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Venezuela Country Risk Report Q2 2016

Venezuela Country Risk Report Q2 2016

Core Views Low oil prices, high inflation and a poor business environment will see Venezuela's recession stretch into its third year in 2016. Major political gains on the part of the opposition in December's legislative elections will result in a gradual turn towards more orthodox economic policy, although the pace of change will be substantially hampered by the institutional strength of the PSUV and the power of the executive branch. Political risk will remain elevated due to deteriorating living standards and lack of confidence in leadership to competently govern. Inflation will remain elevated, at the highest level in Latin America, and the operating environment will remain very precarious for foreign multinationals in the country. Major Forecast Changes We have downgraded our real GDP growth forecasts for 2016 and 2017, due to a further downgrade to our oil price forecasts, an upgrade to our inflation expectations and our view that policymaking will still be inhospitable to private investment. Following inflation of 180.9% y-o-y in 2015, we expect inflation will accelerate, rather than slow, in 2016. We forecast average over 250.0% over the course of the year, and remain above 200.0% at year-end.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Data Release Confirms Persistent Economic Challenges
The long-awaited release of a range of macroeconomic indicators in Venezuela confirms our view that the economic challenges that
have long confronted the country became significantly more severe in 2015. Despite the prospect of economic reform following the
opposition MUD coalition's rise to power in the legislature, the country will experience another year of recession and world-leading price
growth in 2016.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE : GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Economic Reforms Are Insufficient But Symbolically Crucial
Recently announced reforms are an important symbolic step forward for the administration of President Nicolás Maduro, demonstrat
ing that the PSUV is willing to move in a pragmatic direction. Nevertheless, the specific changes outlined by Maduro will be far from
sufficient, and we expect further reforms ahead given the country's debt payment requirements and as the government seeks to mitigate
the economic crisis.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURES CATEGORIES
External Trade And Investment Outlook
Severe External Account Weakness Will Persist
Sustained weakness in oil prices will erode the value of Venezuela's exports and ensure that the country's balance of payments position
remains very weak in the next few years. Financial account inflows will remain subdued at best, making it increasingly challenging to
fund the shortfall.
Outlook On External Position
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS EXPORTS
TABLE: TOP 5 GOODS IMPORTS
Currency Forecast
Immense Pressure On Bolívar Will Persist Following Modest FX Reforms
Venezuela's decision to merge two out of its three exchange rates demonstrates that policymakers are cognizant that the multi-tiered
FX regime creates unwanted market distortions and poses enormous challenges to firms planning for the future. Nevertheless, a full
unification will be delayed by political dynamics.
TABLE: YEARS-LONG DEVALUATION IN ALL BUT NAME
Exchange Rate Policy Framework
Regional Economic Outlook
Little Respite For Sovereign Risk In 2016
Sovereign risk will remain high in Latin America's major economies in 2016 as low commodity prices constrain government inflows,
leading to widening fiscal deficits and increased government borrowing.
TABLE: KEY MACROECONOMIC INDICATORS - 2016 FORECASTS & TREND COMPARED WITH 2014
Chapter 2: 10-Year Forecast
The Venezuelan Economy To 2025
Growth Outlook In A Time Of Transition
Although the Venezuelan economy is likely to experience difficulties over the next few years, we believe there is significant economic
growth potential over the long term.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Tense Legislative Inauguration Is Prelude To Prolonged Political Discord
Although Venezuela's incoming parliamentary majority will help to improve the country's business environment and macroeconomic
stability, the heightened political tensions in the weeks leading up to the National Assembly's session underscore deep political divides
that will undermine a rapid reform agenda.
TABLE: POLITICAL OVERVIEW
Structural Politics
Structural Characteristics Of Government
Venezuela's opposition has enough seats for a strong majority in the National Assembly, but the strength of the executive branch will
preclude an abrupt shift in policymaking or macroeconomic governance.
Long-Term Political Outlook
Structural Challenges Will Keep Tensions High
Venezuela's political outlook is inextricably connected with its economic future. With the economy looking weak, Maduro could well lose
office before his term expires in 2019.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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