External Expansion Limited

Wednesday, 19 March 2014

THE INTERNATIONAL TRADE SITUATION OF VENEZUELA

Given the different social manifestations now a day in Venezuela, we would like to analyze this country to see its the role in international trade and how it plays in foreign markets to understand the issues that affect their society.
Venezuela is a country with a positive trade balance, as its economy is export-oriented, its main economic activity from exploitation and refining oil for export as well as supplying the domestic market. This situation has allowed Venezuela to become the fifth largest Latin American country after Brazil, Mexico, Argentina and Colombia economies. The exploitation of Venezuelan oil is made by their own state company called “Petroleos de Venezuela SA (PDVSA)”. The origins of oil exploration began in 1875, afterwards they moved towards the process refinery products, until 1922, starting with the large-scale exploitation which allowed a change in the direction of the country. Venezuela is one of the founding countries of the Organization of Petroleum Exporting Countries (OPEC). Prior to the change of course, Venezuela had its axis being in the farm at the time exporting coffee, cocoa, cattle, sugar, brown sugar, snuff, balata, cattle hides and rubber.
Dependence on hydrocarbon exports has increased against the rest of the developing country exports and currently still developing but decrease exponentially even failing to satisfy the domestic market. The data demonstrated this statement indicate that in 1999, exports of goods and oil service in that year represented 76% of exports, rising to 86 % in 2005 and 96% in 2012. With the expansion oil came the countryside abandonment, as even the wages and quality of life were higher in the oil industry instead of agriculture. The large-scale exploitation flooded the market with an abundant supply of labor in this sector, enabling the country to grow up per capita income beating countries with similar geographic characteristics of the region, which led the country begins to have significant inflation even higher than they have today.
Besides exporting oil, Venezuela exports iron, steel, aluminum and articles thereof, coal, chemicals and other basic industries, which together contribute 4% of the foreign exchange earned by the country. The value of non-oil exports have suffered a serious setback, because in 1998 passing of 5.529 millions dollars to 3.771 millions dollars in 2012. In return, the country imported goods and services worth to 15.492 billion dollars in 1998 passing to 65.360 billion dollars in 2012. Imports are mainly of processed products to be accentuated year after year due to the growing need for existing machinery and spare parts, whether electrical or electronic. The main buyers of Venezuela´s exports are US, Colombia, UK, Netherlands Antilles, Japan, Mexico, Italy, Germany, Brazil, Canada, France and Spain. Trade has increased with the member countries of the Andean Community of Nations, Community and Common Market of Caribean (CARICOM), the Central American Common Market (CACM) and the Southern Common Market (MERCOSUR).
The country's main industry is the hydrocarbons and their derivatives, leaving Venezuela as the nation's ninth global oil exporter. This activity is mainly concentrated in the mining fields of Lake Maracaibo, Barinas-Apure Basin and the eastern. The state company PDVSA manage this resource. There are data regarding production levels PDVSA company in order to keep people focused on the goodness of this resource which is then often different from reality and often fall into contradictions, being the subject of much controversy in the country.
In 1998 PDVSA with 36.000 employees producing 3 million barrels per day, while in 2011 with just over 121.000 workers fail to produce over 4 million a day. Recruitment of staff increased by 336% to increase only 30% of oil production in the term of 12 years, a fact that demonstrates the ineffectiveness of governments that have opted for one sector over the other leading to country to lose productive capacity and competitiveness. In late 2013 Venezuela exported about 1.3 million barrels of oil keeping the same template, due to production quotas imposed by OPEC.
Meanwhile, the mining industry, which has one of the largest reserves of iron in the world has been falling in the recent years, taking back to a public company (SIDOR) that manages the extraction and processing of this metal. In 1997 the company was privatized, and in that period a wave of privatizations due to lack of oil revenue, which allowed obtaining necessary currencies to convert certain industries were inefficient in productives. Through privatization, the company increase production until 2008 was again nationalized, an event which again demonstrates the failure of a state, as the company has again cut production, producing only 45% of its installed capacity in 2013. Other non-oil minerals that the company operates are bauxite and gold that is not reached intensively exploited yet due to lack of investment of the state.
For its part, the agriculture industry has two warring federations livestock production: FEDENAGA (Traditional) and FEGAVEN (Allied government), which involves getting conflicting statistics between the private sector and government. However, the reality of the data indicate that the production of agricultural products such as milk and meat from two decades ago were much higher and amounted to provide a much higher percentage of domestic consumption of these foods. There are figures indicating that Venezuela came to produce 80% of these foods while now must import 50%. In the case of milk production fell 33% in 2012 as price controls imposed by the government. Also, we can see that the same thing happened in production of rice and maize are reduced year after year. In 2007, white maize one of the highly demanded products internally in the country allowed to self-sufficiency, going to have to import up to 55% of this product in 2012. In data, maize production was located above one million tons, of which 789.000 tons were of white corn, the main ingredient for making arepa. The processing industry demand precooked 1.5 millons tons of cereal per year. Of that, 53.54% is contributed by domestic production and 46.46% is supplied through imports.
It is noted that in the food industry, "Empresas Polar", is the second private company in the country after it PDVSA has expanded internationally. This company is a supplier of food across the country, in the last year suffered delays in supplying supermarket chains, mainly due to the delays the company itself remains in debts with international suppliers that will facilitate the premiums to manufacture staples that are part of the food basket of the Venezuelan people, as the government maintains outstanding authorized many foreign currency payments. The company has confirmed that the delays in the settlement of foreign currency that allow them to pay their debts with external suppliers go from 141 days to 769 days, affecting reception or delays in new batches of these raw materials and consequently produces shortages. The company processes precooked flour, corn oil, pasta, rice, white corn, yellow corn, sugar drinks among other foods that are affected by these delays. Other factors affecting the delay in delivery of food are too bureaucratic, as the company accuses the Superintendency of Agricultural Silos and Storage Tanks for delays in the delivery of permits and guides for moving food, affecting this year supply Barinas, Mérida, Táchira and Zulia, even though the company has the products and raw materials in stock to supply the demand.
The scarcity of everyday goods has become the particular phenomenon of the Venezuelan economy in which the government has tried to intervene through a policy of regulated prices mainly in milk, meat and oils between other products. For its part, the government relates to the shortage increased consumption of the population that can not be quickly satisfied and the existence of hoarding and smuggling, when in fact, price controls to a value below the cost of production before the rise in prices of raw materials, and excess monetary liquidity to a system of little domestic agricultural production, are the lack of such shortage. While smuggling is a fact recognized by all, because in Venezuela there are several cheaper products than in Colombia, Brazil and other neighboring countries, this is not the main reason for the shortage and this problem would end with greater border controls, combating corruption that allows this to happen and with a system of free trade among countries in the region to allow equal competition between them.
Another policies which are missing in Venezuela, is the incentive to the country's tourism industry, as they have great potential for the amount of attractive landscapes they have, but they lack policies that favor the development of this sector and infrastructure investment today suffer very precarious, improve currency instability, as well as combat insecurity from lack of use that has been culturally ingrained and it is endemic in all Latin American economies, affecting local people and tourists visiting the country.
Following is preferential policies hydrocarbons sector, Venezuela has become very dependent on imports of agricultural products, where the main importer is the Venezuelan state. The data show that total imports of the country between 1997 and 2009 represented in average 16% of total foreign purchases happening in 2011 to represent 35% and 64% in 2012. Imports of many products that came before exported mainly focus on the food sector in particular items such as milk powder, sugar, poultry and beef, rice, corn and coffee. The product mostly imported is milk powder. In 2013, 50% of the food consumed in Venezuela were imported. Other products in which the government has embarked to import are weapons, being justified by Chavez to replace weapons already expired and probably some fear of American reaction to the verbal outrages against them rushing. This led to Venezuela was the largest importer of weapons in South America, its main supplier are Russia with 66%, followed by Spain 12% and China with 6% of these imports.
Consequently, Venezuela's GDP unexpectedly fluctuates due to its higher dependency to petroleum, which sometimes helps to overcome the crisis, but not enough due to the weak non-oil sectors, capital flight and unfavorable fluctuations in oil prices. In 2003, due to serious political instability, many social conflicts and cessation of activities of PDVSA, the Venezuelan economy experienced a fall of 7.7% of GDP, what led the government to establish a change in control buying and selling currencies. Chavez reached winnig the elections after a year of growth for the economy, which in 2004 saw a GDP growth of 17.9%, allowing the president to undertake social investments in education, health foods and increased quality lives of the poorest citizens. Its mandate was followed by several years of boom and high growth rates due to record exports, which accounted privatizations significant growth in non-oil activities such as financial institutions, insurance, communication, construction and other services. In 2007, was announced a currency redenomination to sanitize reduce inflation but with results far from what they expected. Nor forget, were years of consecutive increases in oil prices reaching a record high in the year 2008-2009, which also generate substantial foreign exchange reserves that allowed the Chavez government to increase public spending helping to fight poverty and reduce it. Later, with the crisis of 2008-2009 the price of oil began to decline taking the country to a very high inflation rates accompanied by falls in GDP for that year and subsequent, leaving Venezuela within the regional context well below other countries in Latin American and the Caribbean, as it not only oil prices fall, but also the global crisis affected the demand for this product because all countries reduced their productivity and energy consumption. For 2011 the Venezuelan economy back to the path of growth and a slow recovery, being announced in 2013 a major devaluation and a new one in 2014 which led to an increase in inflation plus population fatigue. We should note that the government increases the debt in order to maintain public spending, but they do at higher than revenues derived from oil and other sectors currency suppliers who later will allow you to pay your debt levels worldwide. Faced with a reduction in the price of oil in Venezuela the situation could be more complicated, since the country's debt would currently 70% of GDP according to independent studies in a cycle of high oil prices.
Venezuela needs to change its business strategy towards foreign investment in agriculture in order to supply its domestic demand. The deterioration of the domestic productive apparatus, due to little policy focused on growth of domestic agriculture, has resulted that the country has become more dependent on imports than it was a decade earlier. Analysts believe that as long as resources through oil revenues will be food security, but that policy as well as being unsustainable over time is harmful and we see that is starting to take its toll on the government of Maduro.
The government has undoubtedly favored the less fortunate and consequently improved their quality of life. However, these policies that rely solely on the profits made by the oil sector imply a steady increase in inflation, rising external debt and shortages of basic foodstuffs for the population, which leads to significant distress in a large majority opposed to government policies, and soon reach the brake investments by the state in other basic services such as education and health, as they can not increase oil exports and may maintain the constant current increase debt with third countries.
The Venezuelan government is facing a major change in its internal and external policies, but so far seem not to want to recognize their current situation and needs to claim his people, so let's hope this does not lead to a further deterioration of their situation internal where definitely will be harmed are the Venezuelans.
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Until the next article...

Leonardo Dufau
LinkedIn

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