Venezuela’s Economy Expanded 0.3% in First Quarter (Update2)

May 19 (Bloomberg) -- Venezuela’s economy grew at the slowest pace since 2003 in the first quarter as factory output contracted and export revenue declined on a plunge in oil prices.

The economy grew 0.3 percent from a year earlier, the central bank said today in an e-mailed statement. Gross domestic product expanded less than the 1.5 percent median forecast of 14 economists in a Bloomberg survey.

“We’ve got falling revenue from oil sales, and that’s led to lower government spending,” Miguel Carpio, an economist at Banco Federal CA in Caracas, said in a telephone interview. “For the year, I doubt there’s going to be any growth.”

Carpio expects the economy will contract 2 percent this year, as the fastest inflation rate in Latin America erodes purchasing power and diminishes the impact of government spending. Government expropriations in the oil, banking, cement and steel industries are also discouraging private investment.

Venezuela’s oil sector shrank 4.8 percent in the first quarter, its first contraction in four quarters, the central bank said. Manufacturing fell 1.1 percent, and mining output shrank 13.6 percent.

Oil export revenue in the OPEC country plunged 56 percent in the quarter from a year ago, the bank said. The private sector grew 0.8 percent, while the public sector contracted for the first time since 2003, falling 0.4 percent.

Public Sector

“The contraction in public sector growth is the result of lower oil revenue,” said Alberto Ramos, an economist at Goldman Sachs Group Inc.

Domestic demand grew 1.3 percent in the quarter, down from 3.4 percent growth in the fourth quarter of last year and 6.5 percent in the same quarter a year ago.

“Private consumption is slowing very fast, and that’s the main driver of the Venezuelan economy,” said Juan Pablo Fuentes, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “No one is investing with these expropriations.”

President Hugo Chavez cut the 2009 federal budget by 6.7 percent, raised the sales tax and announced plans to sell 34 billion bolivars ($15.8 billion) in domestic bonds this year to cover a budget deficit. Venezuela depends on oil exports to finance half the budget, and crude prices have plunged 59 percent since touching a record in July.

Capital Investment

The central bank highlighted one area where it said growth was strong -- capital investment.

“The economy’s performance in the first quarter of the year was determined, principally, by the significant increase of 11.6 percent in gross capital investment,” the bank said.

The country had $826 million in net foreign direct investment in the quarter. Re-invested profits accounted for $503 million. The oil sector saw no foreign investment, the central bank said.

Venezuela had a $3.5 billion current account deficit, and a $10.5 billion capital account deficit in the quarter, the central bank said.

Venezuelan consumer prices rose 31.9 percent last year, and Goldman’s Ramos expects a 25 percent inflation rate in 2009, more than the government-mandated 20 percent increase in the minimum wage.

“There’s been a loss of real disposable income because of the acceleration in inflation,” Ramos said in a telephone interview.

The economy is also slowing because of the shrinking supply of dollars at the pegged exchange rate of 2.15 bolivars per dollar.

In a bid to save its dwindling hard currency, the government agency that authorizes dollar purchases at the official rate cut sales 35 percent in the first quarter, restricting imports of consumer goods.

“The government is really trying to cut spending, as they promised to do,” said Fuentes. “It’s bad for the economy because it was one of the main drivers for growth.”

To contact the reporter on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net.

Last Updated: May 19, 2009 18:27 EDT