Venezuelan Economy Grew 5.4% on Spending Ahead of Elections

Venezuela posted economic growth in excess of 5 percent for a second quarter in the three months through June as oil revenue allowed President Hugo Chavez to boost spending on social programs ahead of October elections.

Gross domestic product expanded 5.4 percent from a year earlier, central bank President Nelson Merentes said today in a televised news conference, below the 6.1 percent median estimate of eight economists surveyed by Bloomberg. The central bank revised growth in the first quarter to 5.8 percent from 5.6 percent.

Chavez increased spending 34 percent in the first half of 2012 from a year ago, fueling private consumption, as he seeks to extend his 13 years in power with another six-year term. The self-declared socialist is promoting social programs for the elderly and children in extreme poverty as well as a pledge to eradicate a 3 million-home deficit as cornerstones of his re-election bid in October.

“The expansion of the economy is clearly driven by an expansion in government spending,” said Francisco Rodriguez, an economist at Bank of America Merrill Lynch in New York. “There’s very strong evidence that the economy’s growth rate has an impact on the government party’s electoral performance, especially on the chances of re-election when it’s an incumbent.”

The construction industry, buoyed by government-funded low-income housing projects, expanded a year-on-year 17.6 percent in the second quarter, the bank said. The oil sector expanded 1 percent and the non-oil industry 5.7 percent, while private consumption rose 6.8 percent.

Oil Revenue

Net income for Petroleos de Venezuela SA, the state oil company that accounts for 95 percent of exports, surged 42 percent last year to $4.5 billion as the average price for the country’s crude oil rose to $101.06 a barrel, the highest level for any year on record.

The price averaged $103.47 a barrel in the second quarter, according to preliminary figures from the Oil Ministry.

Chavez’s spending spree has been boosted by development loans of at least $12.5 billion in the past year from Chinese banks. With at least $38.5 billion in loans since 2009, Venezuela has become the biggest recipient of Chinese credit in the region as the nationalization of more than 1,000 companies, the fastest inflation in the region and currency and price controls drive away other lenders.

Venezuela currently sends 264,000 barrels a day to pay off the loans, Oil Minister Rafael Ramirez said Aug. 15, according to El Universal.

Inflation Slows

Annual inflation has slowed for eight consecutive months as the government increases cheap imports and expands price controls. Venezuelan consumer prices rose 19.4 percent last month from a year earlier, the slowest pace in at least three years.

“Lots of countries in the world and in the Americas would like to have 5.4 percent growth right now,” Merentes said. “When the fiscal year ends, let’s see how many countries are above that.”

Manufacturing grew 0.4 percent in the second quarter from the year earlier, while financial institutions rose 34.4 percent. Agriculture expanded 2.2 percent, the bank said.

Venezuela posted a current account surplus of $3.5 billion in the quarter, while foreign direct investment was $1.3 billion. Imports rose 9.1 percent to $13.5 billion in the second quarter, while non-oil exports fell 11 percent.

“Our target for 2012 was for 5 percent and we’re growing above that estimate,” Finance Minister Jorge Giordani said. “We now think it’s possible we’ll grow 5 percent to 6 percent in the next period of government.”

Currency Threat

Venezuela will devalue the bolivar for the third time in as many years after October’s elections to help narrow a budget deficit swelled by Chavez’s spending binge, according to a survey of analysts.

The weakening of the exchange rate and a slowdown in spending after the vote may drive the economy into recession in 2013, according to Bank of America Merrill Lynch.

The government will weaken the official rate 31 percent to 6.2 per dollar in the first quarter of 2013, generating more revenue in local currency from each dollar of oil exports, according to the median estimate of 14 analysts surveyed by Bloomberg in July.

Finance Minister Giordani said on Aug. 7 that the government won’t hesitate to “take measures” if needed, referring to the currency.

Election Race

While economic growth, slowing inflation and a rise in real wages favor Chavez ahead of elections, the race looks closer than in 2006, when he won with 63 percent against 37 percent for opposition candidate Manuel Rosales, said Boris Segura, a Latin America strategist at Nomura Securities International in New York.

Chavez had 45.9 percent support against 45.8 percent for rival Henrique Capriles Radonski in a Consultores 21 poll of 1,000 people taken from June 15 to June 26. The survey had a margin of error of 3.2 percentage points. In a June poll by Caracas-based Datanalisis, Chavez had a 15 percentage-point lead.

“The feel-good factor is there but it’s not as acute as it was in 2006,” Segura said. “He hasn’t been able to spend as much as he did in the last election. In 2006, three months before the election no one was talking about the election because they knew he was going to win.”

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