Country Report Venezuela June 2008

Outlook for 2008-09

• Mr Chavez’s defeat in the December 2007 referendum on constitutional reform will give a boost to the beleaguered opposition. However, its internal divisions will prevent a major political realignment in the near term.
• The government will continue to use the state’s wealth of energy resources as leverage to deepen diplomatic and commercial relations with countries it considers “friendly” within and outside the region.
• The government is unlikely to move towards full state control of the economy, but further nationalisation in “strategic” sectors will curb private investment.
• The central government accounts will remain in surplus, by virtue of high oil prices, but the true fiscal position will be worse, as an increasing burden of expenditure will be placed on PDVSA and Fonden.
• Deficiencies in the policy environment and a stabilisation of fiscal revenue will combine to produce a deceleration of GDP growth in the forecast period.
• Assuming that oil prices stay high, the authorities will not devalue the bolivar until 2010. Sales of US dollar-denominated assets will increase, but will be insufficient to close the gap between the parallel and official exchange rates.

Monthly review

• Mr Chavez's PSUV held primary elections on June 1st to select candidates for regional elections scheduled for November 23rd. The process confirmed that deep divisions remain within the movement, undermining unity.
• In mid-May, Interpol announced that information on a laptop seized during a raid on a FARC camp in Ecuador—which pointed to a close relationship between Venezuela and the Colombian group—had not been tampered with.
• Financial institutions were instructed to sell structured notes (mostly dollar-denominated securities) that had been bought from foreign banks, in an attempt to narrow the spread against the parallel market exchange rate.
• The central government deficit widened in the first two months of the year, owing to sharp increases in spending.
• GDP growth slowed sharply in the first quarter of 2008, to 4.8% year on year. Higher inflation is eroding real incomes, while rising interest rates are hitting consumer purchasing power, slowing private consumption growth.
• High oil prices boosted the current-account surplus in the first quarter of 2008, but this was offset by a significant increase in the capital-account deficit, forcing the government to draw down US$3.8bn in international reserves.