Venezuela: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

After two years of recession, sluggish growth in 2011
The country in 2010 showed the worst performance in South America, staying in recession. Despite the rebound in oil prices, activity remained hampered by the sluggishness of the petroleum industry and a crisis in the electricity sector while heterodox policies have generated massive inflation and undermined consumption and investment.
In 2011, the Venezuelan economy has recovered the path of growth, but it has remained sluggish after two years of recession. Growth is sustained by consumer spending which is supported by increased public spending thanks to high oil prices. However oil production is decreasing by lack of investment while the recurrent power cuts have constrained the recovery capabilities of the industrial sector. In the absence of reforms and appropriate measures, inflationary pressures have persisted while the lack of investor's confidence has fuelled continuous capital flight, hampering domestic engines of growth, private consumption and investment. Unemployment has remained high.

Public finances under strain and increased risk of a liquidity crisis
Budgetary policy has remained expansionary in 2011, in anticipation of the 2012 presidential elections. The public sector balance should continue to post a large deficit despite high oil prices. The government has no more stabilization funds and public financial management remains marked by the recourse to extra-budgetary commitments, via the National Development Fund (FONDEN) and PDVSA, the publicly-owned oil company. The opaque nature of public accounts, mismanagement of oil revenues, the impact on government spending of the current series of nationalizations (estimated at $20 billion, or over 9% of GDP), and the unpredictability of President Chavez (as regards the willingness to pay) result in significant sovereign default risk.
Despite a very large current account surplus, official foreign currency reserves have dwindled. This reflects CADIVI's efforts to support the currency, which remains overvalued, notwithstanding its devaluation early 2010. Despite strengthened exchange controls, capital flight has persisted. The Bolivar's depreciation on the grey market reflects a crisis of confidence in the national currency that could lead to a foreign exchange liquidity crisis and a new devaluation of the official exchange rate.

A deteriorating banking sector
The key indicators of the banking system remained relatively satisfactory in 2010 despite the crisis, but they could deteriorate in 2011. This situation stems from ongoing government interference and constraints (seven banks were nationalised in 2009). The deterioration in the quality of bank portfolios observed late 2010 could accelerate in 2011.

A precarious political environment
The radical policies of President Chavez, in economic matters (increasing interventionism and nationalisations) as well as in political arena, affect governance, the business environment and private enterprise. Moreover corruption and insecurity have reached alarming levels.
While the legislative elections of September 2010 constituted a setback for H. Chavez (loss of the two-thirds majority), they do not prevent the government from keeping a simple majority, or from pursuing heterodox economic policies. But the outlook is uncertain in view of the President health.

Strengths

• Major oil, gas, and mining resources, with considerable oil reserves in the Orinoco delta
• Hydrocarbon wealth provides economic strength to extend Venezuela’s regional political influence
• The US is the principal customer for Venezuelan oil, despite political differences
• External financial position in significant surplus

Weaknesses

• Economy over-dependent on oil (90% of exports, half fiscal revenues and a third of GDP)
• Opaque and discretionary management of oil revenues
• Production capacity of publicly-owned oil company, PDVSA, limited by insufficient investment
• State interventionism and corruption affecting the confidence of the private sector and making economic diversification more difficult