Macroeconomic Performance and Stability of Venezuela Economy

The present study provides an overview on the macroeconomic performance of the Venezuela economy for the past ten years. This analysis has been done with the help of economic indicators such as real gross domestic product, public debt, rate of inflation, Interest rates, current account surplus as percentage of GDP, exchange rate trends and unemployment rates. The Venezuela economy is mainly based on petroleum and manufacturing industry. This study also focuses on the macroeconomic stability and policy of the Venezuela economy. The future of the Venezuela economy depends on the government's ability to implement effective economic policies and stabilize the political situation.

Running head: ECONOMICS ASSIGNMENT
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Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Part A : Economic performance Indicators.....................................................................................3
Macroeconomic performance of the Venezuela economy over the past 10 years...........................3
Economic growth of Venezuela economy.......................................................................................3
Public debt as percentage of GDP...................................................................................................3
Rate of inflation...............................................................................................................................4
Interest rate......................................................................................................................................4
Current account surplus/deficit as percentage of GDP....................................................................5
Exchange rate trends........................................................................................................................6
Unemployment rates........................................................................................................................7
Part B: Macroeconomic stability and policy...................................................................................8
Evaluation of how 2007-2008 GFC affected Venezuela economy.................................................8
Economic policy approach to economic stabilization used by government..................................10
Analyzing changes in Key economic performance indicators......................................................10
Assessing economic outlook of Venezuela economy....................................................................12
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

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Introduction
The present study provides an overview on the macroeconomic performance of the
Venezuela economy for the past ten years. This analysis has been done with the help of
economic indicators such as real gross domestic product, public debt, rate of inflation, Interest
rates, current account surplus as percentage of GDP, exchange rate trends and unemployment
rates. The Venezuela economy is mainly based on petroleum and manufacturing industry. This
country has experienced huge growth since the global economic crisis. The present economic
expansion of the Venezuela is due to oil boom that is driven by rise in the oil prices in the past
and is heading for bust. The Venezuela economy still remains in dire straits. Despite increase in
oil prices, the production of oil has continued to decrease steadily. In the past few years, the
political circumstances has began to stabilize throughout the economic expansion. This economy
has continuous economic growth since onset of political stability. The real GDP has increased at
high rate since the year 2003. Recent evidences reflect that government expansionary monetary
as well as fiscal policies, and exchange controls have highly contributed to the present economic
upswing. This study also focuses on the macroeconomic stability and policy of the Venezuela
economy. This section reflects on the analysis of how the GFC has influenced on this economy
and the economic policy approaches to the economic stabilization used by the government. The
vital changes in economic indicators and present outlook of this economy has been discussed in
this segment.

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Part A : Economic performance Indicators
Macroeconomic performance of the Venezuela economy over the past 10 years
Economic growth of Venezuela economy
Over the past ten years, the Venezuela economy dismiss the present economic expansion
as oil boom that might end in disastrous bust as occurred before the Global Financial crisis
(GFC). According to the current data, the real GDP of this economy has increased at an average
of about 98.32 USD billion from the past few years. The real GDP of this economy reached the
highest in the year 2014. Since first quarter of the year 2003, this economy has increased at high
rate. The fastest rising industries during this period has been insurance, finance. Other fast-
growing industries involve trade and repair services, construction, transport and communication.
In fact, the manufacturing sector has been increasing with around 91% growth over the past ten
years.
Public debt as percentage of GDP
Public debt as on its percentage of GDP that is utilized by the investors to estimate
nation’s ability for making future payments on the debt, thereby impacting the nation’s
borrowing cost as well as government bond yields. Venezuela has recorded government debt
around 23% of the nation’s GDP in the year 2017. The public debt as percentage of GDP has
averaged to around 42.39 % over the past few years, reaching all time high at 72.30% in the year
2013 and low at around 20.30% in year 2008. Over the past ten years, the public debt as
percentage of GDP in this economy has fluctuated at high rate. The percentage of GDP of this
economy increased after the recession period (2008-2010) but again slowed down during the
year 2015-2017.

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Rate of inflation
The rate of inflation in Venezuela economy has averaged to near around 13.55% from the
year 2008 to 2018, reaching all time high at 200 % in the year 2018 and low at around 0.80%
imn the month of April 2012. This nation has experienced double digit inflation rates and hence
has huge fluctuation over the years. Owing to huge current account surplus, large reserves and
lower foreign debt, the government of this country has integrated several tools for stabilizing as
well as reducing inflation rate. The policymakers of this country has slowly brought currency
into alignment without even sacrificing the economic growth. However, at present it did not
appear that present economic expansion is about to end in near future. The present state of this
economy is termed as hyperinflation. Both economic as well as political reasons have led to
rapid rise in inflation rate in this economy. On the political side, shortage of necessity goods
have caused riots as well as political instability. On the economic side, decline in price of oil has
led to huge decrease in total revenue from export of oil.
Interest rate
The benchmark rate of interest in the Venezuela economy has been 20.56 %. The rate of
interest of this nation has averaged to near around 23.68% for the last few years. The below
figure reflects that the rate has been more or less stable during the period 2008 to 2018. During
the recessionary period, the interest rate of this economy was high. But this rate declined after
this period and again increased since the year 2015.

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Figure : Interest rate of the Venezuela economy over the last ten years
Source: (worldbank, 2018)
Current account surplus/deficit as percentage of GDP
The Venezuela economy has recorded current account surplus of around 2% of this
nation’s GDP in the year 2017. The current account as percentage of Venezuela GDP has
averaged to around 4.29 % during this period. The current account value declined since the year
2008 but this became deficit during the period 2014-2016. Over the years, this economy has been
heavily dependent on the export revenues along with high savings rate but weaker domestic
demand.

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Figure : Current account surplus as percentage to GDP of Venezuela over the last ten years
Source: (tradingeconomics. com, 2018)
Exchange rate trends
As per US Federal Reserve, Venezuela – US foreign exchange rate was near around
9.975 Venezuelan Bolivares to around1 US $ in the year 2017. Historically, US – Venezuela
exchange rate reached at high rate of around 9.975 in 2017, which was quite higher than past ten
years. The figure below reflects that the value of exchange rate increased at high rate during the
period 2008-2018. It has been stated by some economists that the currency of Venezuela is 30%
overvalued in relation to dollar (reuters, 2018). However, it discourages development of the non-
oil industries mainly the manufacturing sector. It usually makes imports more cheap and exports
expensive on the global market, thereby putting nation’s tradable goods at disadvantage in
international as well as domestic markets. This in turn creates long term development issue and
also consists of distortions as well as inefficiencies connected with system of the exchange
controls a s well as parallel market.

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Figure : Trend of exchange rate of Venezuela over the past ten years
Source: (tradingeconomics.com, 2018)
Unemployment rates
This macroeconomic indicator signifies the total number of unemployed individuals as
percentage of labor force. The rate of unemployment in the Venezuela economy has been more
or less stable over the last ten years. The labor force in this nation involves those people who are
unemployed but does not involve those persons who are searching for jobs. The data published
by world bank also highlights that the rate of unemployment has declined sharply during the
economic recovery (Mankiw, 2014). The rate has decreased from 16.78%in the year 2003 to
6.85% in the year 2007. Since then it has been quite consistent until the present year. Therefore,
this reflect significant improvement in labor market of this country. Decline in unemployment
rate has occurred due to increase in around 1.9 million jobs in private sector and near around 478
jobs in public sector. Private employment has been higher than the government employment in
this nation during this period. Furthermore, improvement in Venezuela’s labor market occurred

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as the total number of individuals who were out of laborforce for education increased by around
3.4 % points in relation to labor force.
Figure : Unemployment rate in the Venezuela economy over the last ten years
Source: (worldbank, 2018)
Part B: Macroeconomic stability and policy
Evaluation of how 2007-2008 GFC affected Venezuela economy
The economy of Venezuela slowed down in the year 2008 to around 4.9% growth rate
from 8.4% in the year 2007. This slowdown occurred due to the government efforts in slowing
inflation in the year 2007. During this GFC period, the monthly inflation reduced from 20.4% to
15.3% before increasing again. After the GFC, the inflation rate increased to double and thus
affected consumers purchasing power. In addition to this, public sector formation of capital led
to slowdown in growth (Wise et al., 2015). During the year 2008, total capital formation declined
by around 1.5%. Like that of other developing economies, the Venezuelan economy faces

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several challenges after this GFC period. Numerous people residing in this nation became
unemployed. However, the unemployment rate in this nation increased above the target level.
Besides this, the Venezuelan economy did not attain foreign direct investment (FDI) from US or
any other developed economies, which have been hit by GFC as well as economic slowdown. It
also affected on the events that occurred in this country. In fact, the export and import in this
country were also adversely affected due to GFC. In terms of aggregate demand and aggregate
supply model, the aggregate demand of this economy shifts in leftward direction. But the short
run aggregate supply curve shifts in rightward direction. As a result, the price level declines and
output also decreases. This is illustrated in the diagram below-
Figure : AD-AS Model
Source: (Mankiw, 2014)
The above diagram shows that aggregate demand shifts in the leftward direction from
AD1 to AD2. The economy therefore shifts from A to B in short run. Output declines from Y1 to
Y2 and level of price also decreases from P1 to P2. Adjustment of expected price level,

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aggregate supply in the short run shifts in rightward direction from AS1 to AS2. Thus, the
economy moves to C where new AD intersects long –run AS. However, the price level declines
to P3 and output returns to natural rate.
Economic policy approach to economic stabilization used by government
The major determinant of the Venezuelan growth during the year 2009 and 2010 was the
size, efficacy and speed of the fiscal stimulus. The Venezuelan government has adopted several
economic policy approaches in order to stabilize the economy after the GFC. The policymakers
of this country has announced huge public expenditure program of near around $12 billion or
around 3`6% of GDP. The policymakers of this country has also integrated effectual stimulus
package that might keep economy on steady growth path (Hamdi & Sbia, 2013). The
government of this country has done huge investments in the infrastructure and other public as
well as private investments, which in turn increased total productivity over the past few years. In
fact, Venezuela under the Chavez government has managed to attain huge success in reducing
poverty through various redistributive policies such as land reform in rural as well as urban
areas, public education, distribution of food, health care clinics and micro- credit lending.
Besides this, the finance ministry of this economy dollars in bonds that is to be sold within the
country. This in turn has provided institutional investors and citizens with huge opportunity to
attain currency controls. However, this economic policy approach has helped them to stimulate
investment and protect from investors.
Analyzing changes in Key economic performance indicators
An analysis of the key economic performance indicators reflect that the Venezuelan
economy has been unstable after the GFC. This economy is in full recovery after recession
period, which in turn improved the economic health of this nation. The unemployment rate in the

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Venezuelan economy reduced and thus it led to rise in total formal employment in the job
market. However, advancements in the employment to efforts of Chavez administration led to
improvement of living standards. On the contrary, the inflation rate of this economy doubled
after the GFC. This in turn increased the purchasing power of the consumers, thereby adversely
influencing the citizens of this nation. Moreover, this also led to political turmoil and drained
businesses drained out of the nation. Giacalone & Ruiz, (2013) has found out that the face of
poverty rate also changed after the GFC. The economy has high poverty rate, which in turn
negatively affected those people who are finding for jobs.
Figure : Economic growth of Venezuela after the GFC
Source: (worldbank, 2018)

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Assessing economic outlook of Venezuela economy
The prospects of the Venezuelan economy remains grim. The economists have predicted
that the economy will be continuing to be battered by huge hyperinflation, declining production
of oil and misalignments of exchange rate (.focus-economics, 2018). Despite hovering oil prices,
the production of oil has continued to decline steadily. In addition to this, hefty financial
obligations overhangs state-run oil entity PDVSA adds to several sectors issue. The government
of this country has limited accessibility to international financing owing to financial sanctions
adds to the nations woes. Provided the severity of crisis, the conditions might emerge for
political transition. The overvalued fixed exchange rate along with high rate of inflation presents
intermediate- term issue. Although inflation rate is stabilized as well as starts to decline as it
remains at present levels and nominal exchange rate stays fixed, the currency of Venezuela
might become overvalued in the real terms. This might squeeze the domestic production of oil
and gradually become unsustainable.
Conclusion
From the above discussion, it can be concluded that the Venezuelan economic growth
rate has shown negative trend over the last ten years as per world bank report. The inflation rate
also increased double during this period. Besides this, the poverty rate remained high during this
period as the rate of unemployment has remained higher. But still the employment level in this
nation increased in the formal job market. The government of this nation has adopted several
measures to reduce inflation, increase employment and stabilize growth in this economy.

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References
Giacalone, R., & Ruiz, J. B. (2013). The Chinese–Venezuelan Oil Agreements: Material and
Nonmaterial Goals. Latin American Policy, 4(1), 76-92.
Hamdi, H., & Sbia, R. (2013). Dynamic relationships between oil revenues, government
spending and economic growth in an oil-dependent economy. Economic Modelling, 35,
118-125.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Naím, M. (2013). Paper Tigers and Minotaurs: the politics of Venezuela's economic reforms.
Brookings Institution Press.
Wise, C., Armijo, L. E., & Katada, S. N. (Eds.). (2015). Unexpected outcomes: How emerging
economies survived the global financial crisis. Brookings Institution Press.
www.focus-economics.com (2018). Venezuela Economy - GDP, Inflation, CPI and Interest Rate.
Retrieved from <https://www.focus-economics.com/countries/venezuela> (online)
[accessed on 19th October 2018].
www.reuters.com (2018). Venezuela exchange rate fluctuation sparks price surge. Retrieved
from https://www.reuters.com/article/us-venezuela-economy-forex/venezuela-exchange-
rate-fluctuation-sparks-price-surge-idUSKBN1AP2LM (online) [accessed on 19th
October 2018].
www.tradingeconomics.com (2018). Lending interest rate (%) | Data. Retrieved from
<https://data.worldbank.org/indicator/FR.INR.LEND?locations=VE>. (online) [accessed
on 19th October 2018]

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www.ttradingeconomics.com (2018). Venezuela Current Account to GDP | 1980-2018 | Data |
Chart | Calendar. Retrieved from <https://tradingeconomics.com/venezuela/current-
account-to-gdp> (online) [accessed on 19th October 2018]
www.worldbank.org. (2018). GDP growth (annual %) | Data. Retrieved from
<https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=VE> (online)
[accessed on 19th October 2018]