Venezuela Business Forecast Report Q4 2011

Core Views
After two consecutive years of recession we believe that Venezuela will post positive real GDP growth in 2011. Petroleum-related economic activity will drive the majority of growth, but increased government consumption in the run up to the 2012 presidential election will also feature.
Inflation will remain elevated at the highest level in Latin America, and nationalisations are likely to rise.
Major Forecast Changes
We now see potential for a more unified opposition heading into the 2012 presidential elections, which increases the likelihood of a new administration beyond the 2012, although uncertainty still prevails. We have revised our inflation forecasts upwards for Venezuela owing to worse-than-expected fiscal data. We now project inflation to come in at 29.0% y-o-y by end-2011 and 26.0% at end-2012, from 5.0% and 20.0% previously.
Key Risks To Outlook
Upside Risks: Higher than expected global oil prices could boost real GDP growth and the country’s fiscal outlook.
Downside Risks: Electricity supply shortages could lead to a major decline in industrial production, potentially leading to another year of recession.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Key Risks And Election Scenarios
We expect political risks in Venezuela to remain elevated in the run-up to the presidential election in December 2012
Long-Term Political Outlook 9
How Long Can Chávez Last?
The Venezuelan political landscape will very likely remain polarised and discordant over the next 10 years, with potential for pent-up tensions to lead to unrest
Table: Political Overview 10
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Faster Growth Not Sustainable
Venezuela’s real GDP growth of 45% y-o-y in Q111 surprised to the upside, but as it was driven by expansionary government policies we believe this pace of growth is unsustainable
TABLE: ECONOMIC ACTIVITY 14
Balance Of Payments 15
External Accounts Increasingly Unstable
Oil exports will continue to drive Venezuela’s current account surplus over the long term
TABLE: CURRENT ACCOUNT 16
Monetary Policy 18
Policy Dilemma And 2012 Elections To Restrict Devaluation Option
The approaching 2012 presidential elections will continue to restrict economic policy options in Venezuela
TABLE: MONETARY POLICY 18
Fiscal Policy 19
Worrisome Debt Outlook
Venezuela’s long-term fiscal and debt outlooks will come under significant risk as the government continues to rely on sovereign and PdVSA debt issuances to support its macro policies
TABLE: FISCAL POLICY 20
Banking Sector 21
Outlook Still Bleak
While we expect a massive expansion in Latin America’s financial services sector over the coming years, Venezuela is the exception to the rule, owing to the country’s unfavourable macroeconomic outlook and business environment
TABLE: EXCHANGE RATE 22
Regional: Sovereign Risk Ratings 23
Venezuela Poses Greatest Sovereign Risk
While the top half of our sovereign risk ratings has seen little change, in the bottom half we believe there are a handful of economies that are facing the very real threat of a credit event over the next 18 months, with Venezuela the most precarious
Chapter 3: 10-Year Forecast 25
The Venezuelan Economy To 2020 25
Growth Outlook Beyond Chávez
Although the Venezuelan economy is likely to experience a tough time over the next two years, we believe there is significant economic growth potential over the long term
TABLE: LON G-TERM MACROECONOMIC FORECASTS 25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 28
TABLE: BMI LEGAL FRAMEWORK RATING 29
Infrastructure 30
TABLE: LABOUR FORCE QUALITY 30
Market Orientation 31
TABLE: LATIN AMERICA, ANNUAL FDI INFLOWS 31
TABLE: TRADE AND INVESTMENT RATINGS 32
Operational Risk 33
TABLE: TOP EXPORT DESTINATIONS 33
Chapter 5: Key Sectors 35
Pharmaceuticals 35
Table: Prescription Drug Sales Indicators 2007-2015 37
Table: Patented Drug Market Indicators 2007-2015 37
Telecommunications 39
Table: Venezuela Telecoms Sector – Internet -- Historical Data And Forecasts, 2008-2015 41
Table: Venezuela Telecoms Sector -- Mobile -- Historical Data And Forecasts, 2008-2015 41
Other Key Sectors 43
Table: VENEZUELA Oil and Gas Sector Key Indicators 43
Table: VENEZUELA Autos Sector Key Indicators 43
Table: VENEZUELA Food and Drink Sector Key Indicators 43
Table: VENEZUELA Infrastructure Sector Key Indicators 44
Table: VENEZUELA Defence and Security Sector Key Indicators 44
Table: Venezuela Freight Transport Sector Key Indicators 44
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS 45
Table: EMERGING MARKETS AGGREGATE GROWTH 46
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST 47
Table: REAL GDP GROWTH CONSENSUS FORECASTS 47
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