Venezuela Business Forecast Report Q3 2008

Publication Date	May 2008
Publisher	Business Monitor
Product Type	Report
Pages	55
ISBN Number	1744-8883
Product Code	BMI02071

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Summary

Cracks Beginning To Show Although the December 007 constitutional referendum defeat brought a more conciliatory tone out of President Hugo Chvez, this has not been forthcoming. Since vowing to slow his ideological reform agenda to concentrate more on tackling some of the country's macroeconomic problems and encourage investment, Chvez has further alienated the private sector with a bout of nationalisations and sporadic confrontational rhetoric. An overreaction to the Colombian government's attack on the Fuerzas Armadas Revolucionarias de Colombia (FARC) on Ecuadorian soil in March almost resulted in conflict, and brought home the fragility of trade ties with Colombia. Meanwhile, economic growth remains very strong, although signs of overheating are becoming increasingly visible. The economy remains extremely dependent on high international oil prices as production continues to decline at a worrying pace. Loose monetary and fiscal policies have driven up domestic prices, and although Venezuela's new finance minister has enacted some monetary tightening, there is a risk that inflationary pressures may continue to grow.

Following Chvez's referendum defeat, the risk that Venezuela could take on the characteristics of a communist state has largely abated and it looks increasing likely that the president will step down when his term ends in 01 . Chvez has taken a less confrontational tone with his political opposition, which may be a sign of weakening political power. Indeed, opposition parties received a large boost from the 'no' vote and have signed an accord to coordinate their efforts in this year's regional elections. We see the resurgence of the previously dormant opposition parties as a positive sign for Venezuelan democracy and believe this will lessen the likelihood of the country moving towards a one-party political system.

Venezuela's macroeconomic climate is likely to remain highly unstable over the course of 008 as demand-supply imbalances continue to widen. Price controls and an overvalued official exchange rate are crushing the non-oil export sector, driving up imports, and stifling production. Extremely favourable external conditions have not been used as a means to implement structural reform, and we see the country struggling to sustain its recent economic performance in the long term.

Inflation is running at 29.1%, which makes the inevitable devaluation of the currency much more problematic. The introduction of the bolivar fuerte on January 1 has done nothing to alleviate this problem.

Venezuela's frail institutional framework will remain a key weakness of the country's business environment, which is reflected in the country's low ranking in our proprietary Business Environment Ratings. While Chvez has acknowledged the need to encourage private investment, his actions continue to speak louder than words; he recently nationalised the cement industry and took control of some food and steel producers. As such, the environment remains very unattractive to investment and we do not expect this to change any time soon. Furthermore, the concentration of power at the top levels of government continues to diminish the effect of checks and balances, thus increasing the scope for arbitrary policy decisions and corruption.

Content

Executive Summary
Frontier Investment
Potential and Pitfalls
The spectacular macroeconomic performance of frontier markets in recent years has been matched by mildly
successful efforts to deepen capital markets
- Table: Frontier Markets - Key Data and Projections For Top 10 Countries
- Table: GDP Per Capita, uS$ (In Order Of % Increase)
- Table: Diversify Through Frontier Market - Correlation Coefficients January 2004-April 2008
- Table: Frontier Market Indices25
Regional Overview
From Hidden Dragons To Final Frontiers
laos
neighbouring economies The Key To Growth
Laos's GDP growth has been boosted in recent years as neighbours China, Thailand and Vietnam compete for
its natural resources. GDP expansion in 2007 has been estimated at 7.6% and we see annual growth remaining
above 7% for our five-year forecast period
Yemen
Huge Potential, But Don't Bank On GCC Membership
Markets do not come much more frontier than Yemen, and, as would be expected, there is huge potential for
development, with the prospect of eventual GCC membership likely to act a key investment pull
- Table: Yemen - economic activity30
Democratic Republic Of The Congo
Mining Industry To Drive Growth
The Democratic Republic of the Congo's mining industry will be a key driver of growth and is likely to attract
significant levels of FDI, with our real GDP forecasts standing at 8.3% and 7.9% in 2008 and 2009, respectively
- Table: Democratic Republic Of The Congo - economic activity32
Cuba
Investment Prospects after Fidel
The accession of a new leadership structure in Cuba has sparked excitement that the 45-year-old trade embargo
with the US may be lifted and Cuba may move toward market liberalisation
- Table: Cuba Macroeconomic Data and Forecasts36
Mongolia
Minerals To Drive economic Boom
Mongolia is in the midst of a massive resource-led economic boom that should lift GDP growth into the double
digits and underpin robust increases in exports and inflows of foreign investment capital over the long term
- Table: Mongolia - economic activity
Chapter 4: Business Environment39
- SWOT analysis39
- BMI Business environment Risk Ratings40
- Business environment Outlook
- Table: BMI Business and Operational Risk Ratings
- Institutions
- Table: BMI legal Framework Ratings43
- Infrastructure
- Market Orientation
- Table: Latin America Annual FDI Inflows
- Table: BMI Trade Ratings48
- Table: export Destinations uS$mn
- Operational Risk
Chapter 5: Key Sector51
- Food and Drink
- Cracks Beginning To Show
Chapter 1: Political Outlook6
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics8
- Old Habits Die Hard
- The recent steps taken towards the nationalisation of Venezuela's cement industry are a further blow to the
- country's business environment in our view, and can be seen as an attempt by President Hugo Chvez to buttress
- his support base ahead of the November regional elections
- Table: Venezuela Political Overview
Chapter 2: economic Outlook
- SWOT analysis10
- BMI economic Risk Ratings
- economic activity
- Private Consumption leads The Way
- The Venezuelan economy grew by a solid 8.5% y-o-y in Q407, mainly on the back of high levels of government
- investment and private consumption, bringing full-year expansion to 8.4%
- Table: economic activity
- Monetary Policy
- Hyperinflation Beckons?
- Our end-2008 consumer price inflation (CPI) forecast of 27.0% remains in play for now, but the recent data
- coming out of Caracas suggest that this figure may be dwarfed
- Table: Monetary Policy13
- Balance Of Payments
- Current account In Surplus But Distortions Grow
- For the first time since the oil industry crisis in 2002, Venezuela posted an overall balance of payments deficit
- in 2007, as the shrinking current account surplus was unable to cover the ballooning capital and financial account deficit
- Table: Balance Of Payments
- exchange Rate Policy
- De Facto Devaluation ahead
- Local news reports and heightened activity in the parallel exchange rate market suggest that the Venezuelan
- government may be shaping up for what we believe would amount to a large unofficial currency devaluation
- Table: exchange Rate Policy
- a Step In The Right Direction
- Venezuela managed to post a record 3.6% of GDP fiscal surplus in 2007, thanks to booming oil and non-oil
- sector revenues and relatively moderate spending
- Fiscal Policy
- no Cash Constraints Here
- Venezuela managed to post a record 3.6% of GDP fiscal surplus in 2007, thanks to booming oil and non-oil
- sector revenues and relatively moderate spending
- Table: Fiscal Policy20
Chapter 3: Special Reports
- Business Outlook For Global Frontier Markets
- Growing Fast On The new Frontier
- The 41 states that BMI examines in a new report on our online service may make up only a small slice of the world
- economy, but they possess characteristics that will see them gain importance in the eyes of investors and global
- businesses over the coming years. With high GDP growth rates, rapidly rising consumer incomes and burgeoning
- commodity resources, these 'frontier markets' merit attention