Venezuela: don’t bank on a shift to more orthodox economic policies


Matthew Turner
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Investor confidence will depend on the outcome of the next presidential election while oil prices pose most immediate risk to economy.

An imminent shift to more prudent macroeconomic policies to address Venezuela’s chronic imbalances and reduce oil dependency risk is unlikely, say ECR’s expert contributors, following Chavez’s death on Tuesday.

Low and declining levels of FDI in the country and rising domestic tensions heap on near-term risks, according to Pascaline della Faille, analyst at ONDD. In general, market analysts expected the announcement of president Hugo Chávez’s death sooner rather than later – as such, the recent events in the country were priced in by market analysts. This is reflected by a tightening of Venezuela’s yields in the last month and a bottoming out of the country’s ECR score, which plunged nine places in the ECR rankings in 2012.
Oil reliance exacerbates debt burdenHowever, analysts participating in the ECR survey acknowledge that an over-reliance on petro-funds and a weak infrastructural base pose an immediate risk to the country’s economic model. According to Alejandro Arreaza, LatAm economist at Barclays and a member of ECR’s expert panel: “The main vulnerabilities for Venezuela’s economic model are the fluctuation in oil prices, so there must be a strong commitment to adjust economic and monetary policy. So far, there hasn’t been. “Last year, the government had a huge increase in public expenditure, which increased the fiscal deficit, so the market has priced in the risks associated with the government meeting the fiscal adjustments.” The uncertain political outlook could discourage future petro-loans from China and strike a damaging impact to the country’s current account receipts. As Della Faille explains: “The performance of the non-oil sector is weak, owing to the still over-valuated bolivar, the domestic currency and the uncompetitive manufacturing sector that represents a mere 4% of current account receipts. Despite the poorly performing non-oil sector and increasing reliance on imports for food and other basic needs, the current account surplus has been maintained, as imports have grown more slowly than exports due to foreign exchange controls.” And the decision to devalue the country’s currency in February could come with additional knock-on effects. “The devaluation of the Bolivar  is likely to reduce somewhat imports but is unlikely to boost exports as the larger part consists of oil,” says Della Faille. “Despite the devaluation, the discrepancy between the official and the unregulated market exchange rates remains huge. In this context, and as foreign exchange reserves are under pressure, additional devaluation could occur.” Leadership transition Therefore, the hope that the socialist leader’s unorthodox macroeconomic policies will come to an end are slim. Institutional and constitutional bottlenecks will make it difficult for the leading opposition party to ignite social and economic reform, according to analysts. Investors are looking for the opposition to instigate economic reform, through correcting the fiscal imbalances, dismantling price and exchange controls, and adopting a more pro-business approach. “The death of Chávez, along with the surrounding political uncertainty, continues to discourage investment in Venezuela,” says Della Faille. “After the presidential election [due to be called within 30 days], investors’ confidence will depend on who wins the next presidential election. “If it is Nicolás Maduro, the designated successor of Chávez, no major change in policy is expected. If the opposition – which is likely to be represented by Henrique Capriles – wins the presidential election, only gradual changes are expected.”

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