Venezuela: Economy

The Venezuelan Government dominates the economy. There is considerable income inequality. The Gini coefficient was 0.3902 in 2011. According to government statistics, the percentages of poor and extremely poor among Venezuelan households were 23.8% and 5.9%, respectively, in the second half of 2009. Record government expenditures helped to fuel positive GDP growth of about 4.2% in 2011, after a sharp drop in oil prices caused a global economic contraction in 2009-2010. The Consumer Price Index increased by 27.9% from September 2009 to September 2010, following increases of 25.1% in 2009, 30.9% in 2008, and 22.5% in 2007.

The state oil company, PDVSA, controls the petroleum sector. Government companies control the electricity sector and important parts of the telecommunications and media sectors. In 2008, the government nationalized cement and steel producers, as well as select companies in the milk and meat distribution sectors. In 2009 it nationalized assets in the oil (including assets owned by U.S. oil services companies), chemicals, tourism, agribusiness (including a processed rice plant owned by a U.S. company), retail, and banking industries. In 2010, the government nationalized companies in the agricultural and construction sectors as well as U.S. assets in the petrochemical and packaging industries. Threats of continuing nationalizations, as well as other threats to property rights and an uncertain macroeconomic environment characterized by high inflation and foreign exchange controls, have led to reduced space for the private sector and low levels of private investment.

A number of U.S. companies whose assets have been nationalized in Venezuela have chosen to pursue their claims through international arbitration. On January 24, 2012, the Venezuelan Government formally denounced the International Centre for Settlement of Investment Disputes (ICSID) Convention, triggering its withdrawal from this international arbitration forum. Venezuela’s withdrawal will take formal effect in 6 months. While pending ICSID cases will not be affected by the decision, it will affect the ability of prospective foreign investors in Venezuela to invoke international arbitration.

All requests for foreign exchange at the official exchange rate must be approved by the National Exchange Control Administration (CADIVI), and the Central Bank (BCV) completes all legal purchase and sale of foreign currency. On December 30, 2010, the government set the official exchange rate at 4.3 bolivares per dollar. An alternative exchange market, called the Transaction System for Foreign Exchange Denominated Securities (SITME), is accessed through authorized Venezuelan financial institutions and operates by means of a bond-swap mechanism through the Central Bank. The SITME exchange rate has averaged 5.3 bolivares=U.S. $1 since transactions began in June 2010. Any other foreign exchange transactions are not legally permitted, although a black market is reported to exist. Central Bank international reserves were U.S. $28.4 billion at the end of January 2012.

On August 17, 2011, President Chavez announced his government’s decision to relocate all of Venezuela’s international reserves that were deposited in U.S. and European financial institutions. This included 211 tons of gold reserves to be transferred to the Central Bank of Venezuela and $6.28 billion in cash reserves to be transferred to banks in Brazil, China, and Russia.

Petroleum and Other Resources
Economic prospects remain mostly dependent on oil prices and the export of petroleum. The oil sector accounts for roughly 12% of GDP, 95% of export earnings, and about 40% of the central government’s budget revenues. Venezuela remains an important supplier of imported crude and refined petroleum products to the United States.

In the 1990s, the Government of Venezuela opened up much of the hydrocarbon sector to foreign investment, promoting multi-billion dollar investment in heavy oil production, reactivation of old fields, and investment in several petrochemical joint ventures. By the late 1990s almost 60 foreign companies representing 14 different countries participated in one or more aspects of Venezuela's oil sector. On November 13, 2001, under an enabling law authorized by the National Assembly, President Chavez enacted a new Hydrocarbons Law, which came into effect in January 2002. The new law provided that all oil production and distribution activities would be the domain of the Venezuelan state, with the exception of the joint ventures targeting extra-heavy crude oil production. Private investors cannot own 50% or more of the capital stock in joint ventures involved in upstream activities. The new law also provided that private investors could own up to 100% of the capital stock in downstream ventures. A Gaseous Hydrocarbons law promulgated earlier by the Chavez government also allowed substantial participation by private investors with respect to gas production ventures.

During the December 2002-February 2003 general strike, petroleum production and refining by PDVSA, the state-owned oil company, almost ceased. Despite the strike, these activities eventually were substantially restarted. Out of a total workforce of 45,000, over 20,000 PDVSA management and workers were subsequently dismissed because the government asserted they had abandoned their jobs during the strike. Current levels of production remain a subject of debate, with considerable difference between the levels cited by the Venezuelan Government and those cited by private sector and international observers.

In early 2005, the government informed companies with operating service contracts for mature fields that they must migrate the contracts to joint ventures that conform to the 2001 Hydrocarbons Law. The government threatened to seize fields operating under the services contracts on December 31, 2005 if oil companies did not sign transition agreements to migrate their contracts. All but three companies ultimately signed joint venture agreements with the government. One company was bought out by its partner, while the fields operated by two other companies were ultimately taken over by the government. These disputes were handled by negotiation. In early 2007, President Chavez announced that the Venezuelan Government would take a majority government share in the remaining foreign investments in the oil sector, including the four heavy-oil "strategic associations" in the Orinoco belt. Several international oil companies agreed to migrate their interests to joint ventures with majority government ownership. Two U.S. companies decided to pull out of Venezuela and filed for international arbitration.

In May 2009, the National Assembly passed an oil services sector law reserving to the state all primary hydrocarbons activity. This legislation laid the foundation for the expropriation of nearly 80 oil services companies, including three U.S. firms. The National Assembly in June 2009 passed legislation to require private-sector petrochemicals producers to enter joint ventures with Petroquimica de Venezuela (Pequiven, the state chemicals company), affecting many foreign companies operating in Venezuela.

In February 2010, the government announced winning consortia in the Carabobo bid round, allowing two private sector consortia to negotiate the formation of mixed companies to produce crude and to develop heavy oil upgraders in the Carabobo region of the Orinoco belt. This was the first new bid round in the oil sector conducted since President Chavez came to power in 1999.

Trade, Manufacturing, and Agriculture
Despite political tensions between the United States and Venezuela, the United States remains Venezuela's most important trading partner. In 2011, bilateral trade topped U.S. $55.6 billion. Venezuelan exports to the United States were U.S. $43.3 billion (accounting for at least 42% of total Venezuelan exports), and U.S. exports to Venezuela were $12.4 billion (or 24.2% of total Venezuelan imports). The United States is the single most important customer for Venezuelan oil. Venezuela shipped an average of 987,000 barrels of crude oil and petroleum products per day to the United States in 2010, a figure which accounted for at least half of Venezuelan oil exports and 8.3 % of U.S. oil imports.

Manufacturing contributed about 15% of GDP in real terms in 2009, according to the Central Bank of Venezuela. The manufacturing sector remained hindered by a marked lack of private investment and a highly overvalued official exchange rate that inhibits exports and makes it difficult to compete against imports. Venezuela manufactures and exports steel, aluminum, textiles, apparel, beverages, and foodstuffs. It produces cement, tires, paper, fertilizer, and assembles cars both for domestic and export markets.

Agriculture accounts for about 5% of GDP, 10% of the labor force, and at least one-fourth of Venezuela's land area. Venezuela exports cigarettes, fish (primarily domestically raised crab and shrimp), tropical fruits, cocoa, and manufactured products. The country is not self-sufficient in most areas of agriculture. Venezuela imports about two-thirds of its food needs. In 2009, U.S. firms exported $967 million worth of agricultural products, including wheat, corn, soybeans, soybean meal, cotton, animal fats, vegetable oils, fruits, nuts, dairy products, processed fruits and vegetables, and other items to make Venezuela one of the top two U.S. markets in South America. The United States supplies roughly one-quarter of Venezuela's food imports.

Labor and Infrastructure
Official statistics registered 6.6% unemployment at year-end 2009, although such figures do not account for workers in the informal sector of the economy, who constitute approximately half of the country’s total workforce. The public sector employs about 20% of the workforce. Only 12% of workers are unionized. Of those employed, a significant proportion work in the “informal” sector.

Labor unions allege the government repeatedly violates International Labor Organization (ILO) agreements on freedom of association and the right to organize and bargain collectively. Specifically, the constitution and laws permit undue influence in the internal elections of unions. The government has told the ILO it would correct the problem. Labor reform legislation is expected to be enacted through the president’s decree law authority on May 1, 2012.

Venezuela has an extensive road system. With the exception of air service, transportation has failed to keep pace with the country's needs. Much of the infrastructure suffers from inadequate maintenance. Caracas has a modern subway but only one functioning rail line serves the rest of the country. Venezuela’s ports, recently nationalized, do not currently match the country’s status as a trader. Venezuela’s importers and exporters complain of delays and high costs.

Sources:

CIA World Factbook (April 2012)
U.S. Dept. of State Country Background Notes ( April 2012)

Glossary