Archive for February 12th, 2010

Veneconomy on the electric crisis and GDP growth in Venezuela

February 12, 2010

Veneconomy in its weekly publication attempts to estimate the effects of the electricity crisis on the economy. His conclusion is that the economy will shrink by at least 8% in 2010, ignoring the effects of the banking crisis which has destroyed almost 10% of the money in circulation. I have shortened the article to eliminate hings that have been said in the blog already

The real costs of the electricity crisis by Veneconomia

This presidential decree – like everything else the Chávez regime has said or done in relation to the national electric­ity crisis – is no more than noise, smoke and mirrors. Moreover, the “investments” the regime pledges to make, including $4 billion in 2010 to add 4,000 MW of genera­tion capacity, are an illusion at best, and outright lies at worst. Nothing the Chávez regime attempts will reduce the electricity supply deficit in less than three to five years, and the rationing the country will suffer until at least 2012, if not longer, will have an immense cost in terms of lost eco­nomic growth. Meanwhile, the question that most economists and analysts are only just starting to seek answers to is this: How much could the electricity crisis re­ally cost Venezuela?

VenEconomy has attempted to calculate an approximate answer to this critically important question. It’s not simply a case of how much the regime can or should spend, but rather how great might the over­all economy’s losses be while the electric­ity crisis lasts. The baseline employed for the following estimates is a proposal made by a group of analysts including experts from Simon Bolivar University, who pro­posed “reprogramming” all of the country’s “commercial and industrial ac­tivities to four days a week,” and reduc­ing all activities on Sundays to the maximum possible extent. Moreover, these experts suggest that a four-day work week and three-day weekend should be contin­ued until Guri Dam’s reservoir refills and the government restores the thermal power generation park to full operational capacity including the completion of all planned new generation projects. This would achieve the desired electricity con­sumption savings of 20% which the gov­ernment has set as its official short-term conservation target.

However, there’s an important glitch in this proposal’s basic assumptions, which is that this plan only would have to be maintained until the rains return to Ven­ezuela, presumably in May or June.

VenEconomy believes this core assump­tion is mistaken. The electricity deficit will persist for two-three years, or more. Even President Chávez acknowledged just two Sundays ago that Venezuela’s electricity crisis would be worse in 2011 than in 2010. This indeed is a very ominous admission,considering Edelca’s warning that it could be forced to shut down 5,000 MW of Guri’s hydropower generation capacity before end-May 2010, triggering what Edelca calls a “national collapse” due, in part, to the fact that Guri water is what powers the downstream hydroelectric plants.

VenEconomy thinks that the country faces at least three years of permanent electricity rationing.

VenEconomy’s initial crude calculation was that a four-day work week would cost Venezuela the equivalent of 20% of GDP over the course of 12 months. Obviously, most of that loss would be compensated for via increased output of goods and ser­vices over the four working days. Thus, VenEconomy thinks a decline of 5% of GDP is almost certain, to which another 3% of GDP contraction would accrue from the near-total shutdown of the basic indus­tries in Guayana.

As a result, VenEconomy’s preliminary estimate is that the crisis will cost the na­tion the equivalent of 8% of GDP in 2010, plus another 6% in 2011 (assuming that Chávez is mistaken in saying that 2011 will be a worse year for the electricity sector than 2010), and a further 4% in 2012, for a total cumulative three-year contraction equivalent to 18% of GDP, for a total of some Bs.F.5,000 (in today’s bolívars) for every man, woman and child in Venezuela.