Venezuela’s Economic Recovery: Is It Sustainable? A CEPR Report
Venezuela’s current growth is generally described as unsustainable, with various negative scenarios put forth, including spiraling debt, inflation, and balance of payments crises. However, these pessimistic forecasts have been far off the mark for most of the past decade. This paper looks at the available economic data to see if Venezuela’s economic recovery could be sustained, or even accelerated.
Washington, D.C.– The Center for Economic and Policy Research (CEPR) released a report today on Venezuela’s economic recovery, which is often called into question by analysts and the press. The report, “Venezuela’s Economic Recovery: Is it Sustainable?”, looks at the country’s foreign and domestic debt, inflation, balance of payments, and other aspects of the economic recovery to see if it is sustainable.
“For most analysts over most of the past 13 years, Venezuela’s economic collapse has always been just around the corner,” noted economist Mark Weisbrot, Co-Director of CEPR and co-author of the report. “But it hasn’t happened, and these forecasts appear to have been based on some wishful thinking.”
Venezuela went into recession at the beginning of 2009, during the world economic crisis and recession. Recovery began after five quarters, in the second quarter of 2010. The economy grew by 4.2 percent in 2011, and expanded by 5.6 percent for the first half of 2012. Nonetheless, most forecasts and analysts remain gloomy about Venezuela’s economic future.
“Venezuela’s current economic recovery, as well as the rise in living standards, poverty reduction, and increased access to education and health care since the government got control over its oil industry nearly 10 years ago – all this goes a long way toward explaining why President Hugo Chávez is likely to be re-elected on October 7th,” Weisbrot noted.
Since 2004, when the economy had recovered from the 2002-2003 recession, poverty fell by nearly half and extreme poverty by 70 percent. This measures only cash income, and does not include such gains as the provision of health care to millions of Venezuelans, or the doubling of college enrollment, with free tuition for many students.
The report finds that Venezuela’s debt service burden on both foreign and domestic debt is relatively modest, and unlikely to lead to financing problems in the foreseeable future. Even if oil prices were to crash temporarily, as they did in 2008-2009, Venezuela has room to borrow and pursue a stimulus program. The current program to ease the country’s housing shortage produced 147,000 new homes last year. This is comparable to building 1.6 million homes in the United States, and has served as a stimulus to Venezuela’s economic recovery. Another 100,000 homes have been completed this year, of 200,000 more planned.
“Based on Venezuela’s ability to pay its public debt, and looking forward, Venezuela’s government bonds are almost certainly under-priced,” Weisbrot noted.
With a current account surplus (6.6 percent of GDP over the past 12 months), $24.6 billion in reserves, and most forecasts showing higher real oil prices in future years, Venezuela is unlikely to run into balance of payments problems. Venezuela’s ability to borrow from China at low interest rates provides added insurance. The report also notes that inflation has fallen to a 13.7 percent annual rate over the past three months, and has been declining while economic growth has been accelerating.
During the recovery from Venezuela’s previous recession, which was brought on by the oil strike of 2002-2003, the IMF repeatedly underestimated economic growth by gigantic margins of 10.6, 6.8, and 5.8 percentage points for the years 2004-2006.
“A country that is sitting on 500 billion barrels of oil has a lot of room for experimentation,” Weisbrot said. “With reasonable macroeconomic policies and public investment, Venezuela’s economic growth could continue for many years to come.”
For the full PDF paper click here or go to the CEPR website.