Venezuela Retail Report Q1 2013

The Venezuelan Retail Report examines the long-term potential of the local consumer market but flagsshort-term concerns about the impact on Venezuela's economic outlook of high inflation, a lack ofinvestment in the productive sectors of the economy, political risk and an upcoming local currencydevaluation.

The report examines how best to maximise returns in the Venezuelan retail market while minimisinginvestment risk, and also explores the impact of deteriorating regional credit risk on the Venezuelanconsumer and on the ability of producers and exporters to realise returns in the short term.

The report analyses the growth and risk management strategies being used by the leading players in theVenezuelan retail sector, as they seek to maximise the growth opportunities offered by the local market.

Venezuelan per capita consumer spending is forecast to increase by a paltry 0.8% between 2013 and2016, compared with a regional average of 17%. The country comes fifth (out of seven) in BMI's LatinAmerican Retail Risk/Reward Ratings, and underperforms significantly for risk.

Among all retail categories, consumer electronics will be the strongest performer through to 2016 ingrowth terms, with sales forecast to increase from US$3.87bn in 2013 to US$4.49bn by 2016, a rise of16. 0%.

In the competitive arena, BMI sees upside potential in government programmes that provide newfinancing options for consumers. Venezuela is not one of the largest markets in the region, but the lowhousehold penetration of many products suggests there is latent growth potential. The market offerscontinued growth potential in key digital product groups such as computers (less than 15% penetration),notebook computers and LCD television sets.

Over the past quarter, BMI has revised the following forecasts/views:

We have revised up our real GDP growth estimate for Venezuela from 3.5% to 4.7% for 2012,and from 2.2% to 2.6% for 2013. Stronger-than-expected credit-fuelled private consumption andgovernment-financed investment have seen real GDP growth come in above our expectations inH112. However, we believe growth will peak in 2012 and slow over the next few years givenpersisting economic imbalances and the political risks associated with the country.

Higher lending rates, combined with the erosion of purchasing power that will result from theupcoming currency devaluation, lead BMI to believe that real private consumption growth willdecline from 5.5% in 2012 to 2.0% in 2013. We therefore forecast private consumption'scontribution to real GDP growth to decline from 3.8 percentage points (pp) in 2012 to only 1.9ppin 2013.

BMI's forecast for slowing private consumption after the October 2012 presidential election islikely to mean that the current acceleration in retail sales is unsustainable. Information compiledby the Central Bank of Venezuela during the first seven months of 2012 reveals that retail salesgrew 8.71% year-on-year (y-o-y). Retail sales peaked in June 2012 at 15.22%.