Friday, November 14, 2008

If you look really, really, really, really hard you can just make it out... 

The Venezuelan Central Bank came out with its third quarter GDP numbers yesterday. Sadly, they are nothing to cheer about. Overall growth was a decidedly mediocre 4.6%.

What is so bad about 4.6% when the rest of the world seems to be in an outright meltdown these days you ask?

To see what is so bad about it lets back up a bit. The prime mover of the Venezuelan economy is oil. And this year Venezuelan oil has averaged about $95 per barrel versus $66 last year - this in spite of the recent dramatic drop in prices. That means the prime mover of the Venezuelan economy has jumped by a spectacular 50%.

Given that, the Venezuelan economy should be really cooking. Growth rates of around 9 or 10 percent would be what I would expect to see.

Why isn't that happening? Part of it is intentional policy on the part of the Venezuelan government. Recall that earlier this year the Venezuelan government got it in its head that inflation was public enemy number one. This led them to adopt a number of policies such as slowing government spending, raising interest rates, and raising banks capital requirements (boy don't some other governments now wish they had done this!!) among other things. They knew this would slow growth but thought it would also tamp down inflation.

As it turns out they were right about the former but horribly off the mark on the latter. Inflation continues unabated. But they did get the economy's growth rate to drop quite a bit!! Given what dimwits the people in charge of Venezuela's economy are they probably view this as a success.

However, the worst is yet to come. Sadly the BCV seems to have allowed its presentations to have become politicized with the intent of hiding information. We therefore note that in their press release they give growth rates for various economic sectors such as commerce, communications and construction. But they don't give the overall growth rate for manufacturing. Instead they give it for sub-segments of manufacturing some of which do have higher growth rates.

This led me to guess they were trying to hide something as the the growth rate of manufacturing, which for obvious reasons is a key number, had always been given before. Sadly, when I looked at the detailed numbers on the BCV site I saw that manufacturing growth was a paltry/pathetic/abysmal .3%. No wonder they wanted to hide it.

And be sure to read carefully, there is a decimal point there. It is not 3%; it is .3%.

That is, there was growth in manufacturing but such slow growth it was barely perceptible. So small is it that it is well below the population growth rate and there is simply no way Venezuela is going to develop this way.

Why is Venezuelan manufacturing flat lining?

There are almost certainly two reasons for this:

a) a highly distorted exchange rate makes manufacturing uncompetative with imports.


b) under investment in manufacturing.

Of course, we don't have exact numbers on all of the above. Venezuela for some reason doesn't see fit to publish investment numbers (in and of itself that is a bad sign). But under investment and a distorted exchange rate will lead to declining growth rates. And in fact that is what we are seeing - WELL BEFORE THE DECLINE IN OIL PRICES.

As the saying goes, the proof of the pudding is in the eating. Anyone who is willing to take an honest look at this should be able to see what the eating is like in this case.


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