Country Report Venezuela October 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.
• The president, Hugo 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 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

• Clashes between protesters and the National Guard in late August over the government's controversial new education reform have raised concerns that the authorities are attempting to criminalise protest action.
• Reflecting rising tensions between the government and the media, the authorities have announced the imminent closure of another 29 radio stations, and a sixth investigation of Globovision, a television news channel.
• There have been several announcements in the energy sector that the government claims will lift production sharply in the medium term. However, an unfriendly business climate could jeopardise investment plans.
• According to the Ministry of Finance, the stock of domestic public debt jumped from BsF31bn at the end of 2008 to BsF44bn in June 2009, mostly reflecting increased bond issuance.
• A sharp fall in non-oil export earnings has highlighted the ongoing deterioration of the business environment and reinforces the extent to which the economy is becoming dependent on the oil sector.

Source: Country Report