Country Report Venezuela September 2008

Outlook for 2008-09

• Regional elections scheduled for November 23rd will indicate whether the new movements that contributed to Mr Chavez’s defeat in a December 2007 referendum will be able to harness rising discontent with his government.
• 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, decree laws passed in July signal a radical increase in state encroachment on the productive sector and weakening of property rights.
• 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

• On the eve of the expiry of his decree powers, Mr Chavez announced a raft of new legislation. Criticism has focused on the politicisation of the armed forces, the erosion of property rights and the centralisation of policymaking.
• The opposition has agreed on a single candidate for the November 23rd local and regional elections in all but three states, compared with the government, who is fielding a united candidate in only 10 out of 23 states.
• Agriculture has been seriously affected by the decree laws unveiled in late July. A centralised council will decide on which goods should be produced and consumed by region, while "essential" goods are liable for expropriation.
• The government has seized the assets of a Mexican cement company, Cemex, following the breakdown of talks over compensation for its nationalisation.
• Mr Chavez announced that the state will acquire Banco de Venezuela, owned by Spain's Santander. Although it appears that this is a one-off acquisition, the government has attracted criticism for its growing economic presence.
• GDP growth picked up to 7.1% in the second quarter of 2008, owing to a recovery in domestic demand, boosted by increases in transfers and subsidies.
• High oil prices boosted the current-account surplus to US$16.8bn in the second quarter of 2008.