MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month: Chávez 55% (65%)
Five‑Year: Chávez 45% (55%)

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
   

Turmoil

Financial Transfer Direct Investment Export

Market

18‑Month: High C- C- C-
Five‑Year: High C- C- (D+) C-
( ) Indicates change in rating.   *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
 

Years

Real GDP Growth %  

Inflation %

Current

Account ($bn)

2006-2010(AVG) 3.7 24.3 20.97
2011(F) 2.4 27.3 22.10
2012-2016(F) 3.0 24.2 11.20

Chávez as Defiant as Ever

President Hugo Chávez dropped a bombshell in early July, acknowledging via a videotaped address that he has been diagnosed with cancer. The president is currently undergoing chemotherapy, but he insists that he feels fit, that he is confident of overcoming his health troubles, and that he fully intends to stand for another term at a presidential election that has been scheduled for October 7, 2012. A lack of details about the location and type of cancer makes it difficult to assess whether that is a realistic possibility, but in the absence of incontrovertible evidence that he will not be able to stand for re-election, it must be assumed that he will…

Chávez’s opponents believe that he is politically vulnerable, and are counting on his defeat in a fairly fought election to ensure a stable political foundation from which to begin dismantling the institutional underpinnings of the leftist leader’s “Bolivarian revolution.” The opposition’s hopefulness is hardly quixotic, but the prospects for success will dim considerably if the parties in the MUD coalition fail to unite behind a single candidate. The anti-Chavez alliance is planning to choose a joint candidate at a primary election in February 2012, and it is far from certain that the MUD will survive the process intact…

In Chávez’s favor, the economy appears to have pulled out of recession, thanks to high prices for oil and healthy government spending. The debt troubles in Europe and growing doubts about the sustainability of the US recovery point to a global growth slowdown that will impact negatively on oil prices over the remainder of the year. High levels of pre-election government spending will sustain positive growth, but the pace of expansion is forecast to slow over the coming months, holding the annual growth rate to 2.4%…

A Hostile Climate for Private Businesses

Over the last decade, the government has nationalized or otherwise tightened its control over oil and gas production facilities, oil service companies, banks, iron and steel manufacturers, and food processors. The government has also taken over the operations of individual firms in such diverse lines of business as glass manufacturing, agricultural supplies, and production of motor oil and fertilizer…

If Chávez harbors concerns that the electorate has grown weary of “21st-century socialism,” he is not showing it. Since going public about his illness, Chávez has announced the nationalization of the country’s gold-mining operations, initiated a plan to repatriate some $11 billion of gold reserves currently held in banks in London, the US, and Switzerland, and secured passage of legislation that strictly regulates the prices of food, construction materials, health services, medicines, and education…

The most recent moves suggest that he has decided he would rather lose pursuing the cause of revolution than win by abandoning his principles, and there is no reason to expect that he might alter course if that strategy garners him another term in 2012…

The diversion of funds from the state oil company, PDVSA, to finance the government’s generous spending on social programs has left the company without sufficient resources for investment. As a result, PDVSA’s daily production is estimated to have fallen by about one-third since 1998, when output amounted to 3.3 million bpd…

Any chance of producing even moderate levels of economic growth on a sustained basis will depend upon a combination of high oil prices and healthy inflows of new investment, the latter of which is unlikely barring a significant improvement in the business climate…

Assuming external conditions are sufficiently favorable as to avoid a collapse in oil prices, positive real GDP growth can be expected going forward, but the structural weaknesses of the economy will hold average annual growth to just 3% per year on average through 2016. The political necessity of maintaining a loose fiscal policy will limit the potential for any significant easing of inflation, which will average 24.2% per year through 2016.

Economic Forecasts for the Three Alternative Regimes

  Chávez Divided Government Military
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2011 2.4 27.3 22.10 1.5 29.4 18.20 1.0 31.0 16.10
2012-2016 3.0 24.2 11.20 2.1 19.0 8.40 0.6 32.0 -2.70

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