Venezuela's Economy Shrank Less Than Forecast in Second Quarter, Bank Says

Venezuela’s economy, the only one in Latin America still in recession, shrank less than forecast in the three months through June as the oil-exporting nation showed the first signs of recovering from a five-quarter contraction.

Gross domestic product contracted 1.9 percent in the second quarter from a year earlier, the central bank said today. Analysts estimated the economy would shrink 5.7 percent, the median of eight forecasts compiled by Bloomberg. The economy contracted 3.5 percent in the first half of 2010, the bank said.

Venezuela, the biggest oil producer in South America, was still in recession even as crude prices rose 17 percent in the second quarter from a year ago and its Latin American neighbors posted growth. Price and currency controls implemented as part of President Hugo Chavez’s so-called 21st-century socialist revolution have limited industrial output, while a series of nationalizations has driven away investment.

“This was much better than expected,” said Juan Pablo Fuentes, a Latin America economist at Moody’s Economy.com in West Chester, Pennsylvania. “The bottom of the recession has been touched. Historically in Venezuela there’s always been a strong relation between the price of oil and the economy.”

Yields on Venezuela’s benchmark 9.25 percent bonds due in 2027 rose two basis points, or 0.02 percentage point, to 13 percent today. The price fell to 74.5 cents on the dollar.

Currency Market

The central bank attributed the smaller contraction in the second quarter, following a 5.8 percent drop in the first three months, to the new currency market implemented in June. Known as SITME, it replaced the parallel market that Venezuelans used to buy dollars when currency wasn’t available at the official exchange rate.

Venezuela’s economy will probably shrink 4.1 percent in 2010, according to the median forecast in a Bloomberg survey of eight analysts, including economists from Barclays Capital and Citigroup Inc. The International Monetary Fund forecasts that Venezuela will be the only country in Latin America whose economy will shrink this year. Both forecasts were made before the second-quarter data were released.

Chavez, who devalued the bolivar by as much as 50 percent on Jan. 8, acknowledged in April that the economy may shrink for a second straight year as it sheds “capitalist” consumption habits.

Industrial production plunged 3.7 percent in the second quarter after Chavez ordered 20 percent cuts in electricity consumption due to a severe drought that threatened to collapse the power grid because it reduced hydropower output.

Oil Industry

Venezuela’s oil industry contracted 2 percent in the quarter, the non-oil sector fell 1.7 percent and private consumption fell 2.4 percent, the central bank said.

The mining industry, which the government is promoting as critical to boosting non-oil exports, plunged 19.6 percent.

The government posted a current account surplus of $2.62 billion in the quarter.

Chavez reacted to the global economic crisis that emerged in late 2008 and the subsequent fall in oil prices by devaluing the currency and creating a multitiered exchange system in a bid to stimulate non-oil exports and to double the amount of bolivars received for every dollar from oil sales.

“The economy continues to recuperate,” Chavez said today without referring directly to GDP figures. “We are coming out of turbulence.”

Venezuelan imports and industrial output were hampered after the government dismantled the unregulated currency market on May 18.

Price Band

The central bank now oversees a market that allows currency transactions through the buying and selling of dollar- denominated securities within a price band of about 5.3 bolivars per dollar, compared with an official rate for non-essential goods of 4.3 bolivars per dollar.

The market has traded $1.27 billion to date, an average of $26.43 million per day. The parallel market traded between $80 million and $100 million a day, Alberto Ramos of Goldman Sachs said in June.

Improvements in the flow of foreign currency will ensure that the economy begins to recover in the second half of the year, said central bank board director Armando Leon.

“The third-quarter results will be better,” Leon said in an Aug. 6 interview. “The economy should come out of recession toward the fourth quarter of this year or at least by the first quarter of 2011.”

To contact the reporters on this story: Charlie Devereux in Caracas at Cdevereux3@bloomberg.net Jose Orozco in Caracas at jorozco8@bloomberg.net

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