Venezuelan Recession Deepened After Electricity Cuts

By Daniel Cancel and Corina Rodriguez Pons

May 25 (Bloomberg) -- Venezuela’s economy fell deeper into recession in the first three months of the year as electricity rationing decimated manufacturing and investment dried up because of government takeovers.

Gross domestic product shrank 5.8 percent in the first quarter from a year earlier, the central bank said today in a statement. Economists forecast a 7 percent decline, according to the median estimate of 11 analysts surveyed by Bloomberg.

“This is the worst performing economy in Latin America,” Alejandro Grisanti, an economist at Barclays Plc in New York, said in a phone interview before the report. “The government expropriations are weighing on production and it’s impossible to have adequate investment in that kind of climate.”

Venezuela, South America’s biggest oil producer, is entering a second year of recession as President Hugo Chavez’s nationalization drive saps investment and his price and currency controls squeeze industrial output. The International Monetary Fund forecasts that Venezuela will be the only country in South America to see a decline in GDP this year.

“The results show Venezuela is experiencing stagflation due to much reduced economic activity,” Boris Segura, an economist at RBS Securities Inc., said in a telephone interview.

Industrial production plunged 9.9 percent in the first quarter after Chavez ordered 20 percent cuts in electricity usage because of a severe drought that threatened to collapse the power grid. Inflation has accelerated to a seven-year high, with prices rising 31.9 percent in April from a year ago.

Financial Industry

In the first quarter, transport fell 15.9 percent, commerce shrank 11.6 percent and the financial industry contracted 9.7 percent, the central bank said. The decline stems from reduced imports, electricity rationing and the fall in investment.

Venezuela’s oil industry contracted 5 percent, the non-oil sector fell 4.9 percent in the quarter and private consumption dropped 5.9 percent, the bank said in the report.

Chavez, who devalued the bolivar Jan. 8, said April 26 that the economy may shrink for a second straight year as it sheds “capitalist” consumption habits. GDP will probably shrink 2.4 percent in 2010, according to the median forecast of nine banks including Bank of America, Merrill Lynch and Citigroup Inc. The economy contracted 3.3 percent during 2009.

State oil company Petroleos de Venezuela SA slashed output last year by more than 300,000 barrels a day in line with OPEC production quotas. The company says it produces 3 million barrels a day while Bloomberg estimates show that it produced an average of 2.18 million barrels a day in April. Oil exports fell 5.9 percent in the quarter, the bank said.

The mining industry plunged 4.8 percent in the first quarter.

Foreign Investment

In December, Venezuela halted some production lines at state-run aluminum companies Alcasa and Venalum as well as two units at Siderurgica del Orinoco’s steel mill known as Sidor, to save electricity.

The government posted a current account surplus of $7.2 billion in the quarter while the capital account had a $11.5 billion deficit.

Venezuela had a $3 billion direct investment outflow in 2009 as companies pulled capital out of the country following nationalizations in the steel, cement, oil and food industries.

Chavez reacted to the economic recession and fall in oil revenue by devaluing the currency and creating a multi-tiered exchange system in a bid to stimulate non-oil exports and to double the amount of bolivars received for every dollar from oil sales.

Venezuela may be facing a cash crunch as oil output wanes, Morgan Stanley said in March. Venezuela’s economic recovery may also be hindered because of the recent fall in commodity prices spurred by concern about European government debt. Oil, which accounts for 94 percent of government export revenue, tumbled to a seven-month low on May 20.

Venezuelan imports and industrial output may be further hampered after the government dismantled the unregulated currency market on May 18 that companies used as an escape valve to obtain dollars through bond swaps at brokerages.

The central bank will now oversee currency transactions through the buying and selling of dollar-denominated securities within a price band. The bank, which said the system would take at least two weeks to get started, may not be able to supply enough dollars to meet demand.

Venezuela imported about 30 percent of its goods last year through the unregulated currency market, or about $12 billion worth, according to Barclays Plc.

“These poor results are basically due to the electricity crisis but also the lack of dollars injected into the economy by the government and central bank,” Segura said. “Importers have been strangled and that brought negative effects for investment.”