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Venezuela Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

Low oil prices, high inflation and a poor business environment will see Venezuela's recession stretch into its third year in 2016, and persist until 2018. Major political gains on the part of the opposition in December's legislative elections will result in a gradual turn towards more orthodox economic policies, although the pace of change will be substantially hampered by the institutional strength of the Partido Socialista Unido de Venezuela (PSUV) and the power of the executive branch. Political risk will remain elevated due to deteriorating living standards and lack of confidence in leadership's ability to govern competently. Inflation will remain elevated, at the highest level in Latin America, and the operating environment will remain precarious for foreign multinationals in the country.Major Forecast Changes With investment at a stand-still and consumption plummeting, we have downgraded our real GDP growth forecasts for 2016 and 2017. We forecast the economy to contract by 9.8% in 2016 and by 2.3% in 2017.

Table Of Contents

Venezuela Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
The Worst Has Yet To Pass............................................................................................................................................................8
Venezuela will remain in a deep recession over the coming quarters as a result of low oil prices and severe macroeconomic
mismanagement. While gradually rising oil prices will temper the depth of the recession over the coming quarters, substantial
improvements will depend on the implementation of wide-ranging reforms.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Moderate Revenue Gains Will Offer Little Respite.....................................................................................................................11
Venezuela's fiscal deficit will remain extremely wide, as revenue growth trails inflation and expenditures remain elevated. Although rising
oil prices and a managed depreciation will improve revenues beginning in 2017, Venezuela's fiscal dynamics will see little fundamental
improvement over the coming years.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURES CATEGORIES..........................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Oil Sector Headwinds Will Keep Current Account In The Red..................................................................................................14
The impact of lower oil export earnings and political pressure to provide imports will result in a wide current account deficit in
2016. A shortfall will persist over the next several years, while a lack of investment will result in a continued drawdown of foreign
reserves.
Outlook On External Position.................................................................................................................................. 16
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE....................................................................................................................................16
TABLE: TOP 5 GOODS EXPORTS.........................................................................................................................................................................17
TABLE: TOP 5 GOODS IMPORTS..........................................................................................................................................................................17
Currency Forecast.................................................................................................................................................... 18
Government's Managed Back-Door Devaluation Will Continue Apace...................................................................................18
The rapid depreciation of Venezuela's secondary exchange rate will see the weighted average exchange rate fall significantly in the
coming months. This will help to reduce import demand and help support the government's debt servicing.
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Venezuelan Economy To 2025......................................................................................................................... 19
Growth Outlook In A Time Of Transition.....................................................................................................................................19
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. In our view, a more moderate and market-friendly government which is willing to make the
necessary structural reforms is needed to unlock this potential.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics..................................................................................................................................................... 22
Referendum Delay Will Ensure PSUV Dominance.....................................................................................................................22
Venezuela is likely to hold a referendum on President Nicolas Maduro's leadership in 2017, which will result in his ouster. However, he
will be replaced by his vice president, which will underpin continuing political unrest in response to a dismal economic outlook.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................22
Long-Term Political Outlook................................................................................................................................... 23
Structural Challenges Will Keep Tensions High........................................................................................................................23
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. Regardless of who rules Venezuela, the country will face formidable challenges, such as
excessive state control, high inflation, corruption, violent crime and rapid brain drain.
Chapter 4: Operational Risk................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk....................................................................................................................................................... 28
TABLE: OPERATIONAL RISK.................................................................................................................................................................................28
Market Size And Utilities.......................................................................................................................................... 29
TABLE: LATIN AMERICA - MARKET SIZE AND UTILITIES RISK.........................................................................................................................30
Labour Costs............................................................................................................................................................ 33
TABLE: REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE...............................................................................................................34
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
EMs Past The Worst, But Structural Problems Persist.............................................................................................................37
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................37
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................38
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................39
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................41

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