Country Report Venezuela November 2009

Outlook for 2010-11

• Ongoing economic problems will increase public frustrations with the government, but a clampdown on anti-government activities will constrain an already weak and divided opposition.
• Mr Chavez will continue to use foreign policy in an attempt to deflect attention from economic difficulties and rally his supporters around the claim of external threats.
• A bounce-back in average global oil prices in 2010-11 will provide a partial boost to central government income, but the underlying fiscal position will remain extremely weak as significant expenditure is channelled off-budget.
• In contrast with most other countries in the region, a recovery in real GDP in 2010 is unlikely (we forecast a contraction of 3.4% in 2010 and only weak growth in 2011), reflecting the distortions of the policy framework.
• Tighter import restrictions, upward adjustments to some fixed prices and the monetisation of the fiscal deficit will result in a rise in inflation in 2010-11.
• It appears that the authorities will seek to retain a single fixed exchange rate, rather than introducing a dual system. Even assuming step devaluations from 2010, the currency will remain significantly overvalued.
• The current account will continue to register a small surplus, but capital flight will force the authorities to draw down on international reserves.

Monthly review

• Although a lack of consensus within the opposition alliance is damaging its approval ratings, a recent opinion poll has confirmed that support for the PSUV is also falling. The only group that is growing is non-aligned voters.
• Critics claim that Mr Chavez has been gradually seeking to replace the professional military with a more politicised force and that a recent reform to the armed forces marks a further step towards that goal.
• The issuance of US$8bn in bonds by PDVSA in mid-October has failed to close the wide premium between the official exchange rate and the black-market rate.
• A reform to the Central Bank has raised serious concerns about its ability to control inflation. The bank will now be able to purchase PDVSA debt, but monetary growth will rise sharply as it prints money to fund the purchases.
• The fact that the authorities have assumed a growth rate of just 0.5% in the 2010 budget has underscored the still-weak prospects for next year.
• Leading indicators from the third quarter point to a deepening of the recession.

Source: Country Report