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Venezuela Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 47 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. 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.

Table Of Contents

Venezuela Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Data Release Confirms Persistent Economic Challenges8
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 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE : GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS 10
Fiscal Policy And Public Debt Outlook 10
Economic Reforms Are Insufficient But Symbolically Crucial10
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 12
TABLE: MAIN REVENUE AND EXPENDITURES CATEGORIES 12
External Trade And Investment Outlook 14
Severe External Account Weakness Will Persist14
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 15
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE 16
TABLE: TOP 5 GOODS EXPORTS 16
TABLE: TOP 5 GOODS IMPORTS 17
Currency Forecast 17
Immense Pressure On Bolívar Will Persist Following Modest FX Reforms17
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 19
Exchange Rate Policy Framework 18
Regional Economic Outlook 20
Little Respite For Sovereign Risk In 201620
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 and TREND COMPARED WITH 2014 20
Chapter 2: 10-Year Forecast 25
The Venezuelan Economy To 2025 25
Growth Outlook In A Time Of Transition25
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 25
Chapter 3: Political Outlook 27
SWOT Analysis 27
BMI Political Risk Index 27
Domestic Politics 28
Tense Legislative Inauguration Is Prelude To Prolonged Political Discord28
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 28
Structural Politics 29
Structural Characteristics Of Government29
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 31
Structural Challenges Will Keep Tensions High31
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 35
SWOT Analysis 35
Operational Risk Index 35
Operational Risk 36
TABLE: OPERATIONAL RISK 36
Trade Procedures And Governance 37
TABLE: LATIN AMERICA - TRADE PROCEDURES AND GOVERNANCE RISK 37
TABLE: IMPORT AND EXPORT DOCUMENTS 38
TABLE: TRADE PROCEDURES BREAKDOWN 38
Vulnerability To Crime 39
Chapter 5: BMI Global Macro Outlook 43
Global Macro Outlook 43
Tail Risks Mounting Amid Sub-Par Growth43
TABLE: GLOBAL ASSUMPTIONS 43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 45
TABLE: MACROECONOMIC DATA and FORECASTS 47

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