Venezuela Business Forecast Report Q4 2009

Painful Adjustment Begins The Venezuelan political scene continues to heat up, with key opposition members becoming increasingly outspoken against President Hugo Ch??vez's policies. While Ch??vez's popularity remains strong, the crime rate is soaring and the economy continues to weaken. As fiscal spending is curtailed, we believe that Ch??vez's support base may weaken, which could lead to further radicalisation as the president looks to maintain his popularity. We believe that the Venezuelan economy is already in recession and will remain in recession until 2011. The weakness is the country's balance of payment's position is intensifying as food imports continue apace and oil exports remain subdued. The threat to international reserves from the country's high import reliance continues to grow.

Venezuela's Q109 real GDP figures provided compelling evidence that the country is facing economic stagnation, in our view. Despite the still-positive headline growth figure of 0.3% year-on-year (y-o-y), the overall GDP picture revealed the chronic weaknesses within the country's economy.

Indeed, while the government's all-out expansionary macroeconomic policies managed to squeeze the last drop out of domestic demand, the drain from the external sector showed no sign of letting up. In other words, the readjustments that we believe are necessary for the economy to rebalance and embark on a sustainable recovery were nowhere to be seen. Reflecting the weakness in the economy, the parallel exchange rate continues to depreciate. We see the parallel rate weakening from its current level of VEF*6.5200/US$ to VEF*8.0000/US$ by end-2009 and VEF*9.0000/US$

by end-2010. This would equate to a 200% devaluation from the mid-2008 level. As the adjustment will take place through a collapse in imports rather than a boom in exports, this spells very low growth for the next few years.

We expect Venezuelan President Hugo Ch??vez's popularity to come under increasing pressure as economic conditions deteriorate and fiscal spending constraints begin to bite. In our view, the most likely economic and social policies undertaken from here on are likely to further polarise the Venezuelan public. Given Ch??vez's commitment to restrain the influence of his political opposition, with the implicit support of the courts, we are beginning to doubt the ability of the opposition parties to successfully compete with Ch??vez at the polls, even if his popularity deteriorates. Indeed, with former Maracaibo Mayor Manuel Rosales, an outspoken critic of Ch??vez and a main opposition leader, recently forced to seek political asylum in Peru, the political situation facing the Venezuelan opposition is turning intense. Given these factors, we see an increasing possibility of Venezuela transcending towards a single-party state, and cannot rule out the possibility that Ch??vez becomes increasingly radical and authoritarian, both in terms of political and economic policymaking.

Venezuela's business environment continues to worsen as a result of rising political uncertainty, weakening economic growth, and still-rampant inflationary pressures. Since winning the constitutional referendum, Ch??vez has ramped up his socialist drive and continues to marginalise of private sector enterprise. The operating environment for local and international businesses in Venezuela is becoming increasingly precarious as the dollar shortage continues and the executive considers limiting private-sector profits in certain industries.