Venezuela: Risk Assessment
Country Risk Rating
|E||The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Economic activity set to continue shrinking in 2016
Economic activity in Venezuela is expected to continue shrinking in 2016. On the one hand, it is still affected by the erosion of household purchasing power due to the rising inflation and, secondly, by the persistent decline oil prices which limits public spending on various social benefits for the disadvantaged. Industrial activity will continue to be held back because of the backlog in terms of production capacity and the low level of diversification associated with the difficulties of obtaining imported capital equipment and intermediate products. The productive capacities of the agriculture sector, suffering from insufficient investment and neglect in favor of the oil sector, will also slow any upturn in activity. The stalling in private investment should continue despite the likely gradual removal of import and currency restrictions. Caution among local and foreign investors because of legal uncertainty is also likely to lead to further outflow of capital from the country. Inflation is likely to remain high, fueled by the rapid expansion in the money supply and the bolivar’s strong depreciation faced to the dollar.
Very worrying fiscal and external vulnerabilities
In 2016, the fall in the price of oil - which is responsible for almost half of budget revenues, will be the main challenge facing the public finances. Continually weak oil prices will seriously limit the government's room for maneuver and make the danger of a Venezuelan default on foreign debt increasingly plausible. The country narrowly avoided a default in 2015 thanks to Chinese loans and once again, managed to honor its debt deadline in February 2016 (USD 1.5 billion). The two most important settlements (around 4.8 billion USD) are scheduled for October and November of this year. The chaotic economic situation associated with the arrival of opposition into power during the legislative elections, which took place on December 2015, has obliged the president to operate a tighter fiscal policy.
In terms of foreign trade, oil accounts for 96% of Venezuelan export earnings. Persistently low oil prices together with declining production, a result of low investment, are going to continue to impact on the current account balance in 2016. In addition, the volumes delivered to China (subject to opaque contracts) are also likely to increase, at the same time as the outstanding Chinese loans these volumes are used to repay. Paradoxically, oil products are also the second largest item in Venezuelan imports because of the inefficiencies of its local refineries. The lack of competitiveness of the almost non-existent manufacturing sector is another factor inhibiting the growth of non-oil exports. FDI is at a very low level because there is uncertainty about the country's legal framework and recourse to bilateral loans cannot restore the balance of payments, leading to a decline in its reserves and the soaring of US dollar on the parallel market.
No economic strategy from right’s party in Venezuela
The MUD (Mesa Unitaria Democratica) coalition of 25 opposition parties won a majority of seats in the December 2015 parliamentary elections, bringing to an end the left dominated movement created by former President Hugo Chavez sixteen years ago.
Despite the enthusiasm for this victory, the opposition seems not to have an alternative strategy to redress the country's economic and political crisis in which it is immersed. Opposition seems more interested in reforming constitution which aim is to revoke the President Nicolas Maduro’s mandate. This benefits the current president who decided to enact an “emergency economics’ plan” in January 2016 for a period of 2 months renewable (the President can dictate economic, political and social’s measures during this period). One of the first steps was to increase the price of oil (oil super now costs 6 bolivars per liter against 0,097 bolivars), a first for almost 20 years (although the price remains particularly low). It also authorized a devaluation of 58% of one of the three rates of exchange prevailing in the country, used for the purchase of essential goods, which aim would be to boost local production. While necessary, these measures seem still insufficient to redress the economic situation of the country which depends heavily on the evolution of oil prices.