). The misiones include Proyecto Simoncito (the remit of which is pre-school education); Misión Robinson (primary education/literacy); Misión Ribas (secondary education); Misión Sucre (tertiary education); Misión Vuelvan Caras (vocational worker training); Barrio Adentro (primary healthcare in the most deprived neighbourhoods); and Misión Mercal (food distribution among those on a low income). Partly because of their origins as emergency programmes developed during the economic crisis of 2003, all these programmes have until now operated outside the jurisdiction of the relevant ministries and have been funded outside the central government budget. Financing has instead come from a special fund for social investment established by Petróleos de Venezuela (PDVSA, the state oil company), the contributions of which for 2005 were set at US$3.1bn. Critics argue that the misiones should be integrated into existing public institutions, in order to improve administrative capacity and oversight.

The national statistics office, the Instituto Nacional de Estadísticas (INE), reports that there has been a decline in poverty in recent years, following a period of rapid expansion early in the decade. INE!s statistics measure gross household income, including quasi-money sources such as subsidies and cash transfers, but before deductions for tax; define poverty as the inability to buy a basic basket of goods; and define extreme poverty as the inability to buy a basic basket of food supplies. Accordingly, INE states that poverty fell from 55.6% of the population in 1997 to 45.4% in 2001 and then rose to 62.1% in 2003, the low-point of a severe economic recession, before falling again to 39.7% by mid-2006. In the same period, extreme poverty fell from 25.5% to 16.9%, before rising again to 30.2% and finally moderating to 12.9%. Women, those working in rural areas and those with low standards of education are disproportionately likely to live in extreme poverty. A consequence of high levels of poverty, particularly during the recession of 2002-03, has been the rapid growth of informal employment. At end-2005, 47% of the labour force was working in the informal sector. Monthly salaries for formal-sector workers are typically around two-thirds higher than those of workers in the informal sector.

Income distribution is highly skewed. The latest available data (1998) show that the richest 20% of the population accounted for 53.4% of household income, while the poorest 20% accounted for 3% of household income.

Selected socio-demographic indicators 1990 census 2001 census % changeIlliteracya 9.3 6.4 -31.2

Average household size (persons) 5.1 4.4 -13.7Households with electricity (%) 90.3 96.8 7.2

Households with drinking water (%) 91.4 90.7 -0.8Households with sewerage (%) 65.1 68.1 4.6

a Percentage of population over 10 years old.


Poverty and labour informality have become endemic

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Education

Although the literacy rate has increased, Venezuela!s once-high standards of education provision have fallen since the 1980s. At 93%, the literacy rate is still one of the highest in the region (compared with an average for Latin America and the Caribbean of 89%), but there is a deficit of technical and basic skills. Absenteeism is an ongoing problem at primary and secondary levels. Poverty is cited as the main factor for relatively low levels of primary and secondary school attendance and completion. An estimated 20% of the population has no formal schooling. Education spending has traditionally been heavily skewed towards higher education (accounting for 40% of the education budget in 1990), which remains free under the 1999 constitution, despite the inequitable access profile (over 70% of students come from the wealthiest quintile of the population).

Although there is broad consensus that change is needed, there is a fierce dispute over the shape of educational reform. The government of the president, Hugo Chávez, has introduced a number of initiatives to broaden access and encourage attendance. These have included the deployment of the military to repair schools, a programme targeting socially marginalised children for school enrolment and the creation of 3,200 "Bolivarian" schools providing free meals and medical care. Decree 1011, introduced in 2000, created school inspectors in both the public and unregulated private sector. Five social policy misiones (missions) were created to improve standards in pre-school, primary, secondary and tertiary education and to enhance access to vocational training. Under an integrated co-operation accord between Cuba and Venezuela, these programmes have been staffed in part by Cuban teachers. The misiones"and Cuban involvement"have roused opposition from teaching unions and some parents! organisations, which accuse the government of politicising education and spending public funds inefficiently. However, recent statistics from the World Bank!s World Development Indicators show some improvement in relevant indicators that is likely to reflect growth in expenditure on education under the Chávez government (estimated at 5.3% of GDP in 2004 by a local human-rights organisation, Provea, up from 4.5% the year before). The gross primary enrolment ratio (which includes those students enrolled at a particular education level from any age group) was 105.1% in 2004, up from 101.6% in 2000; the secondary-school enrolment ratio rose from 59% in 2000 to 72% in 2004; and the primary-education completion rate rose from 83.4% in 2000 to 89.4% in 2004.

Health

Venezuela!s healthcare system has suffered a profound deterioration in the past two decades, having previously been one of the most comprehensive and well-funded in the region. Fiscal crises have enforced funding cuts, and successive governments have proved incapable of reforming the social security system. A new social security bill has been held up by the uncertain political climate. The side-effects of an unfinished decentralisation process launched in the mid-1990s have further undermined provision. In theory, the constitution of 1999

Disagreement over how to improve education standards

Healthcare services have deteriorated

20 Venezuela


guarantees the right to a free health service, but state hospitals are inefficient and underfunded, and poorly paid doctors often strike to press for pay increases and the payment of wage arrears, all of which affect the quality of healthcare. As standards of public provision are inadequate, many patients are forced to turn to private health services. Private-sector provision, which has flourished over the past decade, is costly, and quality is variable, as it operates without effective regulation.

Expenditure on healthcare has fluctuated sharply in recent years, reflecting macroeconomic volatility and over-reliance on fiscal oil revenue to support spending levels. Following the devastating recession of 2002-03, spending on healthcare as a percentage of GDP has begun to recover, to 4.8% in 2004, according to the World Health Organisation (WHO). However, at this level, health spending is above only the levels in Peru and Ecuador among the major Latin American economies. This is not reflected in basic health indicators, such as life expectancy and infant mortality, which continue to improve gradually and are roughly in line with the rest of the region. However, a number of transmissible diseases, including malaria, measles, tuberculosis and dengue fever, have reappeared in recent years.

The five major health agencies are all in the public sector. They include the Ministerio de Salud y Desarrollo Social (MSDS, the Ministry of Health and Social Development, created in 1999 from the merger of the Ministry of Health and Social Assistance and the Ministry of the Family); the Instituto Venezolano de Seguridad Social (IVSS, the national social security institute); the Instituto de Previsión Social de las Fuerzas Armadas (IPSFA, the health service of the armed forces); the Social Welfare Institute of the Ministry of Education; and the government of the Federal District (Caracas). The MSDS is organised into 23 health regions, broadly along the lines of Venezuela!s state boundaries. Each health region is subdivided into municipalities and further divisions. Weak operational co-ordination between the ministry of health and regional entities has led to the fragmentation and duplication of services. To the detriment of rural communities, provision is concentrated in urban centres. Poor working conditions and low pay contribute to depress standards of service.

The Chávez government has focused on extending healthcare service provision in low-income communities. To this end, in 2003 the government launched a new initiative, Barrio Adentro, under which 8,000 newly constructed clinics in deprived neighbourhoods provide basic curative and preventative medical services. The programme was developed as part of an integrated co-operation accord with Cuba; under the agreement, Venezuela provides Cuba with 90,000 barrels/day of oil, while Cuban healthcare workers help staff the Barrio Adentro clinics. According to official sources, more than 15,000 Cuban doctors have provided care to more than 18m people (two-thirds of the population), in addition to training Venezuelan healthcare workers. The programme has generated some domestic opposition for politicising healthcare and for operating as a special programme of the executive, parallel to existing public healthcare institutions. Critics claim that public hospitals have been neglected in favour of Barrio Adentro. The government has responded with moves to

Major public-sector agencies

Barrio Adentro focuses healthcare on the poor

Venezuela 21


expand the programme, with Barrio Adentro 2 focused on creating new diagnostic and rehabilitation centres, and Barrio Adentro 3 intended to improve resources and equipment at roughly 300 public hospitals.

The deterioration of facilities and service in public hospitals in recent decades means that healthcare services are increasingly sought through the private sec-tor, which now accounts for a significant portion of total hospital bed capacity and total spending. Private-sector spending as a percentage of total spending is estimated at over 50%. The share of this spending covered by prepaid health plans is much lower than in the other large Latin American economies, at just 4% in 2004; this compares with around 35% in Brazil and Colombia, 15% in Peru and 10% in Ecuador. Recognising a shift towards private-sector services, the government eliminated the 8% value-added tax (VAT) on private medical services in 2004 in order to improve accessibility to healthcare services.

Just under 10% of the population is directly affiliated to the IVSS, which provides health insurance coverage for those in formal employment (private and most public). Employees and employers each pay 8% of salary. Indirectly, when family members are factored in, about 30% of the population is covered by the IVSS. The IVSS provides service through its own network of hospitals and contracting beds in other hospitals. It also runs an outpatient network, but coverage is geographically uneven, and many outpatient centres lack supplies and qualified health professionals. Rising unemployment and the expansion of the informal sector (which now accounts for almost 50% of all workers) have been increasing pressure on the IVSS!s finances for the past two decades, but widespread inefficiency and corruption were also to blame for a breakdown of IVSS service in the early 1990s. Mr Chávez has rejected earlier plans to phase out the IVSS and replace it with privately run, state-regulated health and pension funds. A presidential committee has instead been charged with drafting a new social security bill, but progress has repeatedly been delayed by political uncertainty.

Natural resources and the environment

Venezuela has a total surface area of 912,050 sq km, nearly four times the size of the UK and almost twice the size of Spain. It is bordered to the north by the Caribbean Sea and the Atlantic Ocean, to the east by Guyana, to the south by Brazil and to the west by Colombia. The country is divided into four well-defined geographical regions with diverse climates: the dry Maracaibo low-lands to the north-west; the Andean mountain region, which runs from the south-west to the north-east; the expansive central plains bisected by the Orinoco river; and the tropical Guayana highlands to the south-east. The hottest months are May to September. Venezuela!s abundance of natural and mineral resources includes 78bn barrels of proven crude-oil reserves (excluding substantial reserves of extra-heavy oil and bitumen), 148trn cu ft of natural gas, 528m short tonnes of coal, 5.2bn tonnes of bauxite, 4.1bn tonnes of iron ore and 12% of the world!s known gold reserves.

Abundant mineral wealth

A rise in private provision

The social security system has decayed

22 Venezuela


Venezuela is prone to earthquakes. It is also occasionally subject to torrential rains, which can cause major disasters, most recently in Vargas state at the end of 1999. Venezuela is classified in the top ten of the world!s most ecologically diverse countries. Successive governments have sought to develop environ-mental regulations, and around one-half of the country is subject to environ-mental controls. The country has subscribed to several UN pacts: the Montreal Protocol on Substances that Deplete the Ozone Layer; the Vienna Convention for the Protection of the Ozone Layer; the Convention on Biological Diversity; the Framework Convention on Climate Change; and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal. Venezuela has also subscribed to the World Conservation Union!s Convention on International Trade in Endangered Species of Wild Fauna and Flora.

Transport, communications and the Internet

Venezuela has one of the region!s more developed physical infrastructures, with an extensive road network (including an estimated 96,200 km of highway, of which 32,300 km is paved), 13 ports and over 100 airports. However, underinvestment has caused the quality of most services to deteriorate in recent decades. Unevenness in the quality of port and airport facilities has increased since decentralisation in 1991 transferred management to state governments. In the absence of reliable and transparent regulation, private-sector investment in infrastructure development is limited. However, public investment in transport infrastructure has increased in recent years, as a result of windfall oil revenue. A significant part of the US$4.4bn made available by Petróleos de Venezuela (PDVSA, the state oil company) for social and infrastructure spending in 2005 went to transport infrastructure. However, to the extent that these projects are undertaken by PDVSA and are not within the central government budget, they are not subject to the normal process of analysis and approval. This raises questions about the potential for mis-management and inefficiencies, as demonstrated by the closure in early 2006 of a crucial ten-mile stretch of motorway between the capital, Caracas, and the Caribbean coast. The motorway, typically used by around 50,000 vehicles per day, links Caracas to the country!s main airport, at Maiquetía, and one of its principal seaports, La Guaira, as well as to the nearest beach resorts. The closure, forced by the risk of collapse of one of its bridges, more than doubled transport times, as vehicles were rerouted over unpaved secondary roads, and reduced cargo transport to 30% of normal levels (La Guaira normally handles around 40% of the country!s ocean-going freight). The opening at the end of February 2006 of an emergency bypass has brought some relief, pending the construction of a new bridge, the completion of which has been promised for early 2007.

There are a dozen domestic airlines, of which Aeropostal, Avior and Avensa (all privately owned) offer the largest number of routes. Operating conditions and profitability of the domestic airlines is improving after two difficult years in 2002-03, during which maxi-devaluations and foreign-exchange controls disrupted business operations and consumer demand for travel. However, high

Roads and railways

Airline industry restructured

Venezuela 23


oil prices are maintaining cost pressures (the government does not provide subsidies for the private domestic airlines! oil), and fierce competition has narrowed profit margins. The strongest competition has come recently from the new national state airline, Conviasa. The creation of a new flag-carrier was first proposed by Mr Chávez in 2003; the airline began flying in 2005 with two aircraft and a small number of domestic routes, following government investment of around US$16m. The airline is, however, expanding its capacity and domestic routes rapidly and has restarted a few of the international routes that were lost when the country!s former flag-carrier, Viasa, was shut down, including Bogatá and Havana. A US$95m investment to upgrade the fleet from two to 12 aircraft, including several Boeing 737s and two Boeing 767s for international routes, was announced in mid-2005, and by mid-2006 the airline had five aircraft.

In 1992 responsibility for airports was devolved to state governments. There were 280 registered airstrips in the country in 2003, of which only 30 received scheduled air services, according to the US Foreign Commercial Service. There are 11 international airports, with 90% of international flights handled by Maiquetía in Caracas. Maiquetía has been undergoing a major upgrade during the past few years, but progress has been slow.

There are 13 major ports and harbours, with La Guaira, Maracaibo and Puerto Cabello (the busiest) handling 80% of cargo. Plans to develop deepwater ports and to expand existing ports through dredging have made little progress. Following the introduction of a new customs law in 1998, progress on modernising customs procedures has been mixed. The elimination of corruption in the customs service is a high priority for the government, but the problem remains endemic, despite high-publicity dismissals and prosecutions.

Venezuela was one of the region!s earliest adopters of mobile telephony and one of the first Latin American countries in which mobile telephony penetration overtook fixed-line penetration (in 1999). The introduction of new telecommunications legislation in 2000 was intended to pave the way for further investment in communications infrastructure. The new telecoms law replaced antiquated 1940s legislation and liberalised the fixed-line telecoms market (competition in the mobile market was already permitted). The new regulatory framework emerged from a joint effort between private- and public-sector representatives, brought together by the Comisión Nacional de Telecomunicaciones (Conatel, the regulatory authority), and was widely praised in the industry.

Despite this reform, for a time Venezuela fell behind most other large Latin American economies in the rapidly developing telecoms and technology industry. This reflected an extended period of political and economic uncertainty, which discouraged investment flows into the sector and inter-rupted growth in telecoms penetration in 2002-03. Recovery in investment and consumer spending in 2004-06 has brought the mobile penetration rate into line with most of the region, at 58.5 per 100 population in June 2006, but fixed-line penetration remained low even by regional standards, at 14.6 per 100 population.

Telecommunications

Ports and waterways

24 Venezuela


Fixed-line provision is dominated by CANTV (the largest private company in Venezuela), although its official 70-year monopoly ended in 2000. The second-largest provider, Movistar (Spain), has managed to wrest just over 15% of the fixed-line market from CANTV. The mobile-telephony market, which accounts for more than 70% of all telecoms subscriptions in Venezuela, is more competitive. There are six service providers, with the market leaders, Movistar and Movilnet (a CANTV subsidiary), each accounting for over 40% of market share respectively, followed by Digitel (locally owned) with a share of just over 10%. The smaller mobile operators, including Digitel, have only a regional presence within the country and find it difficult to compete with the established nationwide operators.

In a surprise move, Mr Chávez announced in January 2007 that his government would nationalise CANTV, suggesting further that all utilities that had been privatised by previous governments should return to the public sector. Details of the nationalisation are not yet clear. According to the Ministry of Telecommunications, other companies operating in the sector will be unaffected, and market compensation will be given. Mr Chávez has, however, suggested that compensation would not be necessary. CANTV!s shares have plummeted since the announcement.

High levels of income inequality have constrained growth in personal computer (PC) ownership. In 2005 there were an estimated 9.4 PC owners per 100 population. Combined with the slow growth of the fixed-line network, this has hampered Internet access. However, from a low base, Internet penetration is growing rapidly. Between 2003 and 2005 Internet subscriptions almost doubled; by June 2006 penetration per 100 population was 13.8, up from 5.4 in 2003. Access is being widened gradually via the spread of cybercafés, connection centres operated by CANTV and Movistar, and government-backed infocentros (information centres).

Low PC and Internet penetration has acted as a barrier to the development of e-commerce. Also holding back development of the sector are a lack of confidence in payment methods, uncertainty about product quality and delivery, limited credit-card penetration and weak purchasing power. A local consultancy, Datanalisis, estimated business-to-consumer e-commerce at US$132m in 2005. Almost all of these transactions are conducted with foreign companies, as a means of securing goods in US dollars at the fixed official exchange rate of Bs2,150:US$1.

Notwithstanding the limited development of e-commerce in Venezuela, several local banks, including Banco Mercantil and Banco de Venezuela (a subsidiary of Banco Santander Central Hispano of Spain), have developed online banking services. There are many content providers, such as www.eluniversal.com, the digital version of El Universal, a leading national daily newspaper. Several other newspapers, such as Tal Cual and El Nacional, are attempting to turn their websites into subscription-based services, but with limited success.

Internet and e-commerce held back by low PC penetration

Venezuela 25


Most television and radio stations and newspapers have become heavily politicised in the past decade, leaving few reliable sources of information and analysis. The four main privately owned channels"Venevisión, Radio Caracas Televisión (RCTV), Globovisión and CMT"and most of the ten major national newspapers, including El Universal and El Nacional, have played a central role in opposition campaigns against the Chávez government. Government-owned radio and television channels broadcast biased and partial coverage of events. The government has also increased the length and frequency of presidential cadenas (nationwide broadcasts during which all other radio and television programming must be suspended), aimed at defending the government!s view of its achievements and at discrediting the opposition. An international non-governmental organisation, Human Rights Watch, has expressed concern that recent legislative measures erode press freedom by encouraging self-censorship. These include a media law introduced at the end of 2004 and a penal code reform in early 2005, which sharply increase the penalties for defamation, the spread of false information, conspiring against the nation and desacato (disrespect) of public officials, among other offences. International media watchdogs fiercely criticised the government!s decision at the end of 2006 not to renew the licence of RCTV as an attack on press freedom. Mr Chávez has accused the channel of spreading disinformation.

Energy provision

Around 90% of the population is on the national grid, giving Venezuela the highest level of electricity provision in Latin America. Encouraged by state sub-sidies that keep prices low, Venezuelans also consume the highest level of electricity per head in South America. The energy-intensity of the economy (the amount of energy required to sustain a unit of GDP) is among the highest in the world; as with other large oil-producing economies, this reflects inefficient oil usage and subsidised domestic consumption. Extensive government subsidies ensured that energy consumption did not decline as sharply as might have been expected during the devastating recession of 2002-03 and have maintained demand despite the marked rise in international oil prices since then. Just over 70% of the country!s electricity generation comes from hydropower, supplied mainly from the Raul Leoni dam, part of the Guri hydroelectric complex, the second-largest hydroelectric plant in the world. The remainder is thermally generated. Around two-thirds of the electricity in Venezuela is generated by the state-run Electrificación de Caroní (Edelca). There are also several smaller state-owned electric utilities, such as Cadafe, and some privately owned ones, such as Electricidad de Caracas (EDC). In early 2007 Mr Chávez threatened EDC with nationalisation, but as yet, no concrete steps have been taken. Regardless of whether the move is eventually undertaken, the threat will serve to deter private investment in the sector even further, which has already been dampened by an unfavourable price environment and legal framework.

Power facilities have come under strain in recent years, as electricity demand growth has outpaced supply growth. Hydroelectric generation suffers recurrent

Underinvestment has placed electricity supply under strain

Concerns over media bias and press freedom

26 Venezuela


disruption during the dry season (December-April). Chronic power supply problems in rural areas force large projects, especially in the oil industry, to invest in independent power generation. In urban areas, many large businesses, such as shopping malls, have their own generators. Private investment has been deterred by government reluctance to adjust electricity tariffs in line with inflation and the devaluation of the local currency, to combat line losses via theft (these have been growing at twice the rate of demand) or to follow through with planned reforms under the electricity law of 1999. At the same time, the public sector has underinvested in thermal capacity. Overall, investment has in recent years been running at around two-thirds of requirements. In 2005 Venezuela!s installed capacity rose by 3% to 21,849 mw. Electricity consumption rose by 7% to 74.6bn kwh, as did generation, to 104bn kwh, according to the Cámara Venezolana de la Industria Eléctrica (Caveinel, the electricity industry chamber). Over the past five years, growth of electricity generation has averaged slightly over 5% per year.

Some of the slack created by a lack of private investment is being taken up by the public sector, facilitated by windfall oil revenue and, in some cases, by multilateral lending agencies such as the Corporación Andina de Fomento (CAF, Andean Development Corporation) and the Inter-American Development Bank (IDB). According to Caveinel, current investments of US$2.5bn will bring 4,100 mw of installed capacity on-stream between 2006 and 2008. The 2,250-mw Caruachi hydroelectric plant will come fully on-stream in 2006, and the 2,250-mw Tocoma hydroelectric plant is expected to come online in 2010. However, ongoing projects will not reduce the country!s heavy reliance on hydroelectric generation.

Electricity theft is a major issue and places a large burden on the infrastructure by harming company finances. Caveinel estimates that as much as 25% of all electricity consumption is stolen. The greatest losses are suffered by state-owned generators, especially those operating in rural and semi-rural areas.

Investment in thermal generating capacity has been constrained by insufficient domestic gas supplies. Venezuela!s proven natural-gas reserves of 151trn cu ft (4.27trn cu metres) are the ninth-largest in the world and the second-largest in the western hemisphere, after those of the US. However, Venezuela produced only 1trn cu ft of natural gas in 2003, compared with production of 19.1trn cu ft by the US. Investments to exploit vast offshore reserves are under way, but these have been subject to repeated delays. The local oil industry consumes around 60% of total gas production, while 10% is used in power generation, 5% in petrochemicals and the rest in industrial and commercial consumption in the cities. There are around 3,000 miles of gas pipelines domestically, but no export pipelines as yet.

Natural-gas exploration is in its infancy

Venezuela 27


The economy

Economic structure Main economic indicators, 2006 (Economist Intelligence Unit estimates unless otherwise indicated)

Real GDP growth (%) 10.4

Consumer price inflation (av; %) 13.7a

Current-account balance (US$ m) 29,341.2

Exchange rate (av; Bs:US$) 2,147.0a

Population (m) 27.0

External debt (year-end; US$ m) 36,637.6

a Actual.


The Venezuelan economy is subject to cycles of boom and bust, reflecting the legacy of "Dutch disease", whereby the emergence of excessive dependency on oil activities leads to currency overvaluation and the neglect and decline of traditional manufacturing activities. Petroleum has been the mainstay of the Venezuelan economy since the 1920s, typically contributing almost one-half of central government revenue, over 80% of export revenue and around 25% of GDP. This dependence has been entrenched by failure on the part of successive governments to undertake structural fiscal reform. The indirect impact of oil activity on domestic consumption and investment has traditionally been great, depending on oil prices and production levels. In the current environment of high oil prices, the boost to government and private consumption is large, although private investment has been deterred by an uncertain legal and regulatory framework.

In the manufacturing sector, with the exception of state-dominated, capital-intensive industries located in the east of the country, industries are largely uncompetitive, reflecting Dutch disease, a history of protectionism and, more recently, marked underinvestment by the private sector. Agriculture, meanwhile, accounts for less than 5% of GDP and 10% of employment. Its development has been held back by a combination of underinvestment in technology, a persistently overvalued exchange rate and state interventionism. Venezuela is not self-sufficient in most areas of agriculture and imports most of its food, mainly from the US and Colombia.

Notwithstanding the huge oil-financed fiscal expansion of recent years, the share of domestic demand (and particularly private consumption and investment) in GDP has fallen in the past decade, while that of exports of goods and services has risen. Dependence on oil export revenue has left Venezuela vulnerable to fluctuations in the global economy. Expansionary spending policies have been undertaken when oil prices have risen, leading to fiscal difficulties and the imposition of austerity measures in times of weak prices.

Heavy dependence on oil

28 Venezuela


Comparative economic indicators, 2005 Venezuelaa Colombiaa Brazil a Mexico a USa

GDP (US$ bn) 144.8 122.3 795.7 768.4 12,487.2

GDP per head (US$) 5,469 2,682 4,386 b 7,236b 42,129

GDP per head (US$ at PPP) 6,777b 7,614 8,588 b 9,992b 42,129

Consumer price inflation (av; %) 16.0 5.0 6.9 4.0 3.4

Current-account balance (US$ bn) 25.4 -1.9 14.2 -4.8 -804.9

Current-account balance (% of GDP) 17.5 -1.6 1.8 -0.6 -6.4

Exports of goods fob (US$ bn) 55.5 21.7 118.3 214.2 892.6

Imports of goods fob (US$ bn) -24.0 -20.1 -73.6 -221.8 -1,674.3

External debt (US$ bn) 38.9b 32.6b 188.0 b 136.0b �

Debt-service ratio, paid (%) 10.7b 33.1b 46.2 b 13.1b �

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Economic policy

Since the 1980s, successive administrations have entered office promising to undertake reforms designed to diversify the economy away from dependence on oil and increase the efficiency of public spending. However, winning public support for the structural reform that this would entail is difficult, as large sections of the population view the state!s primary role as that of a distributor of petroleum wealth. This perception has been encouraged by successive governments, particularly in the 1960s and 1970s, and by the current president, Hugo Chávez. Since the 1980s, a majority of the electorate has repeatedly rejected candidates proposing structural adjustment. The failure to pursue reforms has caused underlying imbalances to worsen and oil dependency to rise.

Among the structural deficiencies inherited by Mr Chávez when he assumed the presidency in 1999 were the weak non-oil tax base, wage and social-security arrears, and an overstaffed and inefficient bureaucracy. Notwithstanding an unsuccessful attempt to reverse institutional decay in the new constitution of 1999, the Chávez government has not addressed these issues. Parallel government structures (such as the misiones; see Resources and infrastructure: Population) have created an even more complex and inefficient bureaucracy, and record-high oil prices have been a disincentive to a reform of the tax system. At the same time, a clear trend towards ever-greater government interference in economic decision-making has maintained hostilities between the Chávez government and the private sector, as reflected in a deterioration in the business operating environment.

Having consolidated his power since the recall referendum of 2004, Mr Chávez has steadily adopted a more radical left-wing stance. Higher levels of public spending, underpinned by increased fiscal revenue from oil, have facilitated rising levels of state intervention in key sectors. Under these circumstances, respect for contract and property rights is coming under threat. The govern-ment!s first goal post-referendum was to accelerate the process of land reform. Under the Land Law introduced in 2001, public and private land deemed to be illegally held or unproductive is to be redistributed. Private ownership must be

Failure to undertake reform entrenches oil dependency

State-led development model threatens private sector

Venezuela 29


demonstrated with official documentation. If ownership cannot be proved, the land can be expropriated without compensation for redistribution by the state. If ownership can be demonstrated, but the land is deemed to be unproductive or "idle", it can be expropriated with compensation at market value. However, in practice, the law was not applied to private holdings until December 2004, when in the aftermath of the unsuccessful recall referendum, the government announced plans to accelerate the application of the law. Since then, the land reform process has developed in an increasingly disorderly and arbitrary manner, involving an increase in grassroots Chavista groups squatting on large, privately held agricultural estates.

The acceleration of land reform has been accompanied by new threats to property rights in the manufacturing sector, where the government has promoted joint state and worker takeovers of allegedly idle, privately owned factories. Justified as a means of reactivating the non-oil economy, the strategy has been led "from below" by Chavista union organisations and regional officials. The occupation and takeover of closed or idle manufacturing facilities has occurred in parallel with the promotion of co-gestión (worker co-manage-ment) and empresas de producción social (EPS, social production companies, a type of co-operative), under which the government provides financial support for technical training in regions where workers have assumed control of manufacturing facilities. A model for this is a paper company, Invepal, run by co-management, on the basis of assets seized from a privately-owned company, Venepal, which was declared bankrupt three years ago.

Most recently, and most worryingly, in January 2007 the government announced that it would nationalise Venezuela!s largest private company, the dominant telecommunications company, CANTV, and threatened the future nationalisation of all utilities and "strategic sectors" in private hands. Mr Chávez had on many occasions in the preceding year threatened a number of companies, including CANTV, with nationalisation, but until the January announcement, this had been seen largely as a negotiating tactic in revising contracts and resolving disputes with the private sector. The government had in fact previously been careful to state that it continued to welcome the private sector and foreign capital. The January 2007 announcement marks a significant shift in this stance and has raised fears of an eventual elimination of private property rights. There are a number of factors that would appear to complicate any such development, including a lack of managerial and institutional capacity and the expected pressure on the public finances, as oil prices decline from their peaks of 2006.

The budget has relied heavily on oil income, which typically accounts for almost one-half of government revenue, for several decades. However, under the current government, dependence on fiscal oil revenue has deepened, and an expansionary fiscal stance has become the main driver of economic growth. At the same time, state-financed social programmes and infrastructure invest-ment form the cornerstone of the government!s income redistribution strategy and the maintenance of its powerbase. In line with this policy, fiscal stimulus has been massive under the current government; central government spending has risen by 10% of GDP in the past five years. Central government revenue has

Structural imbalances in the public finances worsen

30 Venezuela


kept pace with this growth in expenditure (it rose by 4% of GDP in 2005 alone). This reflects the sharp rise in international oil prices in recent years, as well as the government!s moves to increase the fiscal take from oil production. In 2004 the government increased the royalty rate from 1% to 16.7% for the extra-heavy crude upgrading operations in the Orinoco belt; in 2005 the income tax rate for the 22 companies with operating contracts in the oil sector (since converted to minority equity partnerships) was raised from 34% to 50%, but applied retroactively from 2001, when the new Hydrocarbons Law came into effect.

The central government budget has, moreover, been augmented in the past three years by rising off-budget expenditure, through "parallel" budgets run by the Fondo Nacional de Desarrollo (Fonden, the National Development Fund, which has been capitalised using a portion of the international reserves) and Petróleos de Venezuela (PDVSA, the state oil company). In 2006 alone, it is estimated that the government had access to an additional US$21bn (12% of GDP) from these entities.

That said, fiscal policy is becoming more complicated as a result of the decline in oil prices since late 2006. The Economist Intelligence Unit expects the upward trend in government revenue to reverse in 2007, as oil prices fall from recent peaks. However, at the same time, the government is taking on a growing array of spending commitments that will be politically complicated to cut. Pressure on government revenue is evident in recent government statements that it is considering reducing the state subsidy on petrol (as a result of which petrol prices in Venezuela are the lowest in the world), on the basis that the subsidy benefits low-income consumers the least (although car ownership, owing to factors such as the petrol subsidy, is much more widespread in Venezuela than in most of the region).

Growing pressure on the public finances suggests that the Chávez government will again resort to the common practice of successive governments of devaluing the bolívar to rebalance the fiscal accounts (by increasing the local-currency value of revenue from oil exports). As a result of the oil windfall of recent years, the Chávez government has not needed to devalue the bolívar since 2004. However, this will remain a feature of policymaking over the long term. Cycles of maxi-devaluation and inflation compound underlying fiscal weaknesses by increasing poverty, discouraging investment and fuelling capital flight.

Given Venezuela!s vulnerability to cycles of boom and bust (with commodity price rises feeding through to strong GDP growth and price declines causing recession and fiscal difficulties), public solvency ratios have been volatile. Since 2003, the economy has been enjoying an oil-driven boom, resulting in a general downward trend in the debt/GDP ratio. As a result of massive oil-related inflows of fiscal revenue, debt refinancing, a real appreciation of the bolívar and rapid growth in nominal GDP, the public-sector debt fell from a peak of 47% of GDP in 2003 to 24% of GDP at end-2006"low by regional standards.

Volatile debt ratios, but overall debt burden is relatively low

Venezuela 31


The 1999 constitution formally recognises the independence of the Banco Central de Venezuela (BCV, the central bank) in respect of the design and execution of monetary policy, but the Central Bank has long lacked effective autonomy; although it conducts policy, in practice it does not set it. The government indicates exchange-rate and interest rate preferences, uses the BCV for monetary financing and interferes in specific issues, such as the setting of minimum lending targets for microfinance and agricultural loans. A reform of the Central Bank Law in 2005, paving the way for transfers of "excess" foreign reserves from the Central Bank to the central government, raises serious concerns regarding Central Bank autonomy and the ability of the monetary authorities to back the currency and control inflation. Under the reform, a Fondo de Desarrollo Nacional (Fonden, national development fund) was capitalised in 2005 with US$6bn from existing reserves of more than US$29bn. Since then, the level of excess international reserves to be transferred to Fonden has been calculated at the discretion of the executive. So far, this has not had a detrimental impact on currency or external-debt backing, with import cover remaining above ten months, but given the lack of central bank autonomy, there are no guarantees that this will remain the case. Mr Chávez stated at the beginning of 2007 that he would like to change the constitution to officially eliminate the article establishing BCV independence.

In the absence of structural reform, an exchange-rate anchor has been the primary policy tool used to control inflation. From 1996 until February 2002, the bolívar moved in a sliding band, with preset devaluation targets for each year, leaving it increasingly overvalued in real terms. Capital flight, which escalated after Mr Chávez took office, intensified in 2001, as political tensions increased. The erosion of reserves finally prompted the authorities to float the bolívar in February 2002. Following a turbulent year in the foreign-exchange market, a rise in political tensions and a collapse of GDP triggered by a crippling two-month strike in the oil sector, in February 2003 the authorities resorted to fixing the exchange rate and imposing exchange controls (see The external sector: Foreign reserves and the exchange rate). This is the third episode of exchange controls in two decades. Exchange controls imposed in 1983 lasted for six years. Controls were imposed again in 1992, remaining in place until April 1996. All three instances were prompted by spiralling capital flight and deepening fiscal crises.

A week after the exchange controls were imposed in February 2003, the govern-ment established maximum prices for 169 basic goods and services, of which 106 were food products and the rest cleaning and personal hygiene products. Shortly afterwards, the prices of the inputs for the manufacture of these goods were frozen. More than three years on, price and exchange controls remain in place. Occasional price adjustments have been made since then on an ad hoc basis, usually in the face of pressure from producers protesting at low prices by causing product shortages.

Exchange and price controls are reintroduced in 2003

Central Bank lacks effective autonomy

32 Venezuela


Economic performance

The Venezuelan economy remains subject to cycles of boom and bust, which militate against sustainable long-term development. Owing to the predomi-nance of the oil sector, economic performance has traditionally been closely correlated to trends in world oil prices, with price rises feeding through to strong GDP growth and declines into stagnation or contraction. Oil booms have traditionally underpinned expansionary fiscal policies and stimulated private-sector activity through ancillary industries and the construction and services sectors. Oil booms have also traditionally boosted fixed investment, as the oil sector has invested to maintain and increase production and as the government has spent windfall revenue on public-works programmes.

Since Mr Chávez took office in early 1999, a heated political environment and an unpredictable legal and regulatory framework have increased business uncertainty. Political crises"involving an attempted coup in 2002 and a series of large-scale opposition-led stoppages and demonstrations (in particular a devastating two-month general strike launched in December 2002)"provoked a collapse in GDP in 2002-03. Real GDP fell by 8.9% in 2002 and 7.8% in 2003. Rapid recovery of GDP growth in 2004, to 18.3%, partly reflects the extremely low base of comparison in the previous year. However, a highly expansionary fiscal stance, supported by record-high oil prices, and capital controls, which channelled the fiscal stimulus towards domestic demand, also contributed and have continued to drive strong growth since then. Real GDP grew by 10.3% in 2005 and an estimated 10.4% in 2006, as the fiscal oil windfall fed through into public-sector consumption and investment growth, and from there into rapid private-sector consumption and investment growth. This has outweighed the strongly negative contribution of the external sector. In the past, oil-fuelled booms have been followed by spectacular crashes in the wake of oil price falls. However, with world oil prices expected to remain high (by historical comparison) for a prolonged period, the economic cycle is likely to prove to be more drawn out in the current case. Investment will be an important variable.

Venezuela has struggled to control persistently high rates of inflation. Successive governments have periodically realigned the exchange rate in order to rebalance the fiscal accounts by boosting the local-currency value of US dollar oil revenue. As the exchange rate is used as a means of indexation, devaluations feed directly into the consumer price index (CPI). Consumer price inflation has now been at double-digit levels for more than two decades, even in years (such as 2004) in which real overvaluation of the exchange rate has contained price increases by reducing the cost of imports. The Chávez government currently has a variety of policy tools to reduce price pressures at its disposal, including price controls, the exchange-rate peg (which has reduced pressure on producer prices in particular) and the sale of subsidised basic goods through its expanding network of food distribution centres, but even so, in 2002-06 consumer price inflation averaged 21%. Strong underlying inflationary pressures, stoked by a highly expansionary fiscal policy and by the captive domestic liquidity resulting from exchange controls, are demonstrated by average producer price inflation in the same period of 26%.

Inflation remains high

Oil-related boom and bust is exacerbated under Mr Chávez

Venezuela 33


In the second half of 2006 open unemployment dipped to below double-digit levels for the first time since 1995. High unemployment levels have traditionally reflected the dominance of the capital-intensive oil industry, which has had the impact of limiting the development of industries that create more jobs. Employment levels have also been volatile, reflecting the susceptibility of the economy to cycles of boom and bust. Unemployment peaked at 18% in 2003 on the back of a crippling general strike, but fell to 8.8% in the third quarter of 2006. However, continued oil dependency suggests that this reduction in unemployment will not be permanent.

High levels of unemployment have traditionally constrained real wage growth. To offset the effect of double-digit inflation on wages, the government raised the minimum wage by 30% in 2004, by 26% in 2005 and by 26.5% in 2006, to the equivalent of US$238 per month. This helped to offset the steep fall in real wages that occurred during the recession of 2002-03, but has little relevance for the large numbers of workers who are able to find work only in the informal sector. According to official estimates, just under one-half of the labour force worked in the informal sector in 2005.

In an attempt to counteract the potential negative impact of minimum-wage rises on employment, the freeze on firing low-income workers first introduced in May 2002 has been extended indefinitely. However, this appears to have served mostly to discourage the creation of new jobs in the formal sector, while many companies have merely circumvented the freeze by negotiating voluntary resignations with generous severance terms.

Regional trends

Although Venezuela!s status as a federation was explicated fully in both the 1961 and 1999 constitutions, economic and political conditions have precluded the realisation of a truly federal system. Successive national administrations, including that of Mr Chávez, have proved reluctant to devolve political authority, while the flow of oil revenue to the central government has rendered regional governments financially dependent on intergovernmental transfers. Legislation to decentralise political and some administrative responsibilities was introduced in 1989, and although a number of states assumed control of education, healthcare and transport infrastructure, the majority were reluctant to administer services in the absence of a more transparent and coherent decentralisation of financial resources. Under the 1999 constitution, state governments have the right to impose duties on transfers and inheritances, to tax retail petrol sales and to receive a proportion of the revenue accruing to central government from value-added tax (VAT), as they did before 1999. In common with the approach pursued by central government in the 1970s, regional development corporations (RDCs), rather than state governors, are the Chávez administration!s preferred channel for distributing regional funding.

High unemployment and widespread informality

Trends towards recentralisation

34 Venezuela


Economic sectors

Agriculture

Agricultural development in Venezuela has been held back by exchange-rate volatility, state interventionism and underinvestment. The latter is a legacy of "Dutch disease", whereby excessive dependency on oil activities since the 1970s has led to the neglect and decline of traditional economic sectors. As a result, despite vast arable potential, agriculture accounts for just 4% of GDP; this compares with 13% of GDP in Colombia, 10% in Argentina and 9% in Brazil. The current government aims to develop the agricultural sector in order to diversify the economy, boost job creation and increase food self-sufficiency. However, so far its efforts have had little positive impact. Venezuela is not self-sufficient in most areas of agriculture and imports around 70% of its food, mainly from the US and Colombia. Leading food-related imports include soybean oil and solids, wheat, potatoes, sugar, and milk and milk products. Although local production of beef is high, corn and soybeans for animal feed has to be imported. Major export products include rice, tobacco, cereals, seafood, tropical fruits, coffee and cocoa. Mostly these go to regional markets, particularly Colombia. Trends in production and yields of most crops have been erratic.

The agricultural sector has huge growth potential, owing to the abundance of unexploited arable land and water resources. Successive governments have pledged to promote agricultural development as a means of encouraging diversification of the oil-dependent economy. The present government, led by the president, Hugo Chávez, is no exception, but the radical measures recently undertaken have been undermining investor confidence in contract and property rights, to the detriment of future productive investment in the sector. Under pressure from the government to boost credit to agriculture, in early 2004 the Banco Central de Venezuela (BCV, the central bank) increased the share of bank loans that must be allocated to the agricultural sector from 12% to 16%. At the end of that year the government announced plans to accelerate the application of a radical land reform law. Until then, land reform had been limited in practice to "idle" state-owned land. As the process of land reform continues, the overt politicisation of the issue will fuel uncertainty and erode the already weak protection of property rights.

The rapid expansion of Mercal, a government-sponsored food distribution network serving low-income people, since its inception in 2003 also raises fears of growing state control, particularly as the state company is competing against many of the large domestic private operators that Mr Chávez considers his political enemies. So far, domestic food producers have been keen to participate in Mercal, noting that they are best placed to supply bulk quantities of low-cost goods to the company. However, in many instances, the government has bypassed domestic producers in favour of imported foods, for example, through an oil-for-food barter arrangement with Argentina, which helps to reduce pressure from domestic producers for adjustments to controlled prices and thus to lower inflationary pressures.

Agriculture has potential, but is underdeveloped

Venezuela 35


Mining and semi-processing

Venezuela has a wealth of mineral resources, including those used as industrial raw materials and precious metals. The state controls most of these reserves, but international and domestic private investment is involved in several large-scale projects. A reform of the 1941 mining law introduced in 2000 simplified the cumbersome concession-granting process and sought to improve the legal framework. However, concerns over contract and property rights were exacerbated by the announcement in 2005 of a government review of all existing private mining contracts, with a view to maximising production and improving technology transfer and local content. At the same time, it was confirmed that a new state mining company, Compañia Minera Nacional (CMN), would start operating in 2006. According to the minister of basic industry and mines, Víctor Alvarez, CMN will be to gold and diamonds what the state hydrocarbons company, PDVSA, is to oil, and as in the oil industry, minority partnerships may be sought with international companies.

The mining review has proceeded along similar lines to the recent review of contracts with private oil companies, which has given the state greater control of the sector and maximised fiscal revenue, but still includes foreign private-sector companies to undertake the large investments required. In late 2006 the National Assembly (the legislature) was still reviewing the recommendations of the mines minister, Mr Alvarez, suggesting that a reform will be approved in 2007.

Exploitation of Venezuela!s large aluminium reserves got under way during the 1960s. The country!s comparative advantages include abundant supplies of bauxite and hydroelectric energy and a strategic geographical location. The state-owned Corporación Venezolana de Guayana (CVG) is responsible for four aluminium companies: an aluminium smelter, Venalum; a primary smelting and rolling company, Alcasa; a carbon anode manufacturer, Carbonorca; and a bauxite producer, Bauxilum.

Having reversed privatisation plans, the Chávez administration is now pursuing strategic associations to boost aluminium production capacity from its level of 640,000 tonnes/year in 2004. In 2006 Venalum announced a three-year, US$1bn, 285,000-tonnes/year expansion project, although details of potential joint-venture partners have not been made public. Around the same time, Bauxilum announced a US$900m expansion plan to support increased production of the primary material. Production of aluminium has been broadly stable at just over 600,000 tonnes/year over the past few years.

Exploitation of iron ore dates back to the 1950s. In 2005 Venezuela had a crude-reserves base of 6bn tonnes, with an iron content of 3.6bn tonnes, concentrated in the south-eastern Guayana region. Production in 2005 was estimated at 21,000 tonnes. Since nationalisation of the industry in 1975, extraction activity has been dominated by a state-owned company, Ferrominera Orinoco, a subsidiary of CVG. The company produces nine basic products destined for the steel industry. Around two-thirds of its production is exported to 12 different countries; the remainder is processed in one steel mill and five direct reduced

Aluminium

Iron and steel

36 Venezuela


iron-ore plants in Venezuela. However, in line with a strategic objective of the Chávez government, the company announced in early 2006 that it would reorient sales towards the domestic market, in order to aid the development of the non-oil economy.

The country!s largest steelmaker, Sidor, was put under pressure in 2005 by Mr Chávez to renegotiate its contract for supply of iron ore from Ferrominera Orinoco or face renationalisation. According the Ministry of Basic Industry and Mines, under the terms of the 1997 privatisation, Sidor was paying 44% of the international price of iron ore. Sidor!s private owners quickly agreed to a contract renegotiation, under which it will now receive a maximum discount of 25% for iron ore purchased from Ferrominera Orinoco. According to Sidor, the contract change will cost the company some US$60m and raise the price it charges for steel from US$19/tonne to US$30/tonne. In line with the president!s demands, the company has also committed itself to meeting domestic demand for steel before exporting its products. Sidor has until now exported over one-half of its output.

Sidor was privatised in 1997 for US$1.8bn. Amazonas, a private consortium that includes Argentina!s Siderar, Mexico!s Hylsamex, Brazil!s Usiminas and Venezuela!s Sivensa, controls close to 60% of the company, while the government owns a 30% stake and Sidor!s workers own 10.7%.

At 528m tonnes in 2003, Venezuela!s proven coal reserves are much smaller than Colombia!s (7.3bn tonnes) and Brazil!s (11.1bn tonnes). Production has expanded strongly in the past decade, from 1.8m tonnes in 1992 to 9m tonnes in 2004. This is still well below levels in Colombia (52.5m tonnes), but higher than in Brazil (6.2m tonnes). Little coal is consumed domestically; the great bulk of production is exported, mainly to other countries within the region. The main coalfields are located in the western state of Zulia, on the border with Colombia. Corpozulia, the state development agency, is now the dominant player in the coal market, after the transfer in 2004 by PDVSA of its entire shareholding in the state coal producer, Carbozulia, to the company.

Venezuela has vast untapped potential in gold production. Its exploitable gold reserves are estimated at 10,000 tonnes, the largest in Latin America and 12% of total global reserves. However, production was estimated by the US Geological Survey at just 9,690 kg in 2004. The basic-industry and mines ministry has registered hundreds of concessions for eventual exploration and exploitation, but gold mining activity has been weighed down by disputes surrounding mineral title. Currently, most official production is generated by three companies: Minera Hecla Venezolana, a subsidiary of Hecla Mining of the US; Minerven, an affiliate of CVG; and Crystallex International of Canada. Crystallex also holds the concession for the development of Las Cristinas, one of the largest unexploited gold projects in the world, with estimated reserves of 12.85m ounces. Gold Reserve (US) announced in 2005 that it would proceed with the development of Las Brisas, another of the largest unexploited gold mines in the world, with reserves estimated at 10.1m ounces. The two-year construction of the site was expected to cost US$550m. Both of these mega-projects, however, remain on hold until the completion of a mining reform,

Gold

Coal

Venezuela 37


which could help to resolve the contentious issue of title, but which will require the renegotiation of several private mining contracts with the government.

Venezuela!s 79.7bn barrels of proven conventional reserves (as of end-2005) is more than those of the US and Mexico combined. Only Saudi Arabia (261.9bn barrels), Canada (178.8bn barrels, if oil sands deposits are included), Iraq (115bn barrels), United Arab Emirates (97.8bn barrels), Kuwait (101.5bn barrels) and Iran (132.5bn barrels) have more proven reserves than Venezuela. In addition, Venezuela possesses as much as 270bn barrels of Orinoco Belt heavy-crude reserves. Currently, these are classed as bitumen and not regarded as recoverable reserves, but the Chávez administration is lobbying for them to be reclassified, potentially more than tripling Venezuela!s official reserves. Venezuela!s crude oil currently trades at a discount of US$10-12 per barrel compared with dated Brent crude, owing to its heavier consistency and higher sulphur content.

During the second half of the 1990s Venezuela was the fifth-largest oil producer in the world behind Saudi Arabia, Russia, the US and Iran, and the largest in the western hemisphere. At the end of the 1990s it was overtaken by Mexico, in large part because Venezuela!s output was constrained by tighter adherence to OPEC quotas under Mr Chávez!s government (Venezuela had previously been notorious for cheating on its quotas). Production declined further in 2001-03, as OPEC restraint was compounded by underinvestment in PDVSA and dis-ruption caused by political conflicts. This culminated in an unprecedented oil workers! strike in December 2002-January 2003. Virtually a whole month!s production was lost in January 2003, and the dismissal of 18,000 striking oil workers"out of a workforce of 40,000"compounded the authorities! difficulties in restoring production.

Accurate oil data for Venezuelan production have long been difficult to obtain, but since the strike in 2003, there has been a particularly wide disparity between the monthly production estimates produced by the local authorities and those put forward by private-sector analysts. PDVSA reported average production of 3.1m b/d in 2006, whereas the International Energy Agency reported average production of 2.5m b/d, of which 1.9m b/d were accounted for by conventional production by PDVSA and public-private joint-venture marginal field producers, and 565,000 b/d was accounted for by the four "strategic associations" that upgrade extra-heavy crude.

Established following the nationalisation of the oil industry in 1975, PDVSA is one of the world!s largest oil companies and Venezuela!s leading employer. The company has been used as the principal source of fiscal income by successive governments and currently accounts for almost one-half of revenue. During the decade preceding Mr Chávez!s election as president in December 1998, PDVSA managers had pursued a policy of internationalisation designed to maximise managerial autonomy with regard to the company!s revenue and production and investment decisions. These trends were reinforced by the industry!s opening to private capital as part of a strategy of maximising output. By 1998 the combined effects of internationalisation and apertura (the oil sector!s opening-up) had produced a substantially more autonomous state oil company

Oil

PDVSA, the state oil company

38 Venezuela


than in 1975: PDVSA now exercised significant control over its pricing and production and investment targets and was beginning to operate limited partnerships with private companies.

The increasing autonomy of the managers of PDVSA conflicted sharply with Mr Chávez!s ambitions for the company. Since he took office, Mr Chávez has articulated a more nationalistic set of oil policy objectives, chief among them the maximisation of fiscal revenue from oil exports. In addition, Mr Chávez has sought to re-establish the predominant role of both the executive branch of government and of OPEC in oil policymaking. These steps made the Chávez administration increasingly unpopular with PDVSA managers accustomed to a large degree of corporate autonomy. Oil managers became increasingly involved in opposition activities, culminating in the strike of 2002-03 and mass dismissals.

Former managers of the company claim that the mass dismissals have impaired long-term production potential. PDVSA!s recent commitments to earmark large portions of its capital investment budget to social programmes raise further questions about the state-owned company!s capacity to raise production. Detailed figures for 2006 are not available, but PDVSA!s capital expenditure is expected to have remained at US$5bn-6bn, close to the US$5.6bn budgeted for 2005 (PDVSA!s wells have a natural decline rate of 25% a year, requiring annual investment of an estimated US$2.5bn simply to maintain production). At the same time, the amount set aside for social and infrastructure projects is estimated at closer to US$8bn, up from US$29m in 2003. There is also a risk of pressure on PDVSA!s investment budget from the Fondo Nacional de Desarollo (Fonden, national development fund). The fund was created in 2005 and is partly replenished from PDVSA!s above-budget US dollar revenue. This means that above-budget revenue cannot be ploughed back into investment in exploration and production.

Private involvement in Venezuela!s oil sector occurs within three main frameworks.

• Empresas mixtas: formerly operating service agreements, under which investors operated marginal or low-yielding fields under contract to PDVSA. Around 15 such contracts were awarded in 1991-93 and a further 20 in 1997. As the crude oil from these fields is generally more difficult to extract, production costs are higher than elsewhere in the industry. Production from these mature fields now amounts to around 500,000 b/d. In 2006 the forced conversion of operating service agreements to minority-share joint ventures called empresas mixtas was completed, with the objective of maximising fiscal oil revenue and increasing PDVSA!s and the government!s control over the industry. All but two of the contractors (Italy!s ENI and France!s Total) agreed to the new terms by the end of the financial year in March 2006; these two had their wells expropriated. Another company, ExxonMobil (US), sold its well to Repsol (Spain) just before the deadline. As ExxonMobil had a relatively small presence in Venezuela, it was more easily able to reject the new terms than some other private operators.

• Strategic associations: a special category of joint venture designed for lower-return, longer-term projects, such as the exploitation and upgrade of extra-

Private involvement in the oil industry

Venezuela 39


heavy crude reserves in the Orinoco belt. Foreign companies are involved in four strategic associations with PDVSA in the Orinoco belt. US-based ConocoPhillips participates in the 104,000-b/d joint-venture Petrozuata project; Exxon Mobil operates the 105,000-b/d Cerro Negro scheme; Total/Statoil (France/Norway) operates the 180,000-b/d Sincor project; and ChevronTexaco (US) is involved in Hamaca, which produces 190,000 b/d.

• Profit-sharing agreements (PSAs), under which several exploration bidding rounds were held in 1996. Under the PSAs, private companies agreed to bear all the exploration costs and to form a joint venture with PDVSA (in which PDVSA would have up to 35% of the equity) in the event of a commercial deposit being discovered. A total of 19 firms won the right to explore and develop eight blocks. Significant discoveries were made in three of these: La Ceiba, Golfo de Paria Este and Golfo de Paria Oeste. Production of 75,000 b/d by ConocoPhillips in the Corocoro field in the last block is now expected to come on-stream by 2007. Of the remaining five blocks, one, San Carlos, was converted into a non-associated gas exploration and production contract, and the other four (Punta Pescador, Delta Centro, Guanare and Guarapiche) were terminated after no oil was found.

The government!s determination to extract maximum fiscal benefit from the oil sector has affected the private sector through a revision of contract terms and an elimination of incentives that could have the effect of discouraging investment. In late 2004 the government revised the conditions of the strategic associations that upgrade Venezuela!s vast reserves of extra-heavy crude. At start-up, the Orinoco strategic associations paid around 1% in royalties, the lowest allowed under a sliding scale of 1% to 16.67% stipulated in the Hydrocarbons Law of 1975, under which the projects were signed. In early 2005 the government announced that private oil companies currently paying income tax at the regular corporate rate of 34% under previous arrangements would have to pay the 50% stipulated in the 2002 Hydrocarbons Law. At the same time, it also announced that all of Venezuela!s 32 operating service agreements, under which private companies operated PDVSA fields for a fee based on oil prices and volumes, would be cancelled and have their operations converted into joint ventures controlled by PDVSA. These measures had been hinted at repeatedly by the government. Nevertheless, many of the decisions were taken without negotiation and have raised concerns over contract sanctity, which will hamper future investment flows.

Petrochemicals production in Venezuela began in 1953, and the country has three major petrochemicals complexes: El Tablazo, Morón and José. The sector is controlled by a subsidiary of PDVSA, Pequiven, which was created in 1978. Pequiven operates three wholly owned ventures and participates in 18 joint ventures with the domestic and international private sectors. In line with the government!s chemical industry reactivation programme, Pequiven!s business plan for 2000-09 seeks to double petrochemicals production capacity to 19.4m tonnes, with investments totalling US$8.7bn.

Petrochemicals

Chávez government rewrites contract terms

40 Venezuela


Natural-gas production has been neglected until recently, but investments are under way to exploit vast offshore reserves. This follows legislation passed in 1999 allowing foreign investment in exploration and production, distribution, transmission and gasification. In contrast with oil activities, the Hydrocarbons Law permits 100% foreign ownership of projects to exploit non-associated natural gas. The major natural-gas exploration and production projects include the Plataforma Deltana and Mariscal Sucre offshore natural-gas fields. The former is estimated to contain gas reserves of 40trn cu ft and the latter 10trn cu ft. Three of the five blocks in the Deltana were awarded in 2003, two to Chevron and one to Statoil of Norway, but the last two remain unassigned.

Manufacturing

The manufacturing sector is dominated by small and medium-sized industries focused primarily on the production of consumer goods for the domestic market. Interventionist measures implemented after 1958 fostered development behind protectionist barriers, and the sector was small and inefficient. Structural reform and free-trade agreements (FTA) within the Community of Andean Nations (CAN) at the beginning of the 1990s led to strong growth within the sector, but development has been repeatedly set back by macroeconomic downturns and exchange-rate volatility, and more recently by heightened political uncertainty. In 2003 the Confederación Venezolana de Industriales (Conindustria, the national federation of industry) estimated that industrial activity had fallen back by 15 years since 1999, with the closure of around 5,000 businesses and the loss of around 200,000 jobs. Official GDP data show that real manufacturing output at the end of 2005 was almost 5% below that of a decade earlier.

Construction

Growth trends in the construction industry tend to correlate both with the strength of oil prices and with government spending levels, resulting in boom-bust cycles. The sector expanded in the 1970s, when windfall oil revenue was used to improve infrastructure and housing provision, but as the economy weakened in the 1980s, the industry contracted. Construction flourished again in the early 1990s, on the back of increased spending on investment projects by PDVSA, and again in 1997-98, as a result of the opening of the oil sector, which saw a surge of capital-intensive investment. The latest boom-bust cycle in the economy has had the same effect: the industry contracted sharply in 2002-03 (by an accumulated 45%), in line with deep economic recession, but grew by 32% during the economic rebound of 2004 and by a further 20% in 2005.

Financial services

Reforms introduced after the 1994-95 financial crisis, in which around 50% of the country!s banks were declared insolvent, helped banks to survive the crippling recession of 2002-03 and have supported strong growth in credit and

Collapse of manufacturing

Construction is prone to boom-bust cycles

Financial intermediation remains low

Natural gas

Venezuela 41


profitability since then. Recent growth in lending largely reflects a search for more profitable investment opportunities in the context of captive domestic liquidity and falling interest rates on government securities. By expanding their loan books (and raising fee income), banks posted 35% nominal net profit growth in 2005, despite a sometimes difficult operating environment. Nevertheless, the financial sector remains underdeveloped and unsophisticated compared with much of the rest of the region and continues to be an inefficient financial intermediator. Bank lending was still just equivalent to 13% of GDP in 2005, although this was up from 7.4% of GDP in 2003. The lending/deposit ratio was only 53% in 2005, although this was up from 38% in 2003.

At the same time, the health and profitability of the banking sector faces new threats from a growing trend towards state intervention. This has so far taken the form of directed credits and interest rate controls. Legislative amendments in 2005 have increased the earmarking of loans for specific sectors, such as agriculture, low-income mortgages and tourism, at below-market rates to one-third of banks! loan portfolios. New mortgage regulations introduced in 2005 stipulate that 10% of banks! loan portfolios must go to mortgage lending and cap the rate on mortgages for low-income housing to 65% of the bank lending rate, up to a maximum rate of 18%. In 2005 the BCV also capped lending rates at 28% and introduced a minimum savings rate of 6.5% and a fixed-term deposit rate of 10%. Proposed reforms would, among other things, raise earmarking to small businesses from 3% to 10% of loan portfolios, at below-market rates. The authorities have also set their sights on banks! fee income, freezing bank fees in mid-2006 and commissions at current levels, pending a review and possible adjustment. In January 2007, at the beginning of the third Chávez administration, signs were that the authorities would intervene further in banking operations, with suggestions of a cap on bank profits (with the excess to go towards social investment) or a withdrawal of the substantial chunk of government deposits held by commercial banks, to be held instead by the new state Treasury bank. All of these moves threaten the profitability and creditworthiness of the banks, although so far prudential indicators have not suffered. The non-performing loan ratio was officially 1.25% in September 2006, while bad loan provisioning was over 200%.

As of December 2006, there were 48 private and 10 public banking institutions. Of these, there were 22 universal banks (19 private, three public); 14 commercial banks (all private); five investment banks (one public); two mortgage banks (both private); three savings and loan associations (all private); four banks with special statutes (all public); six development banks (five private, one public); two money-market funds (private); and one financial leasing company (public). Universal and commercial banks are the most important financial institutions in the country, accounting for 97% of the financial system!s total assets of Bs151trn (US$70bn at the official exchange rate of Bs2,150:US$1) in 2006. These banks continue to be primarily short-term lenders: by law, universal and commercial banks cannot extend loans for longer than three years, although this restriction may be raised to five years as part of a banking reform currently before Congress (parliament)"an unstable political and economic environment has at any rate restricted financing mainly to 90-day loans. Investment and

Banks

42 Venezuela


mortgage banks, which each account for less than 0.5% of the financial system!s assets, lend for longer periods.

Universal banks account for around 75% of total financial-sector assets. The four largest universal banks are Banesco, Banco de Venezuela, Banco Mercantil and BBVA Banco Provincial. Banco Mercantil and Banesco are Venezuelan-owned; the other two are majority Spanish-owned. BBVA Banco Provincial is owned by a Spanish bank, Banco Bilbao Vizcaya Argentaria. Banco de Venezuela is owned by Spain!s Banco Santander Central Hispano (BSCH). The 1994 legislation that allowed for the creation of universal banks, which are able to provide a full range of financial services, has stimulated some consolidation in the banking sector, with many savings and loan (S&L) institutions, mortgage banks and investment banks absorbed by commercial banks seeking universal bank status. Consolidation has slowed, however, as the entry of foreign players into the market has slowed, and as smaller, more obvious candidates have been sold.

Foreign banks have been free to invest in Venezuela since 1993. They may take equity positions in domestic institutions and are permitted to open branches and agencies. In a significant reversal of recent trends, holdings of majority stakes by foreign investors fell to eight banks in 2005, down from 12 banks a year earlier. Growing political and economic risk has played a large part in driving smaller operators out of the market. Spain!s BBVA and BSCH are by far the largest foreign players, controlling just under one-quarter of total system assets. The next-largest foreign bank is Citibank (US), which holds 2% of total system assets.

A large chunk of banks! revenue continues to come from investments in stocks and securities, in particular, paper issued by the Central Bank and, since 1999, Treasury debt. Since the introduction of exchange controls in early 2003, banks have taken up government US-dollar-denominated domestic debt issues as a means of gaining access to US dollars at the official rate. However, with the recovery in bank lending since 2004, the proportion of total system assets accounted for by public-sector loans and investments has fallen, from 53% at the end of 2003 to 41% in December 2006. Bank lending as a proportion of total assets has risen from 30% in 2003 to 41% in 2006. The lending/deposit ratio was 53% in 2005, up from 38% in 2003.

Banks have taken advantage of the rise in profitability related to high-yielding government debt to write off questionable loans. As a result, bad loans (comprising overdue credits and those in litigation) have been reduced dramatically throughout the system. Combined with the strong rise in total lending, the result has been a sharp drop in the non-performing loan (NPL) ratio, to 1.2% by end-2006, down from 6.56% in 2002. Underreporting of bad loans has been a problem in the past, however, and although banking supervision has been strengthened in recent years, the actual figure is probably higher. Many public banks have an NPL ratio much higher than the average, especially the Banco Industrial de Venezuela, where the bad loan ratio was reported at 13% of the loan portfolio at end-2006.

Venezuela 43


The Bolsa de Valores de Caracas (BVC, Caracas stock exchange) is the only forum for trading equities and fixed-income instruments in Venezuela. Market capitalisation is still extremely low, at under 5% of GDP, and the exchange has suffered from difficulty in attracting new listings. There were 59 listed companies at the end of 2006, down from 87 in 1999. In June 2005 a small bank, Banco Nacional de Crédito (BNC), became the first firm to launch an initial public offering (IPO) in nearly a decade, offering roughly 30% of its equity. However, apart from a few small banks that may seek to list in order to continue to resist consolidation, the overall number of firms interested in being publicly traded remains limited. The Compañía Anónima Nacional Teléfonos de Venezuela (CANTV), the formerly state-owned telecommunications company, still accounts for the majority of trades. The spread between the price of CANTV shares and its American Depositary Receipts (ADRs), which trade on the New York Stock Exchange, has become one of the main liquid indicators of the black-market rate for foreign exchange. Some investors have resorted to converting shares bought with bolívars into ADRs, in order to be able to sell them for US dollars as a means of avoiding foreign-exchange controls (a method that has not been prevented by the authorities, although a collapse in CANTV share prices since the nationalisation announcement of January 2007 has complicated such transactions).

The performance of the BVC index has been extremely volatile in recent years. The imposition of foreign-exchange controls in 2003 caused a sharp rise in the index, despite the steep economic contraction, as excess liquidity led to a steep fall in deposit rates and highlighted the attractiveness of the undervalued equity market. In 2005, as exchange controls were eased and alternative investments such as US-dollar-backed government bonds were introduced, draining liquidity from the financial system, the BVC index began to fall. By year-end, it had fallen by one-third, to just under 20,000. However, in 2006 the index was the beneficiary of a boom in emerging-market assets in general and of positive perceptions of Venezuela!s creditworthiness in the context of high oil prices. As a result, it more than doubled, to just over 40,000 at year-end. However, the index fell by 20% in the immediate aftermath of the CANTV nationalisation announcement, and prospects for renewed gains appear poor.

The debt market is still dominated by the government; the corporate debt market remains tiny in relation to the size of the economy, at well under 1% of GDP. However, trading volumes in local debt markets are rising in the context of captive domestic liquidity and growing investor demand for higher-yielding investments, which has encouraged firms to tap the local capital market. A local bank, Banco Mercantil, placed two issues of 18-24-month notes worth Bs40bn in November and December 2005, and a real-estate company, Fondo de Valores Inmobiliarios, launched the first longer-term domestic issue in several years, with a Bs60bn five-year note sold at end-2005.

The Ley de Empresas de Seguros y Reaseguros (the Insurance and Reinsurance Company Law) of 1994 lifted restrictions on foreign shareholding. Foreign participation increased rapidly in the late 1990s in anticipation of reform of the social security system, but this has yet to materialise. Foreign involvement has

Financial markets

Insurance and other financial services

44 Venezuela


helped to strengthen and consolidate the sector, which had been ravaged by the 1994-95 banking crisis. In mid-2006 there were 49 companies, down from 52 in 2000. The largest five companies in the market hold more than 50% of all premiums.

The market is small in global terms, but growth has accelerated as a result of technological advances, improved sales efficiency, product diversification and rapid economic growth since early 2004. According to the industry regulator, premiums rose by an annual average of 40% in 2004-05, to Bs7trn (US$3.2bn). The private life insurance sector is relatively small, owing to historically high levels of inflation and a lack of trust by the public. In the non-life sector, automobile and hospital insurance are the highest revenue-producing sectors.

Venezuela operates a mandatory public social security system, which aims to provide retirement, survivorship and disability benefits. However, benefits are meagre, owing to widespread corruption, mismanagement and the country!s dismal economic performance of recent years. The system does not accumulate a reserve fund, but pays benefits out of the contributions made by workers, their employers and the government. Its finances have thus suffered further damage as a result of the sharp rise in informal-sector working in recent decades. A reform in 1998 envisaged a mixed private-public system, but this was never implemented, and in December 2002 the Chávez government approved another reform, the Ley Orgánica de Seguridad (Social Security Law), which puts the state in charge of managing pension funds. Although legislation committed the government to have social security infrastructure functioning by mid-2003, progress has been slowed by political conflict, and by mid-2006 the system was not yet operational.

There is a plethora of small "pension funds" (more appropriately called "savings funds"), managed either by the major banks or by private companies. The largest non-bank-managed pension funds are those run by PDVSA and the armed forces. Because they have a long-term investment horizon, pension funds are one of the few providers of long-term financing and risk capital to companies. They make equity investments in both start-ups and established companies. Although financing from pension funds is generally more expensive than that from banking institutions, pension funds offer a more flexible and accessible source of funding, particularly with respect to longer-term finance.

Mutual funds (unit trusts) are marginal actors in the capital market, but they have become increasingly popular since exchange controls were imposed, given the subsequent decline in local deposit rates. Mutual funds! total net assets rose by more than 15% year on year to Bs498bn in mid-2006, divided among 27 funds. Those operated by Banco Provincial and Banco Mercantil together accounted for more than 75% of this market. Mutual funds are confined by legislation to investing in shares listed on the BVC and in public-debt instruments and bank paper. In mid-2006 more than 75% of mutual funds were invested in bolívar-denominated, fixed-income instruments.

Mutual funds

Pension funds

Venezuela 45


Other services

Venezuela is among the world!s most ecologically diverse countries. It has the world!s highest waterfall, Andean peaks of over 5,000 metres, South America!s largest lake and numerous national parks and natural monuments, as well as a tropical coastline and 72 islands in the Caribbean Sea. However, a track record of macroeconomic instability and persistent cycles of currency overvaluation during oil booms have militated against the development of the tourism industry. Recent maxi-devaluations have been accompanied by political and economic instability and have not spurred arrivals or investment in tourism infrastructure. Infrastructure is generally inadequate, and long-term finance is scarce. Successive governments have pledged to develop the sector, recognising that it is one of the few areas with the potential to create employment on a significant scale. However, promotion initiatives have been erratic and uneven. In the past two years the government has announced a raft of new tourism promotion initiatives, centring on the creation of a state-owned tourism company and a state airline, Conviasa. However, there are fears that, in the context of a deficient legal and regulatory framework, greater government involvement in the sector will serve mainly to dampen private interest in tourism investment.

International tourist arrivals and expenditure are recovering from the sharp decline of 2002-03, a period of deep economic recession and political uncertainty. The Ministry of Tourism reported a rebound in 2004-05 from the strike-depressed levels of 2003. Full-year arrivals rose by an accumulated 80% in 2004-05, to 604,816. Tourism receipts doubled in the same period, to US$656m. However, this was still significantly below the highs posted in the mid-1990s, before the Chávez government came to power in 1998. Foreign-exchange controls remain in operation, business operating conditions are still difficult, the political instability of recent years continues to hinder Venezuela!s image as a tourist market, and Mr Chávez!s anti-US rhetoric continues to harm Venezuela!s popularity in its largest market. Almost all visitor arrivals are from the Americas and Europe: the Americas accounted for 44% of all visitor arrivals in 2004 (the latest data available) and Europe for 54%.

Business arrivals account for the largest proportion of visitor arrivals, at 38% in 2004. As a percentage of the total, tourism arrivals have fallen from 37% in 1999 to 29% in 2004 (and many of these will not have been holidaymakers, as many business travellers enter on tourist visas). Arrivals from visiting friends and relatives have held up fairly well in comparison, most probably as a result of relatively high levels of emigration of skilled workers, along with currency depreciation in recent years, which has made visits home more affordable. From 17% of the total in 1999, arrivals from visiting friends and relatives accounted for 28% of total arrivals in 2004.

After the severe recession and maxi-devaluation of 2002-03, Venezuela!s retail sector is growing strongly, fuelled by pent-up consumer demand and rising personal incomes, which have prompted businesses to renew previously deferred investments. Sales rose by 10% in US dollar terms in 2005, to US$29bn. The sector!s importance in the overall economy also rose, from 7.9% of GDP in

Abundant tourism potential

Retailing is transformed during the 1990s

46 Venezuela


2003 to 9.2% of GDP in 2005. That said, Venezuela!s retail market remains underdeveloped compared with the other major economies in the region. Following the rapid expansion of hypermarkets, supermarkets and franchising operations in the 1990s, larger retailers are now gaining ground only slowly, with the sector still dominated by a large network of corner shops and kiosks. Many of these are in the informal sector, which has burgeoned in recent years, supported by macroeconomic volatility and the shopping habits of the poor majority.

Retailers also face rising competition from the government!s own rapidly growing food distribution chain, Mercal. Mercal was established in 2003 to alleviate shortages created by the general strike and the imposition of foreign-exchange and price controls, but has been expanded to form a core component of the Chávez government!s social policy misiones (missions). It provides a number of basic food products (initially 30, although the product range is increasing) to lower-income consumers at a subsidised price of 25-50% below the market price. By 2005, according to the government, Mercal comprised more than 30 supermarket-style stores and more than 12,000 Mercalitos (food distribution points) serving 10m Venezuelans, with the largest food distribution network in the country. According to some industry sources, it now accounts for one-third of all food sales.

The external sector

Trade in goods

Oil earnings dwarf all other items in the trade account; in 2001-05 they accounted for an average 82% of total export revenue. Aluminium and steel are also important export earners. In the early 1990s the liberalisation of trade within the Andean Community (CAN, a customs union that also includes Colombia, Bolivia, Ecuador and Peru) fomented a rise in Venezuela!s non-traditional exports, which comprise a limited range of manufactures. These products experienced six consecutive years of growth in 1992-98. Since then, the real appreciation of the domestic currency, low domestic private-sector invest-ment and economic problems in major export markets in the Andean region have contributed to a decline in the performance of non-traditional exports.

The weakness of domestic manufacturing and protracted periods of exchange-rate overvaluation have entrenched a high propensity to import in order to satisfy consumption and investment demand. The import bill far exceeds non-oil earnings, although it swings in line with fluctuations in domestic demand and the real exchange rate. In 2005 the non-oil trade deficit was US$16.9bn. Full-year data were not yet available for 2006 at the time of writing, but the deficit is estimated at over US$20bn.

Historically, the US has been Venezuela!s principal market for oil exports and also its main supplier of imports. The government is seeking to diminish the country!s commercial dependence on the US. There is a political dimension to this move. The president, Hugo Chávez, has frequently stated his ambition to shift commercial ties away from the US and towards "friendly" countries within

Attempts to diversify exports meet with limited success

Venezuela 47


and outside the region. Notwithstanding such efforts, the US will remain Venezuela!s dominant trading partner. It is a natural market for Venezuela!s oil exports, as it will be for the country!s massive gas reserves when these are eventually commercialised.

Mr Chávez!s Bolivarian ideals mean that he favours the concept of regional integration, which he also sees as a bulwark against US domination. However, within the region, Venezuela has proved to be an inconsistent trade partner. The country had a patchy record of compliance as a member of the CAN, with tensions arising periodically over Venezuela!s unilateral protectionist measures. In April 2006 the government decided to leave the trade pact altogether, citing the efforts of Venezuela!s CAN partners to negotiate trade agreements with the US, which it claimed would leave Venezuela open to duty-free imports from the US via Colombia. Subsequently, Mr Chávez announced that the country would also withdraw from the Group of Three (G-3), an 11-year trade association with Colombia and Mexico. Colombia is Venezuela!s largest trading partner in the Andean region, and continued membership of the separate G-3 would have made the exit from CAN ineffective.

While moving away from its Andean neighbours, Venezuela has drawn ever closer to the Mercado Común del Sur (Mercosur) trading bloc, which it joined as a full member in July 2006, alongside Argentina, Brazil, Paraguay and Uruguay. It would have been extremely difficult for Venezuela to comply with the legal requirements of both CAN and Mercosur, and the government appears to see the Southern Cone bloc as more amenable to its political goal of promoting South American integration.

The country!s exit from CAN is unlikely to have much immediate impact on trade flows with the other members of the grouping, given that ties are now deep. The Andean bloc accounted for 13% of Venezuela!s imports in 2005 and 12% of non-oil exports. According to the Cartagena Agreement, which governs the CAN, the subregional trade liberalisation rights and obligations stay in force for five years after a country withdraws from the organisation.

Venezuela is a signatory to the World Bank!s Multilateral Investment Guarantee Agreement and recognises its Multilateral Investment Guarantee Agency, a subsidiary offering insurance against non-commercial risks. It also recognises the International Centre for Settlement of Investment Disputes, which facilitates conciliation and arbitration in investment disputes between contracting states and the nationals of other countries.

Invisibles and the current account

Venezuela typically runs a large surplus on its current account, owing to the size of oil revenue. Occasional deficits reflect sharp falls in oil prices, as in 1998.

Venezuela has traditionally run a deficit on its invisibles account, owing to net outflows on interest, import-related transport costs and travel abroad"oil wealth and a strong exchange rate have normally allowed Venezuelans to travel abroad with much greater frequency than their Latin American counterparts, particularly to the US. Net travel receipts have remained consistently in deficit,

An emphasis on regional trade integration

Oil earnings make current- account surpluses the norm

48 Venezuela


as a result of the failure to attract more tourists to Venezuela itself, on account of poor-quality services and political insecurity in the country. Interest payments on the external debt constitute the largest outgoing on the income account. Dividend and profit remittances have been on a generally upward trend since the liberalisation of the oil sector in the mid-1990s, although foreign-exchange controls have limited their growth to a certain extent in recent years.

Venezuela typically records deficits on its current transfers balance, in contrast with most Latin American countries. This largely reflects family remittances by a substantial community of Colombian workers in the country.

Capital flows and foreign debt

Inflows of foreign direct investment (FDI) have been volatile in the past decade. The IMF-supported Agenda Venezuela of 1995-96 provided the impetus for a sharp rise in FDI inflows. It opened the oil sector to foreign investment and led to a series of privatisations, most significantly in the banking sector. The boom years for inward FDI were 1996-98, but liberalisation of telecommunications in 2000 helped to maintain inward FDI at historically high levels until 2001. Since then, an uncertain political and policy environment and a volatile macro-economic climate have served to keep FDI below potential, particularly in the non-extractive sectors. During the oil opening of 1996-98, inward FDI peaked at an annual average of US$4bn a year. By historical standards, inward FDI held up well during the first three years of the Chávez administration, averaging US$3.8bn per year in 1999-2001. However, inflows declined precipitously as political conflict intensified in 2002-04: in these years, inward FDI averaged just US$1.5bn. Although inward FDI showed signs of recovery in 2005, it has lagged well behind overall economic activity. At US$3bn, inflows represented 2% of GDP in 2005, well below the levels of above 5% of GDP recorded in the boom years of the late 1990s. At 27% of GDP in 2005, the stock of FDI is in the mid-range of the major Latin American economies, well below Chile (61% of GDP), but significantly above Brazil (17% of GDP).

Oil is the main magnet for FDI, followed by banking and telecoms. The US is the main source of FDI inflows to Venezuela, followed by Spain, France and Italy. Spanish banks have the largest foreign presence in the financial sector. Other notable FDI inflows come from Chile in forestry activities, and from Canada in the mining industry. Venezuela is actively courting new investment partners in Brazil, China, Russia and Iran, but as yet, inward FDI from these countries is still relatively minor.

Inflows of FDI have been insufficient to offset capital flight, a traditional feature of Venezuela!s external accounts. Since 1998, the capital and financial account has been in deficit every year, culminating in the introduction of capital and exchange controls in February 2003. The controls were imposed in order to arrest a haemorrhage of reserves following the collapse of oil revenue, owing to the two-month opposition-led stoppage launched in December 2002. Since their imposition, administration of the regime by the Comisión de Adminis-tración de Divisas (Cadivi, the exchange-control authority) has become more efficient. Many of the more draconian restrictions were eased in 2004-05, to

FDI is well below potential

Spiralling capital flight climaxes in exchange controls

Venezuela 49


allow, for example, purchases in US dollars via the Internet and credit-card purchases abroad. Facilitated by firm oil prices and fiscal revenue, foreign-exchange approvals have risen. In 2003 Cadivi authorised just US$5.1bn in foreign-exchange disbursements; in 2006 it authorised US$27bn. However, the government!s concern about controlling inflation and the supply of US dollars will preclude the dismantling of controls altogether. There are, moreover, signs that the authorities are concerned about growth in demand for foreign exchange created by the ongoing consumer boom (expressed in a rapid depreciation of the parallel exchange rate and a rise in inflation). At the end of 2006 it was announced that there would be tighter controls on US dollar disbursements for the purchase of luxury goods.

Oil-driven cycles of boom and bust have produced volatility in solvency ratios historically. Since 2003, the economy has been enjoying an oil-driven boom, resulting in a general downward trend in the external debt/GDP ratio, with debt-management operations contributing to a further reduction in the external debt. From a recent peak of 41.7% of GDP in 2003, the external debt/GDP ratio is estimated to have fallen to 20.5% in 2006, extremely low by regional standards. Around three-quarters of external debt is owed by the public sector; recession, uncertainty and capital controls have curbed overseas borrowing by the private sector in recent years.

A return to the international bond market by the sovereign in recent years has been facilitated by abundant global liquidity, a huge increase in international reserves owing to rising oil prices and the imposition of exchange controls, and a reduction of political uncertainty following the presidential recall referendum of late 2004. The sovereign took advantage of favourable market conditions to increase bond issuance and overfunded its liabilities in 2005. This funded US$4.8bn in external prepayments in 2006. Of this, US$3.9bn represents remaining Brady bonds and US$800m represents debt owed to the World Bank and other multilateral lenders.

Foreign reserves and the exchange rate

High oil prices and the imposition of exchange controls in February 2003 have supported the level of international reserves in recent years. Accumulation of reserves in the wake of exchange controls has been rapid: reserves rose from US$12bn in 2002 to US$36.6bn in 2006. However, accumulation of reserves in the period would have been much greater were it not for early debt repayments by the sovereign and for the decision of the government to use part of the international reserves for current spending. A reform of the Central Bank Law in 2005 provided for the creation of the Fondo Nacional de Desarollo (Fonden, national development fund), to be capitalised using "surplus" international reserves as determined by the calculation of an "optimum" reserves level. The methodology for calculating the optimum reserves level has not been made public, but US$10bn has been transferred in the past two years. In addition, the state oil company, Petróleos de Venezuela (PDVSA), has been paying above-budget US dollar revenue directly into the development fund, at a rate of around US$100m per week in 2006.

Relatively low external indebtedness

50 Venezuela


A crawling-peg exchange-rate system with bands was in operation from July 1996 until January 2002, when the steady build-up of currency pressures forced the authorities to float the bolívar. Despite a depreciation in the bolívar, private-sector demand for US dollars continued to exceed supply. The disruption to oil production in late 2002 and early 2003 exacerbated pressures in the foreign-exchange market, and in February the government suspended the free market in bolívar trading and imposed draconian capital controls. The authorities established an official exchange rate of Bs1,600:US$1"13.7% stronger than the prevailing floating reference rate. Two subsequent step-devaluations took the official exchange rate to Bs2,150:US$1 in early 2005, where it has remained. Given double-digit levels of inflation, the real trade-weighted depreciation of the currency during this period has been relatively small. In 2006 the bolívar was held stable at Bs2,150:US$1 and appreciated by almost 5% in real trade-weighted terms.

A parallel market for US dollars began to develop almost immediately after the free market in bolívar trading was suspended. Initially, the black-market premium exceeded 60%; for 2003 as a whole, it averaged 50%. As the provision of foreign exchange at the official exchange rate became more efficient, and as the build-up of reserves allowed an easing of some of the most draconian restrictions, the black-market premium narrowed for some time. In 2005-06 it averaged 29%. However, in recent months the black-market premium has been rising. Demand for US dollars to support the consumption and import boom pushed the black-market premium up to around 65% at end-2006, and a combination of falling oil prices and rising investor nervousness over government plans to nationalise utilities in state hands pushed the black-market rate to almost double the official rate, at close to Bs4,000:US$1 in mid-January. Having previously announced that there would be no adjustment of the peg in 2007, the government is under growing pressure to devalue this year.

A fixed exchange-rate regime is reintroduced

Venezuela 51


Regional overview

Membership of organisations

In 2006 Venezuela announced its departure from the free-trade area of the Andean Community (CAN). Under the terms of the agreement, withdrawal requires maintaining current commitments for a period of five years. In the same year Venezuela was granted full membership of the Mercado Común del Sur (Mercosur) free-trade area. Under the terms of the agreement, Venezuela will be required to adopt a common external tariff within four years. Duty-free access for goods from Argentina and Brazil is to be achieved in 2012; preferential access to the Venezuelan market for Uruguay!s and Paraguay!s main export products is to be immediate.

Foundation: March 1991, Treaty of Asunción, which committed the signatories, Argentina, Brazil, Paraguay and Uruguay, to the promotion of intraregional trade integration and the pursuit of co-ordinated macroeconomic policies.

Members: Core members: Argentina, Brazil, Paraguay, Uruguay and Venezuela. Associate members: Chile (since 1996), Bolivia (since 1997).

Trade integration: Free-trade zone and customs union with a common external tariff (CET) of 0-25%, effective from January 1st 1995. Brazil and Argentina were given until December 1999 to phase in the CET, and Paraguay and Uruguay until December 2000. In practice, these deadlines have been frequently revised.

Mercosur and agreements with other trade blocs: There has been some dispute. Negotiations for a free-trade agreement between Mercosur and the EU were begun in 1999, but have been dogged by disagreement. The original deadline for completion of talks, October 31st 2004, was missed. Members negotiated as a forum on a proposed Free Trade Area of the Americas (FTAA). With that initiative stalled, there has been some dispute over the desire of certain members (Uruguay) to negotiate bilateral trade deals with the US.

Important recent developments: Brazil!s president, Luiz Inácio Lula da Silva, is a strong promoter of Mercosur, but his inclinations for continental and subregional trade promotion will be tempered by the need to placate domestic protectionist lobbies, particularly in sensitive subsectors such as livestock, dairy products and rice. In conjunction with Argentina, Brazil has sought to increase the influence of Mercosur and primary-product-exporting countries more generally in international trade negotiations, in order to offset the dominance of the EU and the US, particularly over the question of agricultural subsidies.

Mercado Común del Sur

52 Venezuela


Appendices

Sources of information

Banco Central de Venezuela (the Central Bank), www.bcv.org.ve

Ministerio de Finanzas, www.mf.gov.ve

Instituto Nacional de Estadística, www.ine.gov.ve/ine

VenEconomía, VenEconomy (weekly and monthly)

BP, Statistical Review of World Energy (annual), London

IMF, Direction of Trade Statistics Yearbook, Washington, DC

IMF, International Financial Statistics (IFS; monthly), Washington, DC

International Energy Agency (IEA), Monthly Bulletin of Statistics, Paris

International Finance Corporation (IFC), Emerging Stockmarkets Review (monthly), Washington, DC

International Institute for Strategic Studies, The Military Balance (annual), London

UN Food and Agriculture Organisation (FAO), Rome

World Bank, Global Development Finance (annual), Washington, DC

World Bank, World Development Indicators (annual), Washington, DC

Julia Buxton, The Failure of Political Reform in Venezuela, Ashgate Press, London, 2001

Steve Ellner and Daniel Hellinger (eds), Venezuelan Politics in the Chávez Era: Class, Polarization and Conflict, Lynne Reiner, London, 2003

Richard Gott, In the Shadow of the Liberator, Verso, London, 2000

Regional Surveys of the World: South America, Central America and the Caribbean 2001, Europa Publications, London, 2001

Asamblea Nacional de Venezuela (National Assembly of the Republic), www.asambleanacional.gov.ve

Consejo Nacional de Promoción de Inversiones (National Council for Investment Promotion), www.conapri.org

Ministerio de la Secretaría de la Presidencia (Presidency of the Bolivarian Republic of Venezuela), www.venezuela.gov.ve

Petróleos de Venezuela, www.pdvsa.com

National statistical sources

International statistical sources

Select bibliography and websites

Venezuela 53


Reference tables

Population and labour force 2001 2002 2003 2004 2005Population ('000) 24,541 25,003 25,525 25,987 26,480 % change 2.0 1.9 2.1 1.8 1.9Labour force ('000) 10,851 11,511 11,971 12,067 11,972 % change 5.6 6.1 4.0 0.8 -0.8Unemployment rate (%) 13.4 16.0 18.0 15.1 12.2


Central government finances (Bs trn)

2001 2002 2003 2004 2005Total revenue 18,487 23,889 31,385 51,076 83,732 Current revenue 18,487 23,889 31,385 51,076 83,732 Tax revenue 10,137 11,448 15,145 26,959 46,395 Oil 2,260 991 1,968 3,812 11,184 Non-oil 7,877 10,457 13,177 23,147 35,211 Non-tax revenue 8,351 12,442 16,240 24,118 37,337 Oil 6,146 10,332 13,586 19,979 29,523 Non-oil 2,205 2,110 2,653 4,138 7,813 Capital revenue 0 0 0 0 0

Total expenditure 22,357 27,735 37,287 55,110 78,793 Current spending 17,147 20,704 27,888 41,668 57,740 Wages & salaries 3,925 4,507 5,709 8,214 10,715 Goods & services 1,108 1,741 2,064 2,588 3,160 Debt interest payments 2,578 4,951 6,300 7,776 8,941 Transfers 9,443 9,468 13,511 22,572 34,350 To private sector 523 307 583 2,863 3,832 To public sector 8,915 9,153 12,923 19,707 30,515 Capital spending 3,909 4,799 7,365 10,733 17,595

Primary balance -1,292 1,105 398 3,742 13,880Non-oil balance -12,275 -15,169 -21,456 -27,825 -35,769

Overall balance -3,870 -3,846 -5,902 -4,034 4,939

Source: Ministry of Finance.

Interest rates (%; period averages unless otherwise indicated)

2001 2002 2003 2004 2005

Lending interest rate (%) 22.5 36.6 25.2 18.5 16.8

Deposit interest rate (%) 15.5 29.0 17.2 12.6 11.6

Money-market interest rate (%) 13.3 28.9 13.2 4.4 2.6

Source: Banco Central de Venezuela.

54 Venezuela


Money supply (Bs bn unless otherwise indicated; end-period)

2001 2002 2003 2004 2005

Money (M1) incl others 9,287.0 10,974.0 19,056.0 27,927.0 42,922.0

% change, year on year 15.6 18.2 73.6 46.6 53.7

Quasi-money 7,282.0 8,207.0 11,166.0 16,475.0 25,482.0

Money (M2) 16,569.0 19,181.0 30,222.0 44,402.0 68,404.0

% change, year on year 15.3 15.8 57.6 46.9 54.1


Gross domestic product (market prices)

2001 2002 2003 2004 2005

Total (US$ bn) At current prices 122.9 92.9 83.5 112.5 144.8

Total (Bs bn) At current prices 88,945.6 107,840.2 134,227.8 212,683.1 302,642.9

At constant (1984) prices 42,405.4 38,650.1 35,652.7 42,172.3 46,530.0

% change, year on year 3.4 -8.9 -7.8 18.3 10.3

Per head (Bs) At current prices 3,624,396 4,313,140 5,258,763 8,184,264 11,429,136

At constant (1984) prices 1,727,954 1,545,837 1,396,797 1,622,835 1,757,179

% change, year on year 1.4 -10.5 -9.6 16.2 8.3


Nominal gross domestic product by expenditure (Bs bn at current prices where series are indicated; otherwise % of total)

2001 2002 2003 2004 2005

Private consumption 48,839 57,740 73,533 104,675 142,631

54.9 53.5 54.8 49.2 47.1

Government consumption 12,663 14,027 17,276 25,428 32,107

14.2 13.0 12.9 12.0 10.6

Gross fixed investment 21,392 23,644 20,765 39,001 61,199

24.1 21.9 15.5 18.3 20.2

Stockbuilding 3,090 -827 -339 7,361 7,217

3.5 -0.8 -0.3 3.5 2.4

Exports of goods & services 20,222 32,820 45,441 76,988 120,108

22.7 30.4 33.9 36.2 39.7

Imports of goods & services 17,260 19,565 22,448 40,769 60,619

19.4 18.1 16.7 19.2 20.0

GDP 88,946 107,840 134,228 212,683 302,643

Source: IMF, International Financial Statistics.

Venezuela 55


Real gross domestic product by expenditure (Bs bn at constant 1984 prices where series are indicated; otherwise % change year on year)

2001 2002 2003 2004 2005

Private consumption 24,001.5 22,295.6 21,345.1 24,642.5 29,016.2

6.0 -7.1 -4.3 15.4 17.7

Government consumption 5,670.5 5,529.5 5,844.8 6,676.2 7,305.9

6.9 -2.5 5.7 14.2 9.4

Gross fixed investment 11,117.7 9,076.6 5,715.9 8,559.4 11,806.6

13.8 -18.4 -37.0 49.7 37.9

Stockbuilding 2,003.6 -415.3 -129.3 2,129.6 1,814.3

0.5a -5.7a 0.7 a 6.3a -0.7a

Exports of goods & services 11,544.5 11,087.3 9,936.0 11,295.9 11,756.6

-3.5 -4.0 -10.4 13.7 4.1

Imports of goods & services 11,932.5 8,923.5 7,060.0 11,131.2 15,169.6

14.1 -25.2 -20.9 57.7 36.3

GDP 42,405.4 38,650.1 35,652.7 42,172.3 46,530.0

3.4 -8.9 -7.8 18.3 10.3

a Change as a percentage of GDP in the previous year.

Source: World Bank, World Development Indicators.

Real gross domestic product by sector (Bs bn at 1997 prices; % change year on year in brackets)

2001 2002 2003 2004 2005GDP 42,405 38,650 35,667 42,036 45,957 % change 3.4 -8.9 -7.7 17.9 9.3Oil 7,689 6,596 6,472 7,225 7,346 % change 0.9 -14.2 -1.9 11.6 1.7Non-oil 30,615 28,789 26,637 31,375 34,599 % change 4.0 -6.0 -7.5 17.8 10.3Mining 283 295 270 302 298 % change 2.9 4.2 -8.5 11.9 -1.3

Manufacturing 7,153 6,215 5,775 7,240 7,895 % change 3.7 -13.1 -7.1 25.4 9.0Electricity & water 926 946 941 1,006 1,091 % change 4.8 2.2 -0.5 6.9 8.4Construction 2,983 2,733 1,654 2,185 2,623 % change 13.5 -8.4 -39.5 32.1 20.0Commerce 3,610 3,121 2,826 3,546 4,238 % change 4.5 -13.5 -9.5 25.5 19.5

Transport & warehousing 1,387 1,242 1,142 1,444 1,630 % change -1.4 -10.5 -8.1 26.4 12.9Communications 1,193 1,223 1,162 1,281 1,534 % change 8.1 2.5 -5.0 10.2 19.8Financial institutions & insurance 870 744 776 983 1,285 % change 2.8 -14.5 4.3 26.7 30.7


56 Venezuela


Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 22.4 31.1 21.7 16.0 13.7


Mineral production ('000 tonnes)

2001 2002 2003 2004 2005Aluminium 571 605 601 624 615

Iron ore 19,990 10,568 19,644 21,561 21,147

Sources: VenEconomía; World Bureau of Metal Statistics, World Metal Statistics.

Domestic cement sales 2002 2003 2004 2005Cement sales (m tonnes) 3.3 2.7 3.6 4.4

Sources: Asociación Venezolana de Productores de Cemento; VenEconomía.

Selected electricity statistics 2001 2002 2003 2004 2005Installed capacity (mw) 20,408 19,667 20,399 21,198 21,849 Thermoelectric 7,201 7,176 7,176 7,333 7,436 Hydroelectric 13,207 12,491 13,223 13,865 14,413Generation (gwh) 87,534 89,412 90,962 96,930 104,883 Thermoelectric 27,093 29,877 29,537 26,856 26,841 Hydroelectric 60,441 59,535 60,532 70,075 77,229

Source: Cámara Venezolana de la Indústria Eléctrica.

Main composition of trade (US$ m; fob-cif)

2001 2002 2003 2004 2005

Exports fob Petroleum 21,745 21,532 22,029 31,917 48,059

Total exports incl others 26,667 26,781 27,170 38,748 55,487Imports cif Total imports incl others 18,322 12,439 9,256 16,678 24,354

Sources: IMF, International Financial Statistics; Banco Central de Venezuela.

Venezuela 57


Main trading partners (% of total)

2001 2002 2003 2004 2005

Exports fob to: US 48.2 44.9 60.5 61.7 57.8

Netherlands Antilles 16.4 12.7 5.7 5.3 4.6

Canada 2.1 1.0 1.9 2.6 2.9

Dominican Republic 0.7 2.8 3.4 3.1 2.8

Imports cif from: US 34.2 34.6 33.7 29.9 28.9

Colombia 8.7 8.6 8.3 10.2 8.4

Brazil 5.9 6.7 7.2 7.3 6.0

China 1.9 1.8 2.4 0.0 3.8

Source: IMF, Direction of Trade Statistics.

Balance of payments, IMF series (US$ m)

2001 2002 2003 2004 2005

Goods: exports fob 26,667 26,781 27,170 38,748 55,487

Goods: imports fob -19,211 -13,360 -10,687 -17,318 -23,955

Trade balance 7,456 13,421 16,483 21,430 31,532

Services: credit 1,376 1,013 878 1,098 1,334

Services: debit -4,681 -3,922 -3,522 -4,724 -5,416

Income: credit 2,603.0 1,474.0 1,729.0 1,564.0 4,152.0

Income: debit -4,623.0 -4,230.0 -4,140.0 -5,449.0 -6,136.0

Current transfers: credit 356.0 288.0 257.0 180.0 213.0

Current transfers: debit -504.0 -445.0 -237.0 -269.0 -320.0

Current-account balance 1,983.0 7,599.0 11,448.0 13,830.0 25,359.0

Direct investment in Venezuela 3,683.0 782.0 2,659.0 1,518.0 2,957.0

Direct investment abroad -204.0 -1,026.0 -1,318.0 348.0 -1,460.0

Inward portfolio investment (incl bonds) 710.0 644.0 -143.0 -853.0 3,378.0

Outward portfolio investment 397.0 -1,354.0 -812.0 -1,090.0 -641.0

Other investment assets -3,919.0 -7,169.0 -4,328.0 -8,004.0 -18,851.0

Other investment liabilities -878.0 477.0 -1,000.0 -635.0 -1,555.0

Financial balance -211.0 -7,646.0 -4,942.0 -8,716.0 -16,172.0

Net errors & omissions -3,601.0 -2,782.0 -1,052.0 -2,961.0 -3,763.0

Financing (� indicates inflow) Movement of reserves 3,588.0 293.0 -8,665.0 -2,830.0 -6,140.0

Use of IMF credit & loans 0.0 0.0 0.0 0.0 0.0


58 Venezuela


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

2000 2001 2002 2003 2004

Public medium- & long-term 27,748 25,230 23,379 24,471 25,852

Private medium- & long-term 6,132 6,015 6,018 6,016 5,366

Total medium- & long-term debt 33,880 31,246 29,397 30,486 31,218

Official creditors 5,924 4,927 4,400 3,888 3,513

Bilateral 2,766 1,726 972 498 375

Multilateral 3,158 3,201 3,428 3,390 3,139

Private creditors 27,956 26,319 24,997 26,598 27,704

Short-term debt 4,070 4,792 4,590 4,344 4,352

Interest arrears 59 49 52 5 13

Use of IMF credit 203 0 0 0 0

Total external debt 38,152 36,038 33,987 34,830 35,570

Principal repayments 3,419 4,885 5,207 6,559 4,373

Interest payments 2,675 2,676 2,245 2,302 2,258

Short-term debt 210 202 130 108 108

Total debt service 6,094 7,561 7,452 8,861 6,632

Ratios (%) Total external debt/GDP 32.6 29.3 36.6 41.7 31.6

Debt-service ratio, paida 16.1 24.7 25.4 29.7 16.0

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, World Debt Tables.

Foreign reserves (US$ m; end-period)

2001 2002 2003 2004 2005

Total reserves incl gold 12,295.0 12,002.0 20,667.0 23,497.0 29,637.0

Total international reserves excl gold 9,239.0 8,487.0 16,035.0 18,375.0 23,919.0

Gold, national valuation 3,056.0 3,515.0 4,632.0 5,122.0 5,718.0


Exchange rates (Bs per unit of currency unless otherwise indicated; annual averages)

2002 2003 2004 2005 2006

US$ 1,161 1,607 606 2,090 2,147

CoPs 0.464 0.558 0.230 0.900 0.909

� 1,097 1,819 753 2,601 2,690

BrR 397.4 522.0 207.0 858.1 986.6

ArPs 379.0 554.0 207.2 719.7 701.8

£ 1,740 2,624 1,109 3,800 3,962


Editors: Fiona Mackie (editor); Justine Thody (consulting editor) Editorial closing date: January 30th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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