Country Report Venezuela October 2008

Outlook for 2009-10

• Mr Chavez will encounter growing problems in 2009-10, as an expected poor performance in local elections in November 2008 emphasises the divisions within his own party.
• The opposition's internal divisions will prevent a major political realignment in the near term, but an economic crisis—provoked by the distortions of the current policy framework—could engender a more radical political upheaval.
• Although the government is unlikely to move towards full state control of the economy, a radical increase in state encroachment on the productive sector and a further weakening of property rights is likely.
• The central government surplus will fall sharply during 2009-10, in spite 0f still-high (albeit falling) oil prices. The true fiscal position will be even 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.
• Given problems with inflation, 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

• Several radical gestures by Mr Chavez, particularly on the foreign policy front, appeared designed to distract attention from domestic problems and boost his support base ahead of local elections in November.
• Domestic developments reflected a similar strategy, particularly the revelation by a government-run television programme of an alleged coup and assassination plot against the president.
• The authorities have been preparing the 2009 budget. The government has made several statements alluding to the need for fiscal austerity, but rising off-budget spending and significant additional expenditure makes this unlikely.
• Sharp rises in public spending during the first half of 2008 widened the central government deficit.
• High oil prices increased net profits at PDVSA.
• Inflation has continued to rise, reaching 34.5% in August. Although food and drink prices remain the main source of inflationary pressure, sharp rises in other goods indicate that price pressures have spilled into other areas.
• Growth of monetary aggregates has remained strong.

Source: Country Report