Venezuela Will Survive Oil Price Drop

International
Venezuela Will Survive Oil Price Drop
Oxford Analytica, 11.13.08, 06:00 AM ESTBut doubts remain over the long-term sustainability of the country's economic policies.
Unsurprisingly, the sudden decline in oil prices has provoked concern within the Venezuelan government. On Sept. 20, President Hugo Chávez called for "austerity" in the 2009 budget and this call been repeated by senior government ministers since.
Short-term outlook. However, it is improbable that Venezuela's economy faces imminent collapse:
--The government has planned its budget very conservatively. In 2007 it calculated oil revenues on the basis of an oil price of $29 per barrel, 56% under the eventual 2007 average of $65. For 2008, the government has budgeted $35 per barrel; the expected 2008 average is more than 270% higher.
--The government has the buffer of around $40 billion in foreign exchange reserves at present, and tens of billions in discretionary government funds.
--Since the government assumed effective control over Petroleos De Venezuela, SA (PDVSA) in 2003, following the end of an opposition-led strike, there has been a recovery of , as well as rapid economic expansion.
2009 economic prospects. On Oct. 2, ex-Central Bank head Domingo Maza Zavala reportedly stated that if oil prices went below $90 a barrel in 2009, Venezuela would be unable to cover the $60 billion in projected imports and debt servicing). However, oil production figures of 2.4 million barrels per day for 2007 suggest that Venezuela could cover this amount with an average oil price of just over $67.8 per barrel in 2009--above the government's proposed budget estimate of an average of $60.
It is worth noting that in the medium term state oil company PDVSA faces the possibility of capacity constraints. Nevertheless, in addition to its international reserves, Venezuela's relatively low public debt means it could be well placed to access international , even amid the implosion of global capital markets. The strategic and security concerns that have resulted in closer ties between Venezuela and countries such as China and Russia could also lead to an increase in borrowing options. For example, Venezuela has borrowed $8 billion from China in 2008 to date, and China offers an important and growing oil market and source of financing for Venezuela.
Comment On This Story
Given this, Venezuela is likely to be able to continue its high public and social spending in 2009, policies which form the bedrock of the government's and Chávez's popularity. In the event that public spending should need to be cut, the government has stated that it will target medium- and long-term investment projects rather than politically sensitive social spending.


Strategic Analysis Provided by Oxford Analytica
Export Growth Stalls In Pearl River Delta
Russian Real Estate Market Softens
The Misalignment Of Dubai, Abu Dhabi
Latin America Combats Credit Crunch
Venezuela Will Survive Oil Price Drop
Outlook. Despite various warnings to the contrary, the evidence does not seem to indicate that Venezuela's economy is under immediate threat from declining oil prices. Moreover, the government seems likely to be able to continue its high levels of social spending in 2009. In the medium term, while it is still too early to assess properly how the global financial crisis will affect countries such as Venezuela, it is likely to compound a number of pressing economic problems such as the high rate of inflation. In the longer term, doubts remain over the sustainability of Venezuela's economic policies, specifically the increasing dependence of the economy on oil given the government's stated long-term development strategy of diversifying the economy away from oil.
To read an extended version of this article, log on to Oxford Analytica's Web site.
OxfordAnalytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visitoxan.com. To find out how to subscribe to the company's Daily Brief Service, clickhere.
You may also sign up to The World Next Week, Oxford Analytica's free weekly service providing depth and context to next week's important international issues.