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Venezuela Business Forecast Report Q4 2008Published by: Business Monitor International Published: Jul. 28, 2008 - 51 Pages Table of Contents
AbstractPrepare For landingAfter five years of above trend economic growth, the Venezuelan economy has begun to showsigns of a slowdown. The distortionary policy mix in place has reduced incentives for private sectorinvestment and domestic production is failing to keep up with oil-driven domestic demand. Thehighest inflation rate in Latin America has been a by-product of this demand-supply imbalance. Theauthorities are seeking to encourage private production through subsidised loans and the removalof price caps on certain goods, which may help, although we believe that the overvalued exchangerate will continue to undermine these efforts. The historical driving force behind Venezuelan economicgrowth has been the oil sector, and we expect this to remain the case. We are forecastinga sharp slowdown in economic growth over the coming years as the authorities attempt to rein ininflation, although high oil prices should limit the downside to domestic demand. With regional elections scheduled for November, we expect to see a rise in short-term political riskas President Hugo Chávez, under increased pressure from a strengthening right-wing opposition,seeks to rally round his supporters using nationalistic rhetoric. Moreover, we believe the macroeconomicenvironment, which policymakers have begun showing an increasingly responsible attitudetowards (illustrated by the recent easing of fiscal spending and money supply growth) will deteriorateas politically driven spending aggravates inflation - which in turn will weigh on Venezuelan debtmarkets. Over the longer term, with Chávez now facing a more credible and moderate opposition,we see scope for the stabilisation of the political climate, which will reduce the capacity for Chávezto enact aggressive socialist reforms. This may create attractive opportunities given the country’sabundant natural resources and geographical location. The Venezuelan economy looks to be finally running out of steam. It expanded by 4.8% year-on-year(y-o-y) in Q108, in line with our view that a hard but necessary landing is in store. We see growth endingthe year at 5.8% before falling to 2.5% in 2009. We view the moderation as part of a structural changewithin the economy, and believe that a decline in imports and private consumption is necessary tobring the economy back into equilibrium and alleviate inflationary pressures. Consumer price inflation(CPI) rose to 32.2% y-o-y in June, its highest rate in five years. We believe that the situation is likelyto deteriorate before it gets better. Indeed, reductions in price and exchange rate controls, which areneeded to raise domestic production, could see the headline inflation rate accelerate over the comingquarters. We have raised our end-2008 CPI target to 32.0% from 27.0%, and our end-2009 target to34.0% from 26.0%. We expect to see the rate decline thereafter as domestic demand slows. The ongoing threat of socialist reforms, a highly overvalued exchange rate, and price caps on certaingoods continue to weigh heavily on the Venezuelan investment climate. A frail institutional frameworkis also a key weakness of the business environment, which is reflected in the country’s low ranking inour proprietary Business Environment Ratings. While Chávez has acknowledged the need to encourageprivate investment, the possibility of further nationalisation decrees remains high. In a positivedevelopment, state-owned oil company Petróleos de Venezuela (PdVSA) has said in a statement thatit will hold bidding rounds open to private companies for three blocks in the Orinoco heavy oil belt. Get Full Details About This Report >> |
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