Country Report Venezuela September 2009

Outlook for 2009-10

• A clampdown on anti-Chavez politicians will reinforce long-standing divisions in the opposition and stymie potential leaders, hampering the opposition's efforts to make gains at the December 2010 legislative elections.
• The government will seek to extend its reach over education and the media. This will arouse local resistance and increase polarisation, potentially setting the scene for widespread social unrest.
• The sharp deterioration of the public finances in early 2009, while spending rose by 12%, is likely to continue, with the underlying fiscal position weakening even further 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 are forecasting a contraction of 3% in 2009 and 3.4% in 2010), reflecting the distortions of the heterodox 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.
• Signs that a dual exchange-rate system could be introduced bode ill for price stability, as the system would deepen economic distortions.
• Weaker oil prices will virtually wipe out the large current-account surplus in 2009. There will be some improvement in 2010, but continued capital flight will force the government to tap international reserves.

Monthly review

• Venezuela's protracted political conflict worsened in August, with the approval of an educational reform law??