Bloomberg Línea — For decades, the Venezuelan economy has been mired in a turbulent scenario. Its Gross Domestic Product (GDP) lost close to 83% between 2013 and 2021; hyperinflation reached 130,060% three years ago and the bolivar depreciated to such an extent that banknotes were used for handicrafts or so-called money art, within Venezuela and even abroad.
No prognosis could have been more discouraging, but for the last few months various international organizations, firms and economists have been making projections that point to an improvement in the country.
While Credit Suisse believes that the economy will grow 20% in 2022, the International Monetary Fund (IMF) forecasts an expansion of 1.5%, while the Economic Commission for Latin America and the Caribbean (ECLAC) expects it to be 5%, the best performance in South America and well above the regional average of 1.8%.
Why does ECLAC put Venezuela first for growth in South America? Daniel Titelman, director of ECLAC’s economic development division, said in an exclusive interview with Bloomberg Linea that, if the recovery that began in 2021 continues, it would be the end of the prolonged downturn of the Venezuelan economy for the last eight years.
Titelman explains the keys to understanding Venezuela’s economic growth. This interview has been edited for reasons of clarity and length.
Bloomberg Línea: How do you explain the growth of the Venezuelan economy, and which surpasses that of its Latin American peers?
Daniel Titelman: In 2022, ECLAC estimates that the Venezuelan economy will grow, for the first time since 2014, by 5%, reflecting a significant improvement in its external sector, by virtue of the increase in oil prices, and a recovery in the levels of remittances sent by Venezuelans working abroad.
In particular, the increase in the reference prices of the Venezuelan consumer price index of 67.9% in 2021, and 60.5% between December 2021 and March 2022, as well as the recovery of crude oil production, will allow for an improvement in the country’s public finances, while higher remittances will allow increasing levels of private consumption.
Beyond oil revenues, what other factors are influencing this growth, and which sectors are showing the best performance?
Sectors such as agribusiness and the pharmaceutical industry have reported growth since the middle of the second half of 2021, which has been sustained in the first half of this year.
Also, the end of the hyper-inflationary process has allowed some stabilization of household incomes, while a more generalized use of the U.S. dollar has facilitated transactions between private parties.
Likewise, a significant reduction in the rate of depreciation of the local currency favors a decrease in inflation, but also contributes to halting the fall in household incomes, especially for those who receive their income in bolivars.
Is the growth also related to remittance inflows? If so, have you been able to calculate what percentage remittances contribute to this growth?
Given the significant migration of Venezuelans in recent years, remittances have been an important source of resources for Venezuelan households. Despite the contraction they experienced in 2020, in line with the recovery of labor markets in the region, the income of Venezuelans in recipient countries has been recovering, and with it the remittances sent to the country.
Various studies carried out in the country maintain that remittances could represent close to $3.5 billion in 2021, approximately 5% of GDP, and have a greater relative impact on the income of the poorest households in Venezuelan society. Thus, given their growing importance, the recovery of remittances in 2021, and the expectation that they will continue to grow in 2022, leads us to expect a recovery in Venezuelan household consumption, thereby contributing to increased spending in 2022.
Could it be said that Venezuela has a dollarized economy, and does this have an influence on the indices we have seen lately about the country?
DThe problems generated by hyperinflation and by the failures in the payment systems, caused by the continuous power cuts, gave a great effect on the use of foreign currencies to carry out transactions in Venezuela. Currency substitution is common in economies experiencing hyperinflation, as was the case until recently, not only for transactions, but also as a store of value. Currently, a large number of transactions in the country are carried out in foreign currency, but the use of the bolivar persists, especially in transactions with the government and the financial system. Undoubtedly, the use of foreign currency to carry out transactions between private parties has facilitated commercial activities.
Is it real growth, in economic terms, or is it just an adjustment given the low base of comparison for 2021?
During the second half of 2021, the Venezuelan economy registered a recovery not only with respect to what had been observed during 2020, but also with respect to the first half of 2021. Again, the recovery of oil activity and greater flexibility in social distancing measures contributed to this. In 2022, we estimate that this will be maintained during the first half of the year, while already for the second half of the year we expect a slowdown in the growth of non-oil economic activity and greater stability in the dynamics of crude oil prices.
You point to an expansion of 5% for that country, the IMF says 1.5% and the Credit Suisse 20%. Why is there so much disparity between each of the projections?
Differences in projections between different sources are frequent, and they depend on the assumptions used in each case. The fundamental pillar of our projections is the recovery of the Venezuelan external sector, both in terms of oil and remittances.
Venezuela has been one of the countries that has been favored by the significant increase in the price of crude oil in international markets, which is expected to mean an increase of close to 50% on average this year with respect to the average price in force during 2021. On the other hand, the average production of Venezuelan crude oil increased by 33% between March 2021 and March 2022, as reported by secondary sources to OPEC. Thus, the easing of the external restrictions will allow for the financing of greater public and private spending.
The end of hyperinflation and greater exchange rate stability will favor greater stability in the real value of incomes, which could underpin a rebound in certain activities such as agribusiness and trade. Additionally, reduced mobility restrictions linked to sanitary measures to combat the coronavirus will also allow for a recovery in non-oil activity in 2022.
However, growth scenarios not only depend on the Venezuelan economy’s spending capacity, but also on the ability of supply to react to demand stimuli, and this is where we see it being difficult for the Venezuelan economy to grow at double-digit rates given the frequent power outages and the persistent problems in diesel supply. In addition, the significant increase in the price of fertilizers in international markets will also affect the production capacity of agribusiness.
Is the recession in Venezuela coming to an end?
Should the scenario anticipated by ECLAC materialize, an expected growth of 5% by 2022, it would put an end to the prolonged decline that the Venezuelan economy has registered for more than eight consecutive years, so that even with the 5% growth by 2022, the Venezuelan GDP would accumulate a 74% fall, that is to say, at the end of 2022, current GDP would represent 26% of what it was in 2013.
Despite the positive news, the main limitation to growth faced by the Venezuelan economy is a significant energy deficit, because despite the recovery in crude oil production, solving the traditional problems in the refining processes - gasoline and diesel production - and in the generation of electricity are fundamental for its economy to experience a sustained recovery. At the same time, solving the energy crisis, of both fuel and electricity, it is currently facing requires a considerable increase in investment, both public and private, in these areas, and this in itself is a challenge.