IMF downgrades Venezuela's economy

Updated: 2015-01-26 06:18

By PAUL WELITZKIN in New York(China Daily Latin America)

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IMF downgrades Venezuela's economy

Venezuela's President Nicolas Maduro delivers his annual State of the Nation address at the National Assembly in Caracas on Jan 21. Venezuela's recession-hit economy shrunk 2.8 percent in 2014 while inflation topped 64 percent, President Nicolas Maduro said. Jorge Silva / REUTERS

The International Monetary Fund (IMF) is predicting that Venezuela's troubled economy will struggle even more in 2015 as the country contends with oil prices that have fallen over 50 percent from last summer.

In a report issued last week, the IMF said the Venezuelan economy will contract 7 percent this year, a dramatic downgrade from October when the IMF said Venezuela's economy would shrink by 1 percent.

"We are working on the assumption that oil prices will be at least 50 percent lower and this represents a huge negative for Venezuela because the country doesn't have access to the international capital market to help smooth out the effects of lower oil prices," said Alejandro Werner, director of the IMF's Western Hemisphere department at a Jan 22 symposium in New York sponsored by the Americas Society/Council of the Americas.

"The economy was already contracting when oil was at $100 a barrel," Werner said. It now trades for about $46 a barrel in New York. Oil accounts for more than 95 percent of Venezuela's export earnings.

He also said the downturn will lead to more shortages in Venezuela, where the ailing economy has led to a deficit of basic goods and has induced panic buying.

At the same time the IMF was releasing its report, Venezuelan President Nicolas Maduro announced in a national address a boost in wages and dismissed talk of a currency devaluation. He didn't propose changes to price and currency controls, which some say are fueling the country's high inflation.

"The scarcity will probably get worse over the next weeks, the people won't be happy, and we could see some social pressure emerge," Henkel Garcia, director of Econométrica, a local economic consultancy said in a Christian Science Monitor newspaper report on Jan 22. "These decisions are not sufficient for the complexity of the current crisis," Garcia said of Maduro's response.

The IMF is not the only organization that thinks the Venezuelan economy will decline dramatically this year. According to a research report from Barclays reported in the Los Angeles Times earlier this month, the investment concern said that after a "devastating" shrinkage in Venezuela's economy by a negative 4.4 percent in 2014, total economic output of goods and services will shrink by a further 6.2 percent in 2015.

Meanwhile, Werner believes that the improving US economy will benefit Mexico because of its close proximity. "Mexico will benefit from the rebound in the US economy, which will be driven in part by lower oil prices," he said. The IMF thinks the US economy will expand 3.6 percent in 2015.

Werner said that Mexico has hedged the price of oil this year so lower prices will not have the same impact as on Venezuela.

Joydeep Mukherji, managing director in the Latin America sovereign ratings group at the McGraw Hill unit Standard & Poor's, told China Daily that oil accounts for about a third of government revenue in Mexico. "Mexico has already hedged oil prices for this year so the government will not suffer that much," she said.

Mexico has also initiated energy reform to allow outside investment in its oil, natural gas and electricity sectors, and Werner said it will be interesting to see "what happens to energy projects in this price environment."

Mukherji said low prices may hold back investment in Mexico's oil sector. "Mexico has just opened its energy sector to outside and foreign investment and the country was counting on that to finance an expansion of its oil facilities. The low prices may mean that investors will not be interested in investing until the price recovers," he said.