venezuela business forecast report q3 2013

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BUSINESS FORECAST REPORT

Q3 2013www.businessmonitor.com

VENEZUELAINCLUDES 10-YEAR FORECAST TO 2022

Political Tensions Threaten Stability

ISSN 1744-8883Published by Business Monitor International Ltd.

Copy Deadline: 19 April 2013

2 Business Monitor International Ltdwww.businessmonitor.com

VENEZUELA Q3 2013 V

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3Business Monitor International Ltd www.businessmonitor.com

Contents

Executive Summary ................................................................................................................................. 5Core Views ......................................................................................................................................................................................5Major Forecast Changes ................................................................................................................................................................5Key Risks To Outlook ....................................................................................................................................................................5

Chapter 1: Political Outlook .................................................................................................................... 7SWOT Analysis .......................................................................................................................................................... 7BMI Political Risk Ratings ........................................................................................................................................ 7Domestic Politics....................................................................................................................................................... 8Maduro Caught Between A Deteriorating Economy And Party Politics

We believe recently elected President Nicolás Maduro will adopt the policy mix of his predecessor Hugo Chávez, meaning the public sector will remain the main driver of the economy, and a significant opening up to foreign investment is unlikely. Moreover, there are significant risks that challenge Maduro's permanence in power, stemming both from the opposition and within his party, and a coup cannot be ruled out given the high levels of social and political tension.

TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................. 8

Long-Term Political Outlook .................................................................................................................................... 9Post-Chávez Era To See Greater Turbulence

Venezuela is entering a new era following the election of Nicolás Maduro as successor to the late President Hugo Chávez, but the narrowness of his victory points to an increasingly polarised electorate, which will make the country harder to govern. With the economy looking weak, Maduro could well lose office before his term expires in 2019. Regardless of who rules Venezuela, the country will face formidable economic challenges, such as excessive state control, high inflation, corruption, violent crime, and a brain drain.

Chapter 2: Economic Outlook ............................................................................................................... 13SWOT Analysis ........................................................................................................................................................ 13BMI Economic Risk Ratings ................................................................................................................................... 13Economic Activity .................................................................................................................................................. 14Substantial Downside Risks To Growth Outlook

We forecast Venezuela's real GDP growth to slow from 5.6% in 2012 to 2.6% in 2013 and 2.8% in 2013, as economic adjustments, including a currency devaluation, feed through to the economy. However, the high level of political and social tensions following a narrow victory by Nicolás Maduro in the country's April 14 presidential election, pose significant downside risks to our outlook.

TABLE: GDP BY EXPENDITURE, REAL GROWTH % ......................................................................................................................................... 14

Exchange Rate Policy ............................................................................................................................................ 15New Dual Exchange Rate, Same Old Problems For The Private Sector

The recent introduction of a new dual exchange rate system in Venezuela will not be enough to address the severe foreign currency shortages in the economy. This in turn will prompt government officials to continue to implement strict regulations to reduce the current high levels of scarcity in essential goods, ultimately curtailing business activity.

TABLE: EXCHANGE RATE ...................................................................................................................................................................................16

Balance Of Payments ............................................................................................................................................. 17Income Outflows Will Weigh Heavily On Current Account

Venezuela's current account surplus narrowed sharply from 8.6% of GDP in 2011 to 2.8% in 2012, driven by record-high income account outflows. Moreover, while the recent currency devaluation in Venezuela will weigh on imports, we believe ongoing income account outflows, amid an unpredictable business environment, will result in near-record low current account surpluses over the next couple of years.

TABLE: CURRENT ACCOUNT .............................................................................................................................................................................. 18

Fiscal Policy ............................................................................................................................................................. 19Maduro Will Use Spending To Retain Support

We believe that recently elected President Nicolás Maduro will pursue expansionary fiscal policies in a bid to retain popularity in a highly polarised political environment. We expect this to take the form of an increase in public sector wages and high levels of social spending. We therefore forecast the nominal fiscal deficit to remain elevated at 8.1% of GDP in 2013, albeit below the 11.8% deficit we estimate for 2012.

TABLE: FISCAL POLICY .......................................................................................................................................................................................19


VENEZUELA Q3 2013

TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS - EVOLUTION OF ABILITY TO PAY ............................................................................ 20

Regional Sovereign Risk Ratings .......................................................................................................................... 21Challenges Remain In 2013

While our latest Sovereign Risk Ratings show no change in the average overall score for Latin America since our last update in October 2012, we continue to see 2013 as a challenging year for several economies in the region. Indeed, our ratings continue to highlight a number of themes we believe will be key in 2013, such as economic underperformance in Argentina and Venezuela, the impacts of slowing Chinese growth on Latin America’s industrial metals exporters, and continued robust economic expansion and fiscal consolidation in Mexico and Colombia.

TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS – EVOLUTION OF WILLINGNESS TO PAY ............................................................. 22

Chapter 3: 10-Year Forecast .................................................................................................................. 25The Venezuelan Economy To 2022 ........................................................................................................................ 25Growth Outlook In A Post-Chávez Era

Although the Venezuelan economy is likely to experience a tough time over the next few years, we believe there is significant economic growth potential over the long term. In our view, a more moderate and market-friendly government which is willing to make the necessary structural reforms is needed to unlock this potential.

TABLE: LONG-TERM MACROECONOMIC FORECAS TS .................................................................................................................................. 25

Chapter 4: Business Environment ........................................................................................................ 27SWOT Analysis ........................................................................................................................................................ 27BMI Business Environment Risk Ratings ............................................................................................................. 27Business Environment Outlook ............................................................................................................................. 28Institutions ............................................................................................................................................................... 28TABLE: BMI BUSINESS AND OPERATION RISK RATINGS .............................................................................................................................. 28TABLE: BMI LEGAL FRAMEWORK RATING ....................................................................................................................................................... 29

Infrastructure ........................................................................................................................................................... 30TABLE: LABOUR FORCE QUALITY ..................................................................................................................................................................... 30TABLE: LATIN AMERICA – ANNUAL FDI INFLOWS .......................................................................................................................................... 31TABLE: TRADE AND INVESTMENT RATINGS .................................................................................................................................................... 32TOP EXPORT DESTINATIONS .............................................................................................................................................................................. 32

Operational Risk ...................................................................................................................................................... 33

Chapter 5: Key Sectors .......................................................................................................................... 35Defence & Security ................................................................................................................................................. 35TABLE: VENEZUELA’S ARMED FORCES PERSONNEL (‘000, UNLESS OTHERWISE STATED), 2003-2009 ............................................... 35TABLE: VENEZUELA’S MANPOWER AVAILABLE FOR MILITARY SERVICES, 2010-2017 (AGED 16-49, UNLESS OTHERWISE STATED) 36TABLE: AIR FREIGHT ...........................................................................................................................................................................................41TABLE: MARITIME FREIGHT ................................................................................................................................................................................41

Other Key Sectors ................................................................................................................................................... 43TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS ................................................................................................................................. 43TABLE: AUTOS SECTOR KEY INDICATORS ...................................................................................................................................................... 43TABLE: FOOD AND DRINK SECTOR KEY INDICATORS ................................................................................................................................... 43TABLE: PHARMA SECTOR KEY INDICATORS ................................................................................................................................................... 44TABLE: TELECOMS SECTOR KEY INDICATORS ............................................................................................................................................... 44TABLE: FREIGHT SECTOR KEY INDICATORS ................................................................................................................................................... 44

Chapter 6: BMI Global Assumptions .................................................................................................... 45Global Outlook ......................................................................................................................................................... 45Lowering Our US And Eurozone Growth ForecastsTABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 45TABLE: DEVELOPED STATES, REAL GDP GROWTH, % .................................................................................................................................. 46TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % .......................................................................... 46TABLE: EMERGING MARKETS, REAL GDP GROWTH, % ................................................................................................................................. 47


Executive Summary

Core Views We believe recently elected President Nicolás Maduro will struggle

to exert his grip on power in a highly polarised political landscape,

and do not rule out an early exit from office, either forcibly or through

referendum recall.

We expect Maduro to continue Hugo Chávez's policies of elevated

social spending, which will result in sizeable fiscal deficits.

Inflation will remain elevated, at the highest level in Latin America,

and the operating environment will remain very precarious for foreign

multinationals in the country.

Major Forecast Changes We have significantly downgraded our current account forecasts, fol-

lowing the country's first quarterly current account deficit in over three

years in Q412, largely driven by sizeable income account outflows.

While we still expect the current account to remain in surplus over

the coming years, the surpluses will reach near-record low levels.

Key Risks To Outlook Upside Risks: Higher than expected oil prices and more aggressive

monetary stimulus could see real GDP growth exceed our forecasts

for 2013 and 2014.

Downside Risks: The potential for elevated political tensions to

materialise in a wider political crisis, poses a significant downside

risk to our growth forecast.

Brief Methodology

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SWOT Analysis

Strengths Setting Venezuela apart from its neighbours, the country has enjoyed

a long tradition of democracy, with elections held regularly since

1959.

A consistently high electoral turnout points to a strong level of public

participation in politics.

Weaknesses The military has traditionally played a dominant role in politics, and

possible future intervention by disgruntled officers – especially

following the attempted coup in 2002 – is not beyond the realm of

possibility.

Relations between the government and the US remain strained, as

Chávez has accused the US government of interfering in Venezuela’s

domestic affairs and threatened to cut off oil supplies to the US.

Opportunities Given prudent investment, areas such as infrastructure and education

could flourish as a result of the fiscal windfalls brought by devaluation

of the bolívar and elevated oil prices, bringing longer-term stability

to the economy and diminishing the risks of civil turbulence.

Threats The national assembly has pushed through several laws that were

previously overturned in the constitutional referendum in 2007. The

weakening of democracy in the country threatens to raise political

risk and poses a threat to private business activity.

A highly polarised political arena creates potential for political ten-

sions between the ruling party (PSUV) and the opposition coalition

(MUD) to heighten at any moment and lead to social unrest.

BMI Political Risk RatingsVenezuela’s long-term political risk rating is weighed down by the ‘char-

acteristics of polity’ category, which ranks among the lowest in the region

with a score of 24.4 out of 100. This is due to the high concentration of

power that the ruling PSUV has managed to build. However, the rating

is supported by the high score of 70.0 in the ‘scope of state’ category,

but this is largely explained by factors such as ethnic and religious

homogeneity, high government spending relative to the size of the

economy, few external constraints, and some improvements made in

income distribution. Overall, Venezuela scores 48.8 and ranks 14th out

of 17 in Latin America in our long-term political risk ratings.

Chapter 1: Political Outlook

S-T Political Rank TrendChile 76.7 1 +Uruguay 74.8 2 -Colombia 72.5 3 =Costa Rica 72.5 3 =Panama 71.9 5 =Brazil 70.8 6 +Peru 67.5 7 =Mexico 65.6 8 =Nicaragua 55.2 9 =Ecuador 55.0 10 -El Salvador 50.8 11 -Bolivia 50.6 12 +Argentina 50.2 13 =Venezuela 48.1 14 -Guatemala 47.5 15 =Paraguay 45.6 16 =Honduras 43.8 17 -Regional ave 59.9/Global ave 64.1/Emerging Markets ave 61.9

L-T Political Rank TrendChile 84.2 1 =Costa Rica 71.8 2 =Uruguay 71.4 3 =Panama 67.9 4 =Mexico 67.1 5 =Brazil 66.5 6 =Colombia 62.8 7 =Argentina 61.9 8 =Peru 61.5 9 =Paraguay 60.4 10 =El Salvador 58.9 11 =Honduras 53.3 12 =Ecuador 50.6 13 =Venezuela 48.8 14 =Guatemala 45.8 15 =Nicaragua 44.7 16 =Bolivia 44.2 17 =Regional ave 60.1/Global ave 61.7/Emerging Markets ave 58.4


VENEZUELA Q3 2013

Domestic Politics

Maduro Caught Between A Deteriorating Economy And Party Politics

BMI VIEW We believe recently elected President Nicolás Maduro will adopt the

policy mix of his predecessor Hugo Chávez, meaning the public sector

will remain the main driver of the economy, and a significant open-

ing up to foreign investment is unlikely. Moreover, there are significant

risks that challenge Maduro's permanence in power, stemming both

from the opposition and within his party, and a coup cannot be ruled out

given the high levels of social and political tension.

We believe that Nicolás Maduro's narrow victory in Venezuela's

April 14 presidential election, defeating Henrique Capriles

Radonski from the opposition coalition by less than 2.0 percent-

age points, sets up significant political obstacles throughout his

six-year term. While Maduro's policy choice will have to be

manoeuvred between improving a rapidly deteriorating economy

and playing the party line by ensuring policy continuity, we

believe he will opt largely for the latter, which will continue

to hurt economic activity in the private sector. However, since

former president Hugo Chávez died on March 5, social and

political tensions have escalated in the country, stemming from

the large power vacuum left behind. Therefore, we do not rule

out an early exit from the presidency by Maduro, either through

a recall referendum, or more forcibly through a coup.

The Chávez Effect Will FadeWhile Maduro owes much of his popular support to the fact

that Hugo Chávez handpicked him as his successor, we believe

that a rapidly deteriorating economy will ultimately see Ma-

duro's approval rate erode. Indeed, the February 8 devaluation

will continue to take its toll on the highly import-dependent

Venezuelan consumer, and will continue to see inflation above

20.0% through 2013, and likely beyond.

While Maduro will attempt to reignite his popularity by con-

tinuing to allude to Chávez's political rhetoric of high levels of

social spending (see our online service, April 19, 'Maduro Will

Use Spending To Retain Support'), the effectiveness of utilising

Chávez's legacy to legitimise Maduro's government will gradu-

TABLE: POLITICAL OVERVIEWSystem of Government Federal Republic. Unicameral National Assembly: made up of 167 deputies. Executive

power rests with the president.

Head of State President (Nicolás Maduro – Partido Socialista Unido de Venezuela, [PSUV]).

Head of Government Nicolás Maduro

Last Election Presidential – October 7 2012

Key Figures President Of National Assembly – Diosdado Cabello Finance Minister – Jorge Antonio Giordani Cordero Former Defense Minister – Carlos Jose Mata Figueroa

Main Political Parties (number of seats in parliament) Partido Socialista Unido de Venezuela (PSUV) (98): Initiated by Hugo Chávez after he won the Venezuelan presidential election of 2006 in order to merge all parties which support the Bolivarian Revolution.

Mesa de la Unidad Democratica (MUD) (65): Broad coalition of opposition political parties formed in June 2009 to challenge the PSUV.

Patria Para Todos (PPT) (2): Left-wing political party in Venezuela founded in 1997 by members of The Radical Cause party who supported Hugo Chávez. It is led by José Albornoz.

Next Election Parliamentary – 2015

Presidential – 2018

BMI Short-Term Political Risk Rating 48.1

BMI Structural Political Risk Rating 48.8

Source: BMI

Opposition Closing The Gap Presidential Election Results, % of votes

Note: * The PSUV was founded in 2007, for the 2000 election the PSUV refers to Hugo Chávez’s party at the time. Source: BMI, CNE


POLITICAL OUTLOOK

ally diminish, forcing Maduro to build his own political rhetoric

– though he lacks the political charisma of his predecessor. We

believe Maduro's policy mix will be skewed towards policies that

are unfavourable for the private sector such as price controls, as

he seeks to construct his own political character. A softening of

policies, would be seen as a victory for the opposition coalition,

which would also likely face significant opposition by the ruling

Partido Socialista de Venezuela (PSUV).

Political Reshuffling, While Playing The Party LineMoreover, we believe that growing signs of disunity among

different factions in the PSUV, will ensure Maduro does not

deviate significantly from the party's political agenda. Indeed,

following Maduro's narrow electoral victory, president of the

National Assembly, Diosdado Cabello, who also holds significant

influence over the armed forces faction of the PSUV, stated that

the results demand a 'deep self-criticism', raising questions over

Cabello's long touted own presidential ambitions. As such, we

believe that Maduro will make sure that his political rhetoric

remains broadly aligned with the broader expectations of the

PSUV, to diminish the possibility of a race to power within the

party. This means, the public sector will remain the main driver

of the economy, and a significant opening up to foreign invest-

ment is unlikely. Moreover, we believe Maduro will embark

in very selective political reshuffling to ensure he holds greater

influence over the main ministries. For instance, Minister of

Finance Jorge Giordani is known to hold significant political

differences with Maduro, and could be replaced to ensure the

president's policy trajectory remains uninterrupted.

Consolidating Support Ahead Of A Potential Recall ReferendumWe believe that the possibility of a recall referendum by the

opposition will further ensure Maduro pursues policy continu-

ity to attempt to consolidate support among his political base.

Indeed, under article 72 of the constitution, once the first half of

a presidential term elapses, the opposition may petition a recall

referendum with signatures from 20% of registered voters, an

option the opposition pursed against Chávez in 2004, albeit

unsuccessfully. Therefore, Maduro's heavy handed managing

of the economy will likely dominate politics over the coming

years, as any deviation from the PSUV's traditional political

rhetoric would increase the probability of a successful recall

referendum.

Intervention Cannot Be Ruled OutBesides a successful referendum recall, we note that the highly

polarised political environment in which Maduro will rule,

increases the likelihood of a destabilising event that could see

him step down from office prematurely (see 'Election Outcome:

Maduro's Grip On Power Far From Certain', April 15). Indeed,

Venezuela has a long history of coup d'etats, with the last one

taking place in 2002, ousting Chávez from office for 47 hours.

Moreover, recent anti-government protests have been escalat-

ing, leaving seven dead on April 16, and tensions are likely

to continue to run high. Indeed, while the electoral board has

agreed to the opposition's demand of a full recount of votes of the

presidential election, it will do so through a long 30-day process,

which could be accompanied by significant social and political

anxiety. Moreover, were the full recount expose instances of

fraud or corruption, or reveal an even tighter presidential race

than initially announced, it could fuel additional social unrest,

and a coup cannot be ruled out.

Long-Term Political Outlook

Post-Chávez Era To See Greater Turbulence

BMI VIEW Venezuela is entering a new era following the election of Nicolás Ma-

duro as successor to the late President Hugo Chávez, but the nar-

rowness of his victory points to an increasingly polarised electorate,

which will make the country harder to govern. With the economy look-

ing weak, Maduro could well lose office before his term expires in 2019.

Regardless of who rules Venezuela, the country will face formidable

economic challenges, such as excessive state control, high inflation,

corruption, violent crime, and a brain drain.

Venezuela's political trajectory over the next decade will re-

main highly uncertain. Former president Hugo Chávez's death

on March 5 marked the start of a new era in the country, but

the political landscape will remain highly polarised and prone

to social unrest. Although we expect Chávez's political ideol-

ogy, characterised by a large public sector, elevated levels of

social spending, and heavy intervention in the private sector,

to dominate Venezuelan institutions over the coming years,

maintaining such a policy mix will become increasingly difficult

as economic conditions deteriorate. Indeed, recently elected

President Nicolás Maduro, from the Partido Socialista Unido

de Venezuela (PSUV), will likely extend Chávez's policies in

a bid to retain the strong popular support the deceased former

president cultivated throughout his 14 years in power. How-


VENEZUELA Q3 2013

ever, Maduro may need to be selective in his policy choices,

as Venezuela faces declining oil revenues – the government's

main source of revenue – as oil production continues to slip

due to mismanagement and underinvestment. Moreover, the

rising support for the opposition coalition, Mesa de la Unidad

Democrática (MUD), particularly since Chávez's passing, could

see a change in government within the next 10 years.

Long-Term Political Risk Ratings Remain PoorVenezuela's score of just 48.8 out of 100 in BMI's proprietary

long-term political risk ratings, ranking it 141 out of 179 na-

tions, reflects serious risks of unrest and turmoil. The main

drag is the 'characteristics of polity' sub-component, where

the country scores a weak 24.4 out of 100 owing to a flawed

system of government, a muddied constitutional framework,

and weak rule of law. Venezuela fares better in the 'scope of

state' component, scoring 70.0, but this is largely explained by

factors such as high government spending relative to the size of

the economy, few external constraints on its policies, and some

improvements made in income distribution. For Venezuela to

make progress in our ratings, we would need to see changes in

the polity, such as a more clear-cut separation of power among

state entities, an independent and more competent judiciary,

and greater media freedom. Below, we present several scenarios

for how the country could evolve politically over the coming

decade, and identify several central challenges and issues which

are likely to have a bearing on its leaders.

Scenarios For Political ChangeReferendum Recall, As Early As 2016: Maduro's below 2.0%

margin of victory in the April 14 presidential election, the tightest

Venezuelan election since 1968, will likely motivate the MUD

to demand a recall referendum, an option the opposition pursued

in 2004, albeit unsuccessfully. Indeed, under article 72 of the

constitution, once the first half of the six-year presidential term

elapses, the opposition may petition a recall referendum with

signatures from 20% of registered voters. A successful recall

referendum would be followed by a fresh presidential election,

with MUD leader and the defeated presidential candidate, Hen-

rique Capriles Radonski, the likely opposition challenger once

again. By that point he may have generated enough support

to win. That said, under such scenario, we do not rule out an

intervention by PSUV hardliners to negate the possibility of an

opposition presidency. If that were to happen, Venezuela would

be at risk of a violent showdown between the 'old' regime and

the opposition.

2018 Presidential Election: The next scenario for an MUD-led

government would be through a victory in the next presidential

election, scheduled for the autumn of 2018. However, the opposi-

tion coalition would have to ensure that it remains united until

then, something it has struggled to do in the past. In addition,

the opposition would need a strong result in the 2015 legisla-

tive election to reduce the PSUV's dominance of the National

Assembly, where it currently controls nearly two thirds of the

seats, and limit the scope for constitutional changes that could

further hamper the MUD's presidential chances. Finally, the

opposition would also need strong results in local and regional

elections, to broaden its support among municipal and state-level

governments, where it has lost substantial terrain in recent years.

Internal PSUV Move Against Maduro: Maduro's popularity

and narrow presidential election victory were based on his close

association with Chávez before and after his death. However,

we expect this factor to be gradually superseded by Maduro's

handling of Venezuela's economic challenges, leading us to

believe that his popularity will decline significantly. This in-

creases the likelihood of an internal power struggle within the

PSUV, particularly between Maduro and the hardliners' faction,

headed by National Assembly President Diosdado Cabello,

who holds significant influence over the armed forces. Any

indication that Maduro's declining support could undermine the

PSUV's dominance of the country's institutions could trigger an

intervention by Cabello's faction in an attempt to marginalise

or replace Maduro. However, any extra-constitutional move

against Maduro would be politically risky.

Popular Uprising: There is also a possibility that Venezuela's

Needs To Fall Further Average Annual Consumer Price Inflation, %

Source: BMI, BCV


POLITICAL OUTLOOK

economy could deteriorate sharply and suddenly, triggering

mass protests that topple Maduro. Since 2000, presidents in

Argentina, Bolivia, Ecuador, and Paraguay have been forced out

of office prematurely. In the event of a future economic crisis,

Venezuela could experience an 'Arab Spring'-like event. If that

were to happen, Venezuela may come under the control of a

military-backed interim government, pending new elections.

Structural Challenges And Threats To StabilityEven if the opposition gains the presidency at some stage,

the government will face a highly polarised country, with the

PSUV remaining a formidable political force. PSUV cadres

hold offices across a broad spectrum of Venezuela's institutions,

meaning that their influence will linger. Regardless of who rules

Venezuela, the government will face significant challenges over

the coming years.

Asphyxiating Private Sector: The PSUV has slowly but stead-

ily extended the reach of the state, with large sections of the

economy now under de facto state control. Price controls and

bureaucratic strictures have proved difficult for businesses, with

investment weakening as a result. Meanwhile, the already-weak

administrative capability of the government is being stretched

further as it tries to micromanage the strategies of its numerous

'acquisitions'. Venezuela ranks 145th out of 173 countries in our

proprietary business environment rating.

Power Shortages: An issue strongly related to the above problem

is the frequent shortages of electricity and water, which have

become a serious drag on the economy in recent years. The PSUV

has continued to blame this on unfavourable weather phenom-

ena, such as the periodic El Niño, but there are strong grounds

to believe that under-investment and skewed pricing policies

have exacerbated the problem. The nationalisation of the power

industry has worsened the mismatch between domestic supply

and swiftly rising demand. Forced rationing and blackouts are

likely to feed rising discontent with the government.

Inflation: Inflation has averaged more than 20% over the past

decade. Few would dispute that misguided economic policy is

to blame, with the suffocation of the private sector leading to a

steady atrophy of productive capacity while the monetary printing

presses have kept humming. Clearly, this situation will only be

bearable for Venezuelans as long as the government can afford

to subsidise key goods and continue to lift minimum wages.

The risks of a vicious inflationary spiral and an attendant flight

from the bolívar are very real. If the government continues to

arm-twist businesses to keep a lid on prices, we could eventu-

ally see a fully fledged shutdown of the retail sector, leaving

the state as the sole vendor of consumer goods.

Crime And Corruption: One of the most conspicuous trends in

Venezuela is the increase in crime, as reflected in the country's

grim homicide statistics. Caracas has received the alarming

moniker 'murder capital of the world', with the number of annual

homicides per 100,000 people recorded at more than 100 (as

high as 130 by some independent observers), with this metric

for the rest of the country has risen above 50.

Needless to say, these harrowing numbers fly in the face of

the government's claims of creating a safer and more stable

Venezuela. The trend of corruption is worrying as well, with

justifiable fears that a culture of nepotism and patronage is

taking root. To illustrate, Venezuela ranks at a very low 165th

place (out of 174 nations) in Transparency International's 2012

Corruption Perceptions Index.

Brain Drain: Another predictable consequence of the PSUV's

policies has been a significant exodus of educated Venezuelans

abroad. An estimated 1mn people have left the country since

Chávez came to power in 1999, of whom many have settled

in the US or Panama. The damage caused by this 'brain drain'

should not be underestimated, as it has left the country starved

of competent staff in academia, industry and elsewhere. Ven-

ezuela's dependence on importing medical professionals from

Cuba is a manifestation of this unsustainable state of affairs,

and a reversal in the tide of talent migration is unlikely as long

as the PSUV remains at the helm.

A Worrying Trend International Homicide Rate, Per 100,000

Source: BMI, UNODC


VENEZUELA Q3 2013

Friction With Church: Notably, the Venezuelan government

is not on friendly terms with the country's traditional Roman

Catholic clergy after the formation of an offshoot, which the

official church has criticised as a political construct to push

the PSUV's socialist agenda. The breakaway branch, dubbed

the Reformist Catholic Church and encompassing Catholics,

Anglicans and Lutherans, has an explicit 'Bolivarian' focus on

helping the country's poor. We expect mistrust between the

church and the government to remain elevated over the coming

years, with Catholic leaders no doubt keen to see a change in

administration.

Bolivarian Militia: Created and formalised by Chávez for

the purpose of consolidating the 'Bolivarian Revolution', these

armed civilian forces have been known to act in parallel with

the military and the police. Indeed, if intra-PSUV struggles for

power heighten, a conflict between the militias and the armed

forces could lead to higher levels of instability in coming years.

Given the militarisation of these radical left-wing groups, this

scenario would become more likely if Maduro were to deviate

from Chávez's political rhetoric.


SWOT Analysis

Strengths Venezuela is rich in natural resources. In particular, it has huge oil

and gas reserves (it has the largest proven oil reserves) and is one

of the main suppliers to the US.

The oil boom has allowed the government to accumulate international

reserves.

Weaknesses Although oil is one of the country’s strengths, a high level of de-

pendence on the energy sector makes the economy increasingly

vulnerable to economic shocks in the long term.

The lack of transparency in the government’s fiscal accounts is a

source of concern.

Opportunities Rising support for the opposition coalition, following Chávez’s death,

increases the scope for a shift to more business-friendly policies.

Threats Inflation remains dangerously high despite the extensive price con-

trol system and successive interest rate hikes. Further erosion of

domestic productive capacity is likely to raise inflationary pressure

in the economy, possibly bringing on hyperinflation.

The sustainability of economic growth will depend on boosting private

investment, rather than relying on oil and public investment (both of

which are dependent on high oil prices).

BMI Economic Risk RatingsBecause of its impressive historical current account surplus, Venezuela

scores solidly in the ‘external factors’ category of our long-term economic

risk ratings, with a score of 60.0 out of 100. The performance in the

‘growth’ category is less impressive at 45.0. Moreover, the ‘monetary’

component, which scores 5.0 out of 100, is weighed down by entrenched

inflationary pressure.

Chapter 2: Economic Outlook

S-T Economy Rank TrendMexico 77.1 1 +Chile 76.0 2 =Peru 75.6 3 +Uruguay 74.0 4 =Brazil 69.8 5 -Colombia 65.4 6 =Bolivia 63.5 7 =Panama 62.1 8 -Guatemala 59.4 9 =Costa Rica 56.2 10 =Ecuador 55.6 11 =Paraguay 55.2 12 +El Salvador 53.1 13 – Honduras 50.0 14 =Nicaragua 46.5 15 -Argentina 45.4 16 -Venezuela 35.8 17 =Regional ave 60.0/Global ave 53.9/Emerging Markets ave 52.2

L-T Economy Rank TrendBrazil 74.3 1 -Chile 72.3 2 +Peru 71.6 3Uruguay 70.0 4 -Mexico 67.6 5 =Colombia 67.3 6 =Argentina 65.6 7 -Panama 64.7 8 =Costa Rica 62.2 9 =Bolivia 60.4 10 =Guatemala 56.1 11 =Paraguay 53.0 12 +Ecuador 52.9 13 -El Salvador 49.0 14 +Venezuela 44.0 15 =Honduras 41.9 16 =Nicaragua 41.0 17 =Regional ave 59.6/Global ave 52.8/Emerging Markets ave 50.3


VENEZUELA Q3 2013

Economic Activity

Substantial Downside Risks To Growth Outlook

BMI VIEW We forecast Venezuela's real GDP growth to slow from 5.6% in 2012

to 2.6% in 2013 and 2.8% in 2013, as economic adjustments, includ-

ing a currency devaluation, feed through to the economy. However,

the high level of political and social tensions following a narrow victory

by Nicolás Maduro in the country's April 14 presidential election, pose

significant downside risks to our outlook.

Macro StrategyAfter Venezuela's real GDP growth came in at 5.6% in 2012,

above our 5.3% estimate, we maintain our forecast for growth to

slow sharply to 2.6% in 2013, and bumping up slightly to 2.8%

in 2014. Our expectations for slower growth are predicated on

our view for a deterioration in private consumption, gross fixed

investment, and exports. However, a highly uncertain political

environment, following Nicolás Maduro's narrow victory in the

April 14 Venezuelan presidential election (see our online service,

April 15, 'Election Outcome: Maduro's Grip On Power Far

From Certain'), could result in an equally uncertain economic

trajectory. We therefore note that the risks to our growth out-

look lie firmly to the downside, given the potential for a social

and/or political outbreak to take place at any moment, which

would have severe negative repercussions to economic activity.

Expenditure BreakdownPrivate Consumption: We believe the main driver of slower

real GDP growth over the next couple of years will be a steep

deceleration in real private consumption growth, which we

forecast to slow from 7.0% in 2012 to 2.0% in 2013 and 2.2% in

2014. Indeed, the February 8 devaluation of the bolívar, which

brought the official fixed exchange rate from VEF4.300/US$

to VEF6.300/US$, will result in a significant deterioration of

consumer purchasing power. This is evident in the rising levels

of consumer price inflation, which in March ticked up to 25.1%

y-o-y from 22.8% y-o-y in February, and we expect inflation to

reach 30.0% by end-year. Moreover, the high levels of political

uncertainty will see consumer confidence decline, and further

contribute to more restrained levels of household spending.

Government Consumption: We expect government spend-

ing to remain relatively elevated through 2013, before slowing

significantly in 2014. Indeed, Maduro's narrow margin of vic-

tory, by less than 2.0%, suggests he is highly vulnerable to a

sharp loss in popularity, particularly as the economy continues

to deteriorate, will likely motivate him to pursue expansionary

fiscal policies. We believe this will take the form of public sector

wage increases – an attempt by Maduro to bolster his support

with in government institutions – as well as through social pro-

grammes and transfers, to ensure he remains popular among the

broader public. As such we forecast government consumption

to expand by 6.0% in 2013, a slight moderation from 6 .3% in

TABLE: GDP BY EXPENDITURE, REAL GROWTH %2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Real GDP growth, % change y-o-y -3.2 -1.5 4.2 5.6 2.6 2.8 3.1 3.0 2.6

Private final consumption, real growth % y-o-y -2.9 -1.9 4.0 7.0 2.0 2.2 2.5 2.5 2.6

Government final consumption, real growth % y-o-y 1.5 2.1 5.9 6.3 6.0 3.0 5.0 3.0 4.0

Fixed capital formation, real growth % y-o-y -8.3 -6.3 4.4 23.3 9.0 2.0 7.0 -1.0 1.0

Exports of goods and services, real growth % y-o-y -13.7 -12.9 4.7 1.6 -0.5 -1.0 0.5 1.0 1.5

Imports of goods and services, real growth % y-o-y -19.6 -2.9 15.4 24.4 15.0 12.0 10.0 10.0 5.0

Net exports of goods & services, real growth % y-o-y -23.2 4.0 21.6 35.8 20.8 16.0 12.5 12.1 5.7

Notes: f BMI forecasts. Sources: BMI calculation.

Imminent Slowdown Ahead Selected Components Of GDP By Expenditure, pp contribution to real

GDP growth

Source: BMI, BCV


ECONOMIC OUTLOOK

2012. However, given Venezuela's elevated fiscal deficit, which

we estimate at 11.8% of GDP in 2012, we believe the govern-

ment will be unable to sustain such high levels of government

spending much beyond 2013. We therefore forecast government

consumption growth to halve to 3.0% in 2014.

Gross Fixed Capital Formation: We forecast gross fixed capital

formation to decelerate from 23.3% in 2012, to 9.0% and 2.0%

in 2013 and 2014 respectively. A large portion of fixed invest-

ment in Venezuela is government-driven and financed through

its off-budget development fund, Fondo de Desarrollo Nacional

(FONDEN), which is largely funded through an oil windfall tax.

While the balance sheet of FONDEN is not publicly available

beyond 2011, we believe the high levels of pre-electoral spending,

particularly in infrastructure and housing, seen in the run-up to

the October 2012 and April 2013 presidential elections, likely

took a large toll on FONDEN's balance. Moreover, in February

the distribution of windfall oil tax revenue, resulting in less oil

revenue for FONDEN. Indeed, combined with a moderation in

oil prices over the coming years, the government's options to

continue to fund such high levels of fixed investment will be

seriously hampered.

Net Exports: We expect net exports will continue to weigh

heavily on the economy, shaving over 5 percentage points to real

GDP growth over the coming years. Real export growth came

in at 1.6% in 2012, and we forecast that a highly inefficient oil

sector, which accounts for over 95.0% of total exports, will see

exports contract by 0.5% in 2013 and 1.0% in 2014. Moreover,

a weaker currency will weigh heavily on imports, though the

lack of domestic availability of substitutes to many essential

goods will add some support to import growth. We therefore

forecast import growth to slow from 24.4% in 2012 to 15.0%

and 12.0% in 2013 and 2014 respectively. As such net exports

will continue to weigh heavily on the economy, shaving over

5 percentage points to real GDP growth.

Risks To OutlookThere are significant downside risks to our growth outlook,

stemming mainly from the highly tense social and political

environment currently in Venezuela. At this moment, we do not

rule out a widespread political crisis in the near term, given the

highly polarised electorate, emerging disunity within the ruling

party, and potential for the armed forces to step in if instability

continues to heighten. A political crisis would likely see both

consumer and business confidence plummet, and potentially

result in a contraction in real private consumption. In addition,

fixed investment would also likely come below our forecast,

which could generate recessionary economic conditions in

Venezuela.

Exchange Rate Policy

New Dual Exchange Rate, Same Old Problems For The Private Sector

BMI VIEWThe recent introduction of a new dual exchange rate system in Ven-

ezuela will not be enough to address the severe foreign currency short-

ages in the economy. This in turn will prompt government officials to

continue to implement strict regulations to reduce the current high lev-

els of scarcity in essential goods, ultimately curtailing business activity.

In line with our view, since the bolívar was devalued on February

8 the Venezuelan government has in creased currency-related

intervention (see our online service, February 11, 'Government

Intervention To Increase Following Devaluation'). On March

19, Finance Minister Jorge Giordani announced the introduc-

tion of a parallel exchange rate mechanism, which will auction

US dollars at a weaker rate than the official VEF6.300/US$

exchange rate to supplement the supply of foreign currency from

the primary exchange rate window. However, we believe the

recent measure is insufficient to address the acute FX distortions

in the economy, which will prompt the government to impose

additional measures that will curtail business activity. We believe

the most likely government measures will be the following:

2012 Levels Of Investment Will Not Be Sustained Gross Fixed Investment

Source: BMI, BCV


VENEZUELA Q3 2013

• More stringent price controls, particularly in sectors that

weigh heavily on the consumer price index, such as health

and food and beverage.

• Greater intervention in the banking sector to ensure a steady

flow of US dollars into the economy.

• Another one off-exchange rate adjustment – with the most

probable date being 2015, when a legislative election will

take place.

Parallel Exchange Rate System Not Enough To Address ShortagesWhile information on the mechanics of the newly introduced

parallel exchange rate remains scant, we believe it will not be

effective in substantially reducing the severe foreign currency

shortages in the economy. Under the new system – administered

by the newly created Sistema Complementario de Administración

de Divisas (Sicad) – only pre-approved companies will be able

to place bids for foreign currency, and it remains unclear how

much will be auctioned, and how many companies will benefit

from each Sicad auction . Moreover, the Venezuelan authori-

ties have not specified where the additional foreign currency

will come from.

We believe Sicad will likely rely on dollar-denominated debt

issuance from state-owned oil company Petróleos de Venezuela

(Pd VSA ), which provides nearly 95% of th e foreign currency

in the country. However, Pd VSA's debt has doubled from

US$18.6bn in 2009 to US$37.8bn in 2012, at a time when oil

production growth averaged just 2.5%. We therefore believe

that additional debt issuance by Pd VSA, without significant

improvements in production, will raise borrowing costs and

make it increasingly unsustainable as a vehicle to supply for-

eign exchange .

What is clearis that companies will likely need to continue to

Goods Scarcity Will Prompt Officials To Step Up Intervention

Consumer Price Inflation & Central Bank’s Scarcity Index

Source: BMI, BCV

Significant Foreign Currency Shortages Will Continue

Black Market, Implied, & Official Exchange Rate

Source: BMI, BCV

TABLE: EXCHANGE RATE2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Exchange rate VEF/US$, ave [1] 2.15 4.25 4.29 4.29 6.10 6.30 7.65 9.00 9.00

VEF/US$, ave % change y-o-y [1] 0.0 97.9 1.1 0.0 42.0 3.3 21.4 17.6 0.0

VEF/US$, ave, PPP [2] 2.02 2.89 3.63 4.09 4.89 5.92 6.85 7.71 8.49

Exchange rate VEF/EUR, ave [1] 3.01 5.64 5.97 5.45 8.17 8.00 9.41 10.80 10.80

VEF/GBP, ave [1] 3.33 6.59 6.91 6.85 9.82 10.08 12.62 15.30 15.75

VEF/CHF, ave [1] 1.98 4.08 4.84 4.58 5.94 5.88 7.22 8.56 8.62

VEF/AUD, ave [1] 1.68 3.90 4.43 4.45 6.10 5.64 6.04 6.75 6.75

JPY/VEF, ave [1] 201.00 372.99 342.45 342.92 555.10 592.20 742.05 886.50 904.50

VEF/CNY, eop [1] 0.31 0.63 0.66 0.68 1.00 0.99 1.40 1.37 1.36

Notes: f BMI forecasts. Sources: 1 BMI; 2 BMI/IMF.


ECONOMIC OUTLOOK

access foreign currency through the black market given the

magnitude of US dollar shortages in Venezuela. Indeed, despite

the recent devaluation, the black market rate remains over four

times weaker than the official rate, a clear indication of the foreign

currency supply shortfalls in the economy. This is magnified by

Ven ezuela's heavy reliance on imports, purchasing US$60bn

worth of goods from abroad in 2012, an amount Sicad alone

will not be able to supply.

Therefore, foreign currency shortages will continue to limit the

availability of essential goods in the economy, as evidenced by

the central bank's scarcity index, which in the first two months

of the year saw its highest levels on record. Moreover, the black

market rate will remain a main driver of inflation in Venezuela,

as importers price goods according to the weaker exchange

rate. We believe this will prompt the government to increase

measures such as price controls and goods rationing to diminish

social instability and maintain popular support – further eroding

productive capacity and significantly limiting business activity.

The Next Devaluation… Highly Probable In 2015We believe that price controls and additional debt issuance will

not be sufficient to sustain the current exchange rate over a multi-

year period, and expect the government will resort to another o

ne-off exchange rate adjustment in the coming years. Indeed,

following Hugo Chávez's death, the ruling Partido Socialista

Unido de Venezuela (PSUV) will likely maintain high levels

of social spending to remain popular in the absence of the late

president's strong persona (see 'Chávez's Elevated Social Spend-

ing Legacy To Continue', January 16). In order to sustain such

high levels of government spending, we believe officials will

rely on currency devaluations to increase the amount of local

currency they receive for dollar-denominated oil revenue – the

main source of fiscal revenue. We believe the most probable date

for the next devaluation is 2015, when legislative elections are

scheduled to take place in the fall. This will be the first legisla-

tive election since Chávez's death, making it key for the PSUV

to ensure it can sustain high levels of social spending to retain

its dominance in the National Assembly.

Balance Of Payments

Income Outflows Will Weigh Heavily On Current Account

BMI VIEWVenezuela's current account surplus narrowed sharply from 8.6% of

GDP in 2011 to 2.8% in 2012, driven by record-high income account

outflows. Moreover, while the recent currency devaluation in Venezue-

la will weigh on imports, we believe ongoing income account outflows,

amid an unpredictable business environment, will result in near-record

low current account surpluses over the next couple of years.

After Venezuela posted its first quarterly current account defi-

cit in over three years in Q412, largely driven by substantial

political uncertainty, we have revised down our 2013 and 2014

current account forecast, noting that elevated political risk will

likely continue to weigh heavily on the country's external ac-

count position. Indeed, record-high income account outflows, as

First Quarterly Current Account Deficit Since 2009Current Account Balance And Selected Subcomponents, US$mn

Source: BMI, BCV

Income Account Will Remain A Major Drag Income Account Balance, US$mn

Source: BMI, BCV


VENEZUELA Q3 2013

businesses increased profit repatriation, contributed to a sharp

reduction in the country's current account surplus last year, fall-

ing from 8.6% of GDP in 2011 to just 2.8% in 2012. Moreover,

with political uncertainty likely to continue, we anticipate the

income account deficits will remain sizeable. In addition, weak

oil exports will contribute to narrower goods trade surpluses,

resulting in near-record low current account surpluses over the

coming years. As such, we are revising down our current ac-

count forecast to a surplus of 2.7% of GPD in 2013 and 3.8%

2014, down from 8.2% for both years previously.

Sizeable Income Account Deficits To PersistWe believe that an unpredictable business environment, given

the considerable political uncertainty following Nicolás Ma-

duro's narrow victory in the April 14 presidential election (see

our online service, April 15, 'Election Outcome: Maduro's Grip

On Power Far From Certain'), will see large income account

deficits over the coming years. The in come account saw its

highest deficit in 2012, coming in at US$10bn (2.5% of GDP),

mainly due to increased repatriation of profits as firms wary of a

potential currency devaluation – which eventually took place in

February 2013 – moved to limit their exposure . However, given

the lack of political clarity in Venezuela following Maduro's

election, we believe that firms will continue to hedge against

the potential for further unfavourable regulation, such as price

controls, and additional currency devaluations (see 'New Dual

Exchange Rate, Same Old Problems For The Private Sector',

March 22), by moving investment income abroad. This will

ultimately result in persistent sizeable income account deficits,

which will continue to weigh on the current account over the

coming years.

No Major Improvement In Trade Dynamics Due To Weak Oil SectorMoreover we forecast Venezuela's trade surplus to narrow from

US$38.0bn in 2012, to US$35.4bn and US$32.4bn in 2013 and

2014 respectively , further narrowing the current account surplus.

While we believe that the recent currency devaluation will see

imports contract by 3.9% in 2013, a larger 6.8% contraction in

Devaluation Will Hurt Imports, But Oil Exports Will Also Fall

Trade Balance, US$mn

Source: BMI, Bloomberg

TABLE: CURRENT ACCOUNT2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Goods imports, US$bn [2] 39.6 38.6 46.4 59.3 57.0 59.0 61.4 63.8 66.4

Goods imports, % of GDP [3] 12.0 16.3 14.7 15.0 17.6 21.5 21.1 20.3 19.8

Goods exports, US$bn [2] 57.6 65.7 92.6 97.3 92.4 91.4 92.2 95.7 96.5

Goods exports, % of GDP [3] 17.5 27.8 29.3 24.7 28.5 33.4 31.7 30.4 28.8

Goods exports, % of imports [3] 145.3 170.3 199.4 164.0 162.2 154.9 150.3 149.9 145.4

Balance of trade in goods, US$bn [2] 18.0 27.1 46.2 38.0 35.4 32.4 30.9 31.9 30.2

Balance of trade in goods, % of GDP [3] 5.4 11.5 14.6 9.6 10.9 11.8 10.6 10.1 9.0

Balance of trade in goods and services, US$bn [2] 9.5 17.9 35.7 22.0 21.4 18.9 19.9 21.9 19.7

Balance of trade in goods and services, % of GDP [3] 2.9 7.6 11.3 5.6 6.6 6.9 6.8 7.0 5.9

Income account balance, US$bn [2] -3.1 -5.3 -5.2 -10.0 -9.0 -8.0 -5.2 -5.3 -5.4

Income account balance, % of GDP [3] -1.0 -2.2 -1.6 -2.5 -2.8 -2.9 -1.8 -1.7 -1.6

Net transfers, US$bn [2] -0.3 -0.6 -0.4 -1.0 -0.4 -0.5 -0.5 -0.5 -0.5

Net transfers, % of GDP [3] -0.1 -0.2 -0.1 -0.2 -0.1 -0.2 -0.2 -0.2 -0.1

Current account balance, US$bn [2] 6.0 12.1 27.2 11.0 12.0 10.4 14.2 16.1 13.8

Current account balance, % of GDP [3] 1.8 5.1 8.6 2.8 3.7 3.8 4.9 5.1 4.1

Openness to international trade, % [1,3] 29.5 44.1 44.0 39.7 46.1 54.9 52.7 50.7 48.7

Notes: f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 BCV; 3 BMI calculation.


ECONOMIC OUTLOOK

exports will drive a deterioration of the trade surplus. Indeed,

the country's oil sector, which accounts for over 95.0% of total

exports, will see production continue to slip due to underinvest-

ment and unsustainable domestic fuel subsidies (see 'Maduro

Election To Bring More Of The Same', April 15). This will

be exacerbated by a moderation in oil prices over the coming

years, with our Oil & Gas team forecasting the average price

of Opec basket crude to decline from US$109.5/bbl in 2012, to

US$108.0/bbl in 2013 and to US$104.0 in 2014.

Foreign Reserves Will Remain At Critically Low LevelsWhile persistent, current account surpluses, suggest the country

is not facing an imminent external account financing risk, a sharp

decline in foreign reserves over the coming years increases the

country's vulnerability to external shocks. Indeed, we believe

foreign reserves will continue to be used to finance social spend-

ing, particularly as oil revenue declines. We therefore forecast

reserves import cover to reach record low levels over the coming

years, falling below five months of cover in 2013, down from

above 10 months of cover just five years ago. Given such dy-

namics, an unexpected sharp decline in oil prices, which could

see the cur rent account fall into deficit and would also likely

be followed by significant financial account outflows, could see

an even further reduction in foreign reserves, potentially posing

external account financing risks.

Fiscal Policy

Maduro Will Use Spending To Retain Support

BMI VIEW We believe that recently elected President Nicolás Maduro will pur-

sue expansionary fiscal policies in a bid to retain popularity in a highly

polarised political environment. We expect this to take the form of an

increase in public sector wages and high levels of social spending. We

therefore forecast the nominal fiscal deficit to remain elevated at 8.1%

of GDP in 2013, albeit below the 11.8% deficit we estimate for 2012.

We believe that Venezuelan President Nicolás Maduro, will seek

to extend Hugo Chávez's legacy of elevated social spending in

a bid to retain popular support, particularly as he faces rapidly

deteriorating economic conditions. Indeed, Maduro's influence

TABLE: FISCAL POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Fiscal revenue, VEFbn [2] 137.0 164.9 234.3 300.0 350.0 400.0 450.0 500.0 575.0

Revenue, % of GDP [3] 19.4 16.2 17.3 17.7 16.2 14.6 13.4 12.7 12.7

Fiscal expenditure, VEFbn [2] 187.6 229.7 353.0 500.0 525.0 550.0 650.0 700.0 725.0

Expenditure, % of GDP [3] 26.5 22.6 26.0 29.5 24.4 20.1 19.4 17.8 16.0

Budget balance, VEFbn [2] -50.6 -64.8 -118.7 -200.0 -175.0 -150.0 -200.0 -200.0 -150.0

Budget balance, % of GDP [3] -7.2 -6.4 -8.7 -11.8 -8.1 -5.5 -6.0 -5.1 -3.3

Primary balance VEFbn [1,2] -40.3 -120.1 -75.7 -40.0 -50.0 -125.0 -100.0 -175.0 -125.0

Primary balance % of GDP [1,2] -5.7 -11.8 -5.6 -2.4 -2.3 -4.6 -3.0 -4.5 -2.8

Notes: e BMI estimates. f BMI forecasts. 1 Fiscal balance stripping out interest payments on government debt. Sources: 2 Ministerio del Poder Popular para Economia y Finanzas; 3 BMI calculation.

Elevated Fiscal Deficits To Continue Government Budget Balance



VENEZUELA Q3 2013

over government institutions is far from guaranteed, following a

narrow, below 2.0%, victory in the April 14 presidential election,

which he won by less than 2.0% (see our online service, April

15, 'Election Outcome: Maduro's Grip On Power Far From

Certain'). In addition, the February 8 currency devaluation will

further erode Maduro's approval rate, as it continues to take its

toll on consumer purchasing power, adding further incentives

to increase government spending. We therefore forecast the

government's fiscal deficit to remain elevated over the coming

years, coming in at 8.1% of GDP in 2013 and 5.5% in 2014,

compared to 11.8% in 2012.

Devaluation Will Offer Some Relief To Fiscal AccountWe forecast strong fiscal revenue growth of 16.7% and 14.3%

in 2013 and 2014 respectively, as the recent 46.7% devalua-

tion of the bolívar increases the amount of local currency the

government receives from dollar-denominated oil exports, the

country's main source of fiscal revenue. Indeed, while our Oil &

Gas team forecasts the average price of OPEC basket crude to

decline from US$109.5/bbl in 2012 to US$108.0/bbl in 2013 and

US$104 /bbl in 2014, we expect the currency devaluation will

more than make up for the lost revenue from weaker oil prices.

However, Venezuela's growing oil-for-loan commitments with

China in recent years, which at the current pace could see state-

owned oil company Petróleos de Venezuela (PdVSA) send up

to half its total net exports to China by 2015, poses serious risks

to fiscal revenue growth over the longer term.

Heavy Spending Through 2015We believe that strong fiscal revenue growth will allow Maduro

TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS - EVOLUTION OF ABILITY TO PAYCountry Total Score Rating Market View Ability To Pay

2013 2013 2013 2008 2009 2010 2011 2012 2013

Chile 76 B 2 69 76 64 82 75 67

Mexico 75 B 3 69 69 64 67 67 71

Colombia 74 B 2 - 51 56 60 56 58

Peru 71 B- 3 73 69 67 76 75 71

Brazil 69 C+ 4 73 60 73 69 67 69

Uruguay 66 C 3 36 49 40 49 44 56

Trinidad & Tobago 63 C- 3 - 67 65 71 73 73

Panama 62 C- 4 44 33 44 44 42 42

Costa Rica 58 D+ 3 45 42 49 45 45 46

Guatemala 54 D 4 32 42 55 53 53 55

Dominican Republic 53 D 3 22 17 40 33 38 35

Barbados 47 E+ 3 - 24 25 24 31 33

Ecuador 45 E 3 - 36 47 53 53 51

El Salvador 44 E 4 16 12 33 29 29 31

Nicaragua 42 E 3 18 9 11 20 29 29

Honduras 41 E 3 55 35 44 51 38 36

Jamaica 33 E 4 20 5 15 24 7 13

Argentina 29 E 4 56 38 53 49 29 33

Venezuela 27 E 4 65 47 42 38 38 27

Sovereign ratings in ranges from A to E, with + indicating that a credit is in the top of its range (eg B+ is 77, 78, 79), and - indicating it is near the bottom (eg B- is 70, 71, 72). Market outlook is on a scale of 1 to 5, from very bullish to very bearish, with 3 being neutral. Total and ‘willing-ness to pay’ is out of 100. Source: BMI

Revenue Benefiting From A Weaker Bolívar Fiscal Revenue And Average Exchange Rate

Source: BMI, BCV


ECONOMIC OUTLOOK

to adopt significant expansionary fiscal policies, particularly

in 2013. Indeed, as Maduro's grip on power comes into ques-

tion in a highly polarised political landscape, he will likely

opt to increase spending as soon as possible to prevent further

declines in popularity.

We believe Maduro's fiscal spending strategy will be two-fold.

First, Maduro will likely seek to reassert his position in power by

increasing government wages, particularly as inflation remains

above 20.0% due to the recent currency devaluation. Indeed,

before the election Maduro vowed to increase the minimum

wage by up to 45.0% this year, which will likely be accom-

panied by sizeable increase in public sector wages. Second, to

offset his already apparent declining approval rate among the

public, he will likely continue to support heavy social spending

programmes. We believe the main social programme that will

be used to consolidate support will be the government's afford-

able housing programme, 'Gran Misión Vivienda', which built

about 200,000 homes in 2012, and authorities suggested it is

scheduled to build over 300,000 new homes this year. We expect

government spending to remain particularly elevated through

2015, when the first legislative elections since Chávez's death

will take place, making it particularly important for the ruling

party to have a strong performance.

Regional Sovereign Risk Ratings

Challenges Remain In 2013

BMI VIEW While our latest Sovereign Risk Ratings show no change in the aver-

age overall score for Latin America since our last update in October

2012, we continue to see 2013 as a challenging year for several econo-

mies in the region. Indeed, our ratings continue to highlight a number

of themes we believe will be key in 2013, such as economic underper-

formance in Argentina and Venezuela, the impacts of slowing Chinese

growth on Latin America’s industrial metals exporters, and continued

robust economic expansion and fiscal consolidation in Mexico and Co-

lombia.

The most recent Sovereign Risk Ratings (SRR) for Latin America

highlight a number of themes we have long emphas ized for 2013,

including that the industrial metals exporters will be hit hard by

a rebalancing of the Chinese economy, Mexico and Colombia

will remain two of the region’s most dynamic growth stories

while Argentina and Venezuela will underperform, and Central

America and the Caribbean will continue to face significant

macroeconomic headwinds (see our online service, December

12, ‘Our Key Themes For 2013’).

However, the average score for Latin America remains steady at

54, following significant declines in our previous two updates,

keeping the average rating at D (see ‘Sovereign Risk Ratings:

Global Headwinds Further Erode Creditworthiness’, October

17). This comes as the majority of the significant downgrades to

our macroeconomic forecasts for 2013 have already taken place.

A Shake-Up At The TopAlthough Chile (76, B) retained the top spot in our regional rat

ings, its score has declined significantly in recent months (-8) as

Chile The Biggest Loser Among Major EconomiesLatin America – Change In ‘Ability To Pay’ Score Since Last Update

For Selected Countries

Source: BMI

A Mixed Bag Latin America – Change In Sovereign Risk Ratings Scores Since Our

Last Update

Source: BMI


VENEZUELA Q3 2013

we expect that China’s rebalancing away from an investment-

led growth model will see Chile’s current account dynamics

deteriorate significantly. In addition, we expect a slowdown

in headline real GDP growth, combined with weaker copper

prices and an election in 2014, will result in net budget deficits

of 0.1% and 0.8% of GDP in 2013 and 2014 (see ‘An Enviable

Fiscal Outlook’, January 18), further weighing on the country’s

‘ability to pay’ score.

Despite our expectation that a rebalancing of the Chinese

economy will weigh on Peru (71, B-) as well, we have seen its

‘ability to pay’ score rise modestly on the back of upgrades to the

country’s fiscal outlook. Indeed, we now forecast fiscal surpluses

of 0.5% and 0.4% of GDP in 2013 and 2014, up from modest

deficits previously, on the back of more moderate spending (see

‘Moderate Spending To Improve Fiscal Outlook’, November 30).

In addition to these factors bolstering the country’s ‘ability to

pay’ score, we have modestly upgraded Peru’s ‘willingness to

pay’ score on the back of our expectation that fiscal policy will

remain relatively sound in the coming years.

We believe the moves in Chile and Peru are also indicative of

a broader shake-up at the top of our regional ratings in recent

quarters, with Brazil (69, C+) and Chile losing their lustre, while

Colombia (74, B) and Mexico (75, B) have climbed toward the

top of our ratings in recent quarters. This chimes well with our

view that Brazil is set for a period of more moderate growth in

the coming years, and fiscal consolidation is likely to remain

off the cards in the near term due to a general election and the

expiration of the government’s growth acceleration programme

in 2014 (see ‘Expenditures To Keep Fiscal Deficit Substantial

In 2013’, January 18).

Meanwhile, Mexico has continued to rise in our ratings to oc-

cupy second spot in our most recent update, largely due to an

improvement in its ‘ability to pay’ score. This follows a modest

improvement in our 2013 fiscal deficit forecast from 2.1% of

GDP to 2.0%, as well as an upgrade to our 2013 real GDP growth

forecast to 3.6% from 3.4% previously, due to a more optimistic

outlook for the US economy (see ‘Stronger US Performance

To Boost Growth’, January 15). Meanwhile, despite losing the

second spot in our league table to Mexico, Colombia’s ‘ability

to pay’ score increased to 58 (out of 100), from 56 in our last

update, as we expect real GDP growth to accelerate from 3.8%

in 2012 to 4.3% in 2013 and the government to continue with

its fiscal consolidation agenda.

TABLE: LATIN AMERICA SOVEREIGN RISK RATINGS – EVOLUTION OF WILLINGNESS TO PAYCountry Total Score Rating Market View Willingness To Pay

2013 2013 2013 2008 2009 2010 2011 2012 2013

Chile 76 B 2 79 93 91 89 86 86

Mexico 75 B 3 89 89 82 74 78 80

Colombia 74 B 2 - 82 82 93 93 93

Peru 71 B- 3 71 72 79 64 66 70

Brazil 69 C+ 4 87 78 78 73 68 68

Uruguay 66 C 3 84 84 83 87 89 77

Trinidad & Tobago 63 C- 3 - 58 58 54 49 50

Panama 62 C- 4 82 89 89 88 87 86

Costa Rica 58 D+ 3 78 80 79 76 73 73

Guatemala 54 D 4 35 60 56 50 52 52

Dominican Republic 53 D 3 33 31 70 71 71 76

Barbados 47 E+ 3 - 76 79 70 64 64

Ecuador 45 E 3 - 31 30 30 37 37

El Salvador 44 E 4 34 34 76 69 62 59

Nicaragua 42 E 3 44 44 46 44 54 58

Honduras 41 E 3 56 34 58 54 48 46

Jamaica 33 E 4 73 57 62 61 57 57

Argentina 29 E 4 48 41 34 38 28 23

Venezuela 27 E 4 53 54 38 26 26 26

Sovereign ratings in ranges from A to E, with + indicating that a credit is in the top of its range (eg B+ is 77, 78, 79), and - indicating it is near the bottom (eg B- is 70, 71, 72). Market outlook is on a scale of 1 to 5, from very bullish to very bearish, with 3 being neutral. Total and ‘willingness to pay’ is out of 100. Source: BMI


ECONOMIC OUTLOOK

Argentina And Venezuela To Remain UnderperformersWe highlighted in our ‘Key Themes for 2013’ that Argentina

(29, E) and Venezuela (27, E) are in for a turbulent year, a view

which our SRR data continues to reflect. Indeed, following the

most recent downgrades to our macroeconomic forecasts, as well

as the countries’ ‘willingness to pay’ scores, they rank at the

bottom of our league table. Following Venezuela’s devaluation

of the bolívar in February, the country has seen a substantial

downgrade (-9) in the ‘ability to pay’ category of our SRR

due to rising debt-to-GDP, declining foreign reserves and our

expectation for real GDP growth to slow to 2.6% in 2013, from

an estimated 5.3% in 2012 (see ‘Government Intervention To

Increase Following Devaluation’). Venezuela’s ‘willingness

to pay’ score held steady at 26 – second to last in the region.

This suggests that risks to the Venezuelan economy remain

significant, with the country scoring particularly poorly in the

sub-components of our ‘willingness to pay’ ratings that discuss

fiscal responsibility, debt management and political upheaval.

Default risk is higher Argentina, with the country scoring only

23 in the ‘willingness to pay’ category – the lowest in the region.

The country’s weak score is underpinned by a number of factors,

many of which are highlighted in the ongoing legal battle between

the government and the ‘hold-out’ investors who have rejected

restructuring offers, and appear on the verge of winning a major

decision in US courts. The Argentine government has repeat-

edly stated it will not pay the ‘hold-out’ investors, regardless

of the case’s outcome, leading us to believe that there is a high

likelihood that the country will enter technical default in order

to avoid doing so (see ‘Technical Default Risk Remains High’,

January 16). Moreover, we expect the government’s unsustain-

able economic policies will prompt a one-off devaluation of

the peso this year, weighing on its ‘ability to pay score’, as we

forecast the unit to be 22.5% weaker on average in 2013 than in

2012. Indeed, we believe depreciatory pressure on the currency

will rise throughout 2013, while the policies employed to keep

the currency overvalued will grow less effective. As such, we

believe the country’s international reserves position will fall

to a point where Argentina must allow the peso to depreciate,

likely by mid-2013 (see ‘ARS: Weakening Reserves Picture To

Trigger Devaluation’, December 3).

However, Argentina is not the only Southern Cone country to

score poorly in the ‘willingness to pay’ portion of our ratings, as

Uruguay (66, C) has seen a major downgrade (-12) in our most

recent update. This is underpinned by our view that there is divi-

sion within the government about whether fiscal responsibility

or promoting growth should take precedence, implying further

fiscal slippage is likely on the cards in the coming quarters.

Central American Creditworthiness Is LackingCentral American countries have long languished at the bottom

half of our SRR, and the most recent update is no exception,

highlighting that the region’s creditworthiness remains sub-par.

Honduras (41, E) has seen the region’s largest downgrade in its

overall score (-10) on the back of a major deterioration in the

country’s ‘ability to pay’. This comes as we believe the Novem-

ber 2013 presidential election is likely to encourage a sizeable

increase in government spending over the coming quarters,

weighing on the fiscal accounts. We also foresee a significant

Venezuela And Honduras Lead The Way DownLatin America – Change In ‘Ability To Pay’ Scores Since Our Last

Update

Source: BMI

CentAm Scores Head Lower Latin America – Change In ‘Willingness To Pay’ Scores Since Our

Last Update

Source: BMI


VENEZUELA Q3 2013

deterioration of the external accounts this year as an outbreak

of coffee rust weighs heavily on the country’s exports and the

income account shortfall widens as foreign companies repatri-

ate profits on the back of rising uncertainty surrounding the

upcoming election (see ‘Pressure Rising On External Account

Position’, February 28). In addition, the country’s ‘willingness

to pay’ score declined on the back of downward revisions to the

‘election’ and ‘fiscal discipline’ sub-components of our ratings.

Panama (62, C-) and El Salvador (44, E) also saw their ‘willing-

ness to pay’ scores decline modestly on the back of an anticipated

uptick in spending before the May and March 2014 elections,

respectively. El Salvador’s willingness to pay score was also

negatively impacted by a downward revision of its ‘debt man-

agement’ sub-component given that the country continues to

post one of the highest debt-to-GDP ratios in Central America.

Caribbean Not All Rosy Despite Upgrades Although both Barbados (47, E+) and Jamaica (33, E) have seen

upgrades in their overall SRR scores, and Trinidad & Tobago

(T&T, 63, C-) has taken the top spot in the region’s ‘ability to

pay’ table, we believe significant macroeconomic headwinds,

stemming from still-weak global growth, are likely to continue

impacting the Caribbean in the coming years. Indeed, while

Barbados’ ‘ability to pay’ score rose on the back of a pick-up in

growth and slightly more robust export and reserves positions,

our forecast for average real GDP growth of just 1.6% between

2013 and 2018 means that the country’s debt burden is unlikely

to decline substantially over the coming years.

Jamaica’s ‘ability to pay’ score also got a boost from an upgrade

to our fiscal forecasts, and we believe the recently agreed-

upon debt swap and the increased likelihood of IMF support

will improve the country’s macroeconomic prospects over the

coming quarters. However, this is a fundamentally short-term

phenomenon. Indeed, we believe the restructuring will do little

to substantially improve the country’s macroeconomic position

over the long term given our expectation for only limited reforms

to bolster growth and encourage greater fiscal consolidation (see

‘New Restructuring, Old Problems’, February 14).

Meanwhile, although T&T now tops the region in terms of

‘ability to pay’ with a score of 73, we believe this is due to a

decline in Chile’s score rather than a substantial improvement

in T&T. Indeed, while the country’s score remains supported

on the back of a low debt-to-GDP ratio and a strong current

account surplus, the long-term decline in T&T’s hydrocarbons

production, as well as our view that the economy is likely strug-

gle to adjust to the unconventional oil and gas boom in the US

mean that it could fall in our ratings over the coming quarters.

Sovereigns Continue To Benefit From Risk AppetiteWe have changed adjusted the methodology for our market out-

look slightly this quarter, looking at our SRR and the spread of

similar maturity US$-denominated global bond yields over aver-

age US 10-year bond yields. This comes as we look to neutralize

the effect of rising US bond yields on emerging market debt. The

chart below shows that investors’ search for yield has continued

to bolster emerging market debt in recent months, bringing the

spreads in some of the Latin America’s riskier economies to

near record lows. While we believe that risk appetite and very

loose monetary policy in developed states could see this trend

continue in the coming months, we highlight rising risks due

to increasing debt issuance in emerging markets and potential

for several countries’ macroeconomic positions to deteriorate

in the coming months. Our ‘fair value’ frontier continues to

suggest room for yields on Salvadoran and Guatemalan debt

to head higher, while Peru and Mexico remain near fair value.

As financial markets increasingly price in normalisation in US

monetary policy over the coming years, while creditworthiness

declines in some cases, we expect to see yields of some of the

region’s riskier sovereigns head higher. This highlights potential

for these spreads to widen quickly, saddling sovereigns with

both higher nominal debt loads and higher debt servicing costs.

Risk Appetite Keeps Spreads Low Latin America – Risk Ratings



Chapter 3: 10-Year Forecast

The Venezuelan Economy To 2022

Growth Outlook In A Post-Chávez Era

BMI VIEW Although the Venezuelan economy is likely to experience a tough

time over the next few years, we believe there is significant economic

growth potential over the long term. In our view, a more moderate and

market-friendly government which is willing to make the necessary

structural reforms is needed to unlock this potential.

Determining Venezuela's long-term economic outlook is no

easy task. The direction of the economy over the next 10 years

depends on the direction of the country's politics. The transition

towards socialism will likely continue in post-Chávez era, albeit

at a more moderate pace, and the country's economic growth

rate would remain substantially below potential. However, if we

see a change of leadership at any moment and a shift to a more

moderate administration, we believe the Venezuelan economy

has the potential to experience solid rates of economic expan-

sion over the long term.

We believe Venezuela's severe economic contraction ended in

2010, and despite the country's unsustainable policy mix, this

could set the stage for an era of steady economic growth. We

currently forecast an average annual real GDP growth rate of

3.2% over the 2013-2022 period. However, with huge levels of

natural resources, the Venezuelan economy has a great deal of

potential. A growth rate far greater than this could be realised

with the correct mix of economic reforms.

Decoupling From OilWe are confident that Venezuela's economic growth cycles

will continue to track the price of crude oil over the long term,

as the two have been inextricably linked in the past. On this

front, our Oil & Gas team forecasts oil production to rise by

a year-on-year average of approximately 3% over the next 10

years, with exports rising by a similar amount. We also see an

average Brent crude oil price of US$110.5/bbl over the same

period. Petro-dollar inflows will allow the country to sustain

current account surpluses and allow investment to exceed the

country's savings rate over the long term. However, sustainable

economic prosperity, in our view, will be largely dependent on

the government's ability to develop the non-oil sector and to

smooth out the business cycles. In recent years, high oil prices

have masked the atrophy of the non-oil sector, which we believe

has exposed the Venezuelan economy to the fall in oil prices.

In our view, the liberalisation of capital controls would be

needed to encourage a resurgence of the non-oil sector, which

we believe could be achieved under more market-friendly lead-

ership. The current system, under which domestic companies

have restricted access to dollars, has led to a lack of investment

and production as companies have been unable to finance daily

operations. The fixed exchange rate, which has been pegged at

too high a level given the high rate of fiscal spending, has also

led to a drain of capital out of the country and has severely dis-

torted capital allocation. A move to a floating exchange rate, or

TABLE: LONG-TERM MACROECONOMIC FORECASTS2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f

Nominal GDP, US$bn [1] 291.3 314.3 334.7 358.3 385.5 416.4 451.5 504.8

Real GDP growth, % change y-o-y [2] 3.1 3.0 2.6 3.1 3.4 3.6 3.9 4.1

Population, mn [3] 31.2 31.7 32.1 32.5 32.9 33.3 33.7 34.1

GDP per capita, US$ [1] 9,329 9,927 10,429 11,021 11,706 12,491 13,382 14,788

Consumer price index, % y-o-y, ave [4] 22.2 17.3 15.0 15.0 15.0 15.0 15.0 15.0

Current account balance, % of GDP [2] 4.9 5.1 4.1 3.3 3.8 4.0 4.8 4.6

Exchange rate VEF/US$, ave [5] 7.65 9.00 9.00 11.00 13.00 13.25 13.50 13.50

Notes: f BMI forecasts. Sources: 1 BCV, IMF; 2 BMI calculation; 3 World Bank/UN/BMI; 4 BCV; 5 BMI.


VENEZUELA Q3 2013

BMI’s long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most

cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,

demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,

our forecasts also reflect analysts’ in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in

the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,

fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,

external account balances and interest rates.

at the very least a crawling peg, would allow the non-oil sector

to compete internationally, allowing a much-needed resurgence

of the manufacturing sector and a general improvement in the

allocation of capital.

Strengthening Infrastructure And Institutions Will Be KeyWe also believe that more controlled, and more economically ef-

ficient, fiscal spending would be a necessary condition to encour-

age long-term economic progress. Notwithstanding the poverty

reduction that Chávez's 'Bolivarian Missions' have achieved, we

question the long-term growth impact of his profligate public

spending policies. A move away from using fiscal resources to

expand the government's reach overseas and towards improv-

ing the country's ailing physical infrastructure, which would

act as a complement to private investment, would also help the

country to grow over the long term. This would need to be ac-

companied by a move by the government to encourage private

sector enterprise by strengthening property rights. Finally, a

government that made progress on strengthening the country's

institutions and reducing government corruption would lay the

groundwork for sustainable economic expansion.


SWOT Analysis

Strengths Venezuela is an important supplier of oil to the US and is a member

of OPEC.

Home to some of the largest oil reserves in the world, the Orinoco

region will provide opportunities for large-scale investment.

Weaknesses A lack of domestic and international investment, largely as a result of

the uncertain political environment, could undermine the long-term

growth outlook.

Privatisation ground to a halt under the administration of former

President Hugo Chávez, with the government instead preferring

production-sharing agreements to encourage foreign direct invest-

ment.

Opportunities Government support for businesses, through a range of low interest

rate loans, is available. The government fund for industrial credit

provides large sums of money for small- and medium-sized busi-

nesses.

Threats The implementation of stringent foreign currency controls has hit

the business community hard. This has restricted import growth,

as businesses lack the currency to purchase raw materials.

State expropriation of ‘idle’ plants and proposals for land reform

will act as a disincentive for prospective investment (domestic and

foreign).

BMI Business Environment Risk RatingsVenezuela’s business environment rating is the lowest in the entire region

and comes in 145th place globally. The country scores just 40.9 in the

‘infrastructure’ category as a result of low levels of investment in recent

years, and just 24.6 in the ‘institutions’ category owing to the poor legal

framework and high levels of bureaucracy. The largest deterioration in

recent years, as a result of the PSUV’s socialist drive, has been seen

in the ‘market orientation’ category, in which Venezuela scores 32.5.

Chapter 4: Business Environment

Business Environment Rank TrendChile 64.0 1 +Uruguay 59.8 2 +Mexico 53.8 3 +Brazil 53.7 4 +Peru 53.5 5 +Colombia 52.6 6 +Costa Rica 52.1 7 +Panama 51.6 8 =Argentina 48.3 9 -Paraguay 43.2 10 +El Salvador 42.0 11 -Guatemala 40.9 12 +Nicaragua 40.3 13 +Ecuador 38.4 14 +Bolivia 37.5 15 +Honduras 36.3 16 -Venezuela 32.6 17 +Regional ave 47.1/Global ave 48.1/Emerging Markets ave 45.1


VENEZUELA Q3 2013

Business Environment Outlook

IntroductionThe ongoing threat of socialist reforms, combined with price

caps on certain goods, continues to weigh heavily on the Ven-

ezuelan investment climate. A frail institutional framework is

also a key weakness of the country's business environment,

which is reflected in the country's low ranking in our proprietary

business environment ratings.

Institutions

Legal Framework Venezuela uses an adversarial legal system based on code law,

which operates at a federal level. There is no parallel system of

courts at the regional level. This means nearly all court officials

are employed by central government. Historically, the courts

have not been as powerful as the executive.

The judiciary is not perceived as being independent of the

executive by international observers. This perception was re-

inforced by the government's 2005 decision to change the rules

by which supreme court judges are elected to make it easier

for the dominant force in the legislature to influence the court's

composition. The government has said the associated increase

in the number of judges was necessary to improve the supreme

court's efficiency.

Venezuela officially provides equal treatment for local and for-

eign businesses. However, in practice, the business environment

is considerably less accommodating to foreign companies. This

has been exemplified by the ongoing seizure of a number of

foreign-owned companies across many sectors of the economy.

The 'Enabling Law', which the national assembly passed in

December 2011, allows the president to dictate regulations in

areas including the 'economic and social sphere' to the 'transfor-

mation of state institutions'. This provides him with the power

to implement his nationalisation plans, which include reversing

legislation that previously allowed for substantial or complete

private ownership of the energy sector.

Property Rights The danger of land and investment expropriations remains seri-

ous. The government has terminated some investment contracts

with foreign firms in a manner that some countries have regarded

as expropriation.

The 2001 land law was revised to reinstate a provision allowing

what is effectively expropriation of land without court approval

– a measure previously deemed unconstitutional by the Supreme

Court. Private land may be used to promote collective production,

with the government installing state-sponsored cooperatives on

TABLE: BMI BUSINESS AND OPERATION RISK RATINGSInfrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Argentina 55.8 44.8 44.4 48.3

Brazil 60.9 53.3 47.0 53.7

Chile 53.4 68.1 70.4 64.0

Colombia 51.6 56.4 49.8 52.6

Costa Rica 55.1 51.1 50.0 52.1

Dominican Republic 38.6 45.8 49.6 44.6

El Salvador 42.4 43.1 40.5 42.0

Guatemala 39.2 37.2 46.4 40.9

Guyana 36.9 46.8 46.7 43.5

Honduras 32.0 32.6 44.5 36.3

Jamaica 42.1 49.7 37.5 43.1

Mexico 51.2 53.0 57.2 53.8

Nicaragua 34.6 38.0 48.5 40.3

Panama 48.6 54.2 51.9 51.6

Peru 49.4 50.2 60.8 53.5

Trinidad & Tobago 44.9 47.3 61.0 51.0

Uruguay 63.5 66.2 49.7 59.8

Venezuela 40.9 24.6 32.5 32.6

Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator


BUSINESS ENVIRONMENT

many properties under dispute and even on properties whose

owners have won court decisions. The government indicates

that such measures are aimed at reclaiming what it describes as

federal property, rather than expropriation. In a country where

more than half of all arable land is owned by around 1% of the

people, it regards this as necessary to promote equitable land

distribution.

Empowered by the Enabling Law, Chávez ordered the seizure of

Venezuela's biggest telephone company, Compania Nacional de

Teléfonos de Venezuela in 2007 and refused to pay sharehold-

ers the market value of their shares. In late 2009, four private

banks – Confederado , Central , Bolivar and Banco Real – were

shut down for investigations owing to alleged accounting ir-

regularities.

Intellectual Property Rights Venezuela is party to a number of agreements. It is a member

of the World Intellectual Property Organization and has signed

major intellectual property rights (IPR) and copyright protec-

tion pacts.

Despite its withdrawal from the Andean community (CAN),

Venezuela's obligations under the WTO Agreement on Trade-

Related Aspects of Intellectual Property Rights – as part of its

CAN commitments – remain applicable for the moment. How-

ever, enforcement is weak, and staffing levels at organisations

charged with tackling IPR issues and piracy are inadequate.

According to the 2011 Intellectual Property Rights Index, out

of the 130 countries ranked (which represent more than 95% of

global GDP), Venezuela ranked in 128th place.

Corruption Corruption is a major issue in Venezuela and appears to be

worsening. According to Transparency International's 2012

Corruption Perceptions Index, Venezuela comes in a low 165

place out of 176 nations. Government tenders are the most

vulnerable to corruption because the tender process frequently

lacks transparency. The current exchange controls are also a

source of corruption. The constitution and existing legislation

provide a platform from which to tackle the issue, but the judici-

ary frequently fails to implement the law.

Although Chávez's main political platform became the removal

of the corrupt political elite, the perception is that corruption

has worsened since he came to power. He has strengthened his

grip on the institutions by employing members and military

cronies in government roles. There is very little oversight into

the running of the Venezuelan political system.

TABLE: BMI LEGAL FRAMEWORK RATINGInvestor Protection Score Rule of Law Score Contract Enforceability

ScoreCorruption Score

Argentina 26.0 46.3 64.0 56.8

Brazil 42.5 69.8 55.4 52.4

Chile 61.9 90.2 53.7 72.2

Colombia 67.1 64.3 8.7 36.9

Costa Rica 31.5 79.4 38.7 89.5

Dominican Republic 42.4 37.2 42.8 44.7

El Salvador 28.0 24.7 49.2 68.6

Guatemala 24.1 42.0 27.6 46.1

Guyana 41.2 48.5 50.9 50.5

Haiti 5.8 9.6 35.9 42.7

Honduras 26.4 41.3 20.4 22.9

Jamaica 38.9 53.6 23.1 70.5

Mexico 51.9 55.5 54.8 30.8

Nicaragua 23.1 33.8 64.0 43.2

Panama 61.1 60.9 20.1 47.4

Peru 53.6 41.1 49.2 44.8

Trinidad & Tobago 48.1 63.1 17.8 64.8

Uruguay 60.6 85.0 52.3 84.9

Venezuela 4.2 17.1 38.1 20.8



VENEZUELA Q3 2013

Infrastructure

Physical Infrastructure Venezuela reportedly has the most paved highways of any

country in Latin America, at approximately 60%. However,

successive governments have neglected the country's physical

infrastructure – instead favouring education, health and social

services – and many highways are in disrepair. In 2006, a via-

duct connecting the country's main airport to Caracas, which

was on the verge of collapse, was closed, causing chaos and

adding several hours to journey times. While this has now been

repaired, its previous state of disrepair is representative of the

government's neglect of physical infrastructure.

The main highways linking Caracas to the eastern and western

parts of the country are also in disrepair and may face bridge

collapses. Venezuela's electrical grid has also been suffering.

Major electricity blackouts, although less frequent than in the

past, are still a cause for concern.

On the plus side, road and highway projects are now said to be

high priorities. Other projects include construction and expan-

sion of refineries, power plants and petrochemical complexes.

Furthermore, institutions such as the Andean Development Cor-

poration have been providing financial assistance to Venezuela.

The railway system is very limited outside Caracas. However,

the recently launched National Railway Development Plan is

designed to create 15 railway lines, totalling 8,500 miles, by 2030.

The network will be built in cooperation with China Railways .

Caracas has a subway system, and the rest of the country is

served by a very small railway system of 584km which is used

to transport freight. The government is seeking ways to expand

this system. Venezuela has 11 international and 36 domestic

airports, with the major one in Caracas processing roughly 90%

of international flights. There are also 13 ports and harbours.

Approximately 90% of households have access to electricity.

Venezuela's infrastructure sector has displayed double-digit

growth in the last few years. Oil revenues form the mainstay

of the Venezuelan economy and largely steer growth of all

industries, including construction.

Labour Force Venezuela's total labour force (all persons 15 years of age and

older who are working or looking for work) was 12.5mn at the

end of 2006, out of a total population of 27.2mn. According

to the IMF, 7.7% are unemployed. However, persons are re-

garded as employed if they work at least 1 hour per week, and

approximately 45% of those employed work in the informal

sector. Of those working in the formal sector, the government

TABLE: LABOUR FORCE QUALITY Literacy Rate,% Labour Market Rigidity Score Female Labour Participation, %

Argentina 97.60 21.00 52.40

Brazil 89.60 46.00 60.10

Chile 96.40 18.00 41.80

Colombia 92.30 10.00 40.70

Costa Rica 95.80 39.00 45.10

Dominican Republic 88.80 21.00 50.50

El Salvador 83.60 24.00 45.90

Guatemala 72.50 28.00 48.10

Guyana 91.80 19.00 44.70

Haiti 61.00 10.00 57.50

Honduras 82.60 57.00 40.10

Jamaica 85.50 4.00 56.10

Mexico 91.70 41.00 43.20

Nicaragua 80.10 27.00 47.10

Panama 93.20 66.00 48.40

Peru 88.70 39.00 58.20

Trinidad & Tobago 98.60 7.00 55.10

Uruguay 97.80 18.00 53.80

Venezuela 93.00 69.00 51.70

Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 0 = highest score,



employs about 1.8mn, equivalent to 35%. Some two-thirds of

workers are employed in the services sector, around a quarter

in industry and the remaining 12% are employed in agriculture.

The major labour organisations in Venezuela are the independent

Confederation of Venezuelan Workers and the National Workers

Union. The 1997 Organic Labor Law provides that the minimum

wage will be reviewed at least once a year and may be adjusted

based on considerations such as the food basket. Following the

announcement of a 25% rise in January 2010 – 10% in March

and 15% in September – the minimum wage in Venezuela will

be VEF1,200/month (US$521). Under Chávez, the minimum

wage has risen at a faster rate than inflation.

In any enterprise with more than 10 workers, foreign employees

are restricted to 10% of the workforce, and Venezuelan law

limits foreign employee salaries to 20% of the payroll. The

state oil company PdVSA in particular seeks to maximise local

worker content.

A two-month national strike at state-run oil company PdVSA,

which ended in February 2003, halted oil production, brought

the economy to the edge of ruin and resulted in the sacking by

the government of more than 18,000 striking employees out of a

total workforce of 46,000. Since then, strike action in Venezuela

has become increasingly rare and is much less common than in

neighbouring countries.

Foreign Investment Policy While most sectors are open to foreign investment, Chávez was

aiming to nationalise 'key sectors' such as hydrocarbons, mining,

telecommunications and energy. The government now favours

deals between state corporations over private participation. The

advancement of the socialist revolution has soured the national

attitude towards foreign investors in recent years.

The 2001 Hydrocarbons Law reserves exploration and pro-

duction, as well as the initial transportation and storage of

hydrocarbons, to the state. Under this regime, primary activities

must be carried out directly by PdVSA, or by a joint venture

company with more than 50% of the shares held by the state.

The Hydrocarbons Law increased royalty payments from 17%

to 30% and stipulated that any arbitration proceedings would

be conducted within Venezuela.

The natural gas sector remains more open to foreign investment.

The 1999 Gaseous Hydrocarbons Law opened the entire natural

gas sector to private investment, both domestic and foreign. Pd-

VSA involvement is not required for gas development projects.

However, complete vertical integration of the gas business from

wellhead to consumer is prohibited.

In 2007, Chávez stripped away the Venezuelan oil holdings

of Exxon Mobil Corp and ConocoPhillips, refusing to pay

adequate compensation, and seized US-owned telecommunica-

tions company RCTV. These proceedings and other acts of a

similar nature have soured foreign investor attitudes towards

the government.

Aside from the natural resource industries, the strong overvalu-

ation of the exchange rate has reduced the competitiveness of

the Venezuelan economy, damaging the non-oil export sector

and dampening the country's appeal to foreign investors. Moreo-

ver, foreign exchange controls, originally introduced in 2003,

remain in place. Government approval is required to send funds

overseas, slowing down transactions. This has overturned some

of the measures in the Law for the Promotion and Protection

of Investment, decreed in 1999, which enshrined the right to

repatriate all capital and profits, as well as guaranteeing equal

treatment for domestic and foreign investors, and simplifying

investment and tax procedures.

TABLE: LATIN AMERICA – ANNUAL FDI INFLOWS2009 2010 2011

US$bn Per Capita US$bn Per Capita US$bn Per Capita

Argentina 4.0 100.3 7.1 174.6 7.2 177.7

Brazil 25.9 134.3 48.5 248.8 66.7 339.0

Chile 12.9 760.1 15.4 898.3 17.3 1001.7

Colombia 7.1 156.3 6.9 149.0 13.2 282.0

Mexico 16.1 143.9 20.7 182.6 19.6 170.3

Peru 6.4 223.6 8.5 290.8 8.2 280.0

Trinidad & Tobago 0.7 530.6 0.5 409.6 0.6 426.3

Venezuela -2.5 -88.9 1.2 41.7 5.3 180.1

Source: UNCTAD, BMI


VENEZUELA Q3 2013

The Overseas Private Investment Corporation , which helps US

businesses invest overseas, currently has significant exposure

in Venezuela but is statutorily obligated to suspend operations

due to Venezuela's failure to achieve certification under the

anti-narcotics trafficking laws.

Foreign Trade Regime Venezuela is the founding member of the ALBA initiative,

the 'Bolivarian Alternative for the People of Our America', an

international organisation based on the idea of social, political

and economic integration between countries in Latin America

and the Caribbean. The agreement was initially proposed as an

alternative to the US-led Free Trade Area of the Americas. It is

intended to foster economic integration that is based on social

welfare as well as trade liberalisation.

In 2012, Venezuela joined Mercosur, a regional trade agreement

between Brazil, Argentina, Uruguay and Paraguay focused on

promoting free trade and free movement of people.

In 2006, Chávez withdrew from CAN – the regional trade bloc

comprising Bolivia, Colombia, Ecuador and Peru – citing the

irreparable damage caused to the community by the free trade

agreements signed by Colombia and Peru with the US.

TOP EXPORT DESTINATIONS2004 2005 2006 2007 2008 2009 2010 2011

United States 16946.30 26975.10 32267.60 31012.50 48210.80 21771.90 26421.30 43868.20

United States, % of total 42.72 48.41 49.20 45.06 50.67 37.80 40.17 48.03

Netherlands Antilles 6989.29 8099.38 6092.96 5803.74 3.79 1.23 5.96 6508.52

Netherlands Antilles, % of total 17.62 14.54 9.29 8.43 0.00 0.00 0.01 7.13

India 9.76 20.85 67.50 2325.44 3805.52 2282.54 5187.31 5943.74

India, % of total 0.02 0.04 0.10 3.38 4.00 3.96 7.89 6.51

Singapore 499.81 433.54 992.56 1524.46 2579.59 2819.06 3566.66 4599.34

Singapore, % of total 1.26 0.78 1.51 2.21 2.71 4.89 5.42 5.04

Sweden 0.92 2.97 0.62 149.97 516.00 345.74 445.19 1358.54

Sweden, % of total 0.00 0.01 0.00 0.22 0.54 0.60 0.68 1.49

TOTAL 39667.70 55716.50 65578.10 68826.30 95137.70 57594.70 65781.60 91338.10

TOP 5 24507.70 35595.61 39481.35 40875.20 55173.09 27267.13 35679.90 62345.04

% from top 5 trade partners 61.78 63.89 60.21 59.39 57.99 47.34 54.24 68.26

Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

TABLE: TRADE AND INVESTMENT RATINGS Openness To Investment Score Openness To Trade Score

Argentina 58.50 20.15

Brazil 64.65 9.40

Chile 43.95 68.45

Colombia 53.90 9.25

Costa Rica 66.00 63.55

Dominican Republic 62.75 44.35

El Salvador 19.30 66.00

Guatemala 42.20 45.30

Guyana 60.45 87.80

Haiti 47.50 44.55

Honduras 54.90 61.75

Jamaica 21.35 32.90

Mexico 63.40 38.65

Nicaragua 56.85 73.35

Panama 46.40 81.35

Peru 76.80 49.05

Trinidad & Tobago 37.40 70.45

Uruguay 45.65 37.95

Venezuela 36.75 20.00




Tax Regime Efforts are being made to improve tax collection, evident in an

increase in the number and thoroughness of tax inspections for

both domestic and foreign-owned firms. In an attempt to rein

in inflation, the government took the decision to lower VAT

rates in 2007 by 5%, taking the rate to 9%. However, VAT rates

were raised again to 12% in April 2009. Some luxury goods,

such as expensive vehicles and jewellery, attract an additional

10% charge. Banking and financial services, sales of shares and

bonds, domestic (non-air) passenger transport, basic foods, farm-

ing machinery, ships, and some education and health services

are exempt from VAT. The 2007 tax cuts have been replaced

by the financial transaction tax, which charges 1.5% on every

transaction at each stage of the production process.

Corporate tax rates rise progressively to 34% in most sectors.

In the hydrocarbons sector, firms pay 50%, except for asso-

ciations under the Hydrocarbons Law. Mining firms pay 60%.

The Business Assets Law places a 1% tax on business assets.

Resident companies and permanent offices of foreign entities

are taxed on worldwide income. A credit for foreign tax paid

is then provided. Non-residents pay tax on Venezuela-sourced

income only.

Individual tax is charged on residents at progressive rates up to

34%. Non-residents pay a flat rate of 34% and are not entitled

to personal allowances. Dividends received by residents from

resident entities are exempt from tax unless dividend payments

are greater than the taxable profits of the payer. Residents pay

tax on worldwide income with a credit for foreign tax paid.

Non-residents are taxed only on Venezuela-sourced income.

Capital gains are usually taxed as ordinary income. Gains on

the sale of a main private residence by an individual are nor-

mally exempt. Gains from the sale of publicly traded shares on

a domestic stock exchange are subject to a 1% withholding tax

but are not included in taxable income.

Operational Risk

Security Risk Street crime in Venezuela is high and on the rise. According to a

January 2008 poll by Datanalisis, 90% of Venezuelans believed

Chávez was doing too little to catch criminals. Survey group

Latinobarometro claims that half of all Venezuelans were victims

of crime between 2006 and 2007, which makes Venezuela the

most crime-ridden nation in Latin America.

While there have been no significant terrorist attacks in Ven-

ezuela in recent years, there is an ongoing threat of terrorism

and kidnapping from groups such as the Revolutionary Armed

Forces of Colombia – People's Army that are active around the

Colombian border.


Chapter 5: Key Sectors

Defence & Security

Executive Summary The government introduced a new gun law banning commercial

sales of firearms and ammunition in an effort to improve security

and curtail crime ahead of the general election in October 2012.

Only the army, police and certain specified groups are now al-

lowed to buy arms from state-owned weapons manufacturers.

The annual number of murders in the country reached a record

high in 2011, according to a report released by the Venezuela

Violence Observatory. The report revealed that at least 19,336

people were killed with an average of 53 murders a day.

We are revising up our 2012 real GDP forecast for Venezuela

from 2.5% to 3.5% on the back of a very strong Q112 real

GDP reading of 5.9%. Stronger-than-expected credit fuelled

private consumption and government-financed investment has

prompted real GDP growth come in above our expectations in

H112. However, we believe growth will peak in 2012 and slow

over the next few years given persisting economic imbalances

and the political risks associated with the country.

Industry ForecastArmed Forces

Venezuela has rapidly expanded its armed forces in recent years

through the training of a sizeable military reserve, designed to

give the country extra fighting power.

Government Defence Spending

Modernisation and upgrades under the new procurement pro-

gramme are likely to continue, and be externally directed, with

Russian, European and Middle Eastern countries expected to

make up most of the suppliers. However, the overall increase

in procurement could prove beneficial for the defence industry

if cooperative or domestic bids are chosen for later contracts.

Venezuela’s defence expenditure received a major boost from

a US$4bn loan from Russia in October 2011. The deal, which

comes in exchange for oil and gas projects, will provide half

the funds in 2012 and the remaining half in 2013, while Russian

firms Rosneft and Gazprom secure projects within the energy

sector. The deal was signed with Venezuela’s Petroleos de Venezuela. BMI expects to see Venezuela’s defence expendi-

ture to grow by as much as 21.72% to VEB27.6bn (US$5.28bn)

in 2013, with growth set to decline y-o-y until 2015. Beyond

the middle of the decade BMI sees Venezuelan defence ex-

penditure growing by 14% y-o-y through to 2021. By the end

of the forecast period, we expect defence expenditure to reach

as much as VEB77.56bn (US$4.43bn), while total spending as

a proportion of Venezuela’s GDP will remain within the 1%

mark over the next 10 years.

Venezuela’s strengthening military links with Russia have led to

a series of arms purchases which may well continue. However,

the decline in oil exports may affect the level of expenditure,

although President Chávez seemed determined to spend money

on imported arms. For the duration of the forecast period, Ven-

ezuela is not likely to develop a competitive defence industry. As

such, it will remain import-dependent for its weapons purchases

TABLE: VENEZUELA’S ARMED FORCES PERSONNEL (‘000, UNLESS OTHERWISE STATED), 2003-20092003 2004 2005 2006 2007 2008 2009

Army 34.00 34.00 34.00 34.00 34.00 34.00 63.00

Navy 18.30 18.30 18.30 18.30 18.30 18.30 17.50

Air force 7.00 7.00 7.00 7.00 7.00 7.00 11.50

Paramilitary force 23.00 23.00 23.00 23.00 23.00 23.00 23.00

Total 82.30 82.30 82.30 82.30 82.30 82.30 -

- % of population 0.32 0.31 0.31 0.30 0.30 0.29 -

- % of manpower available for military services 0.63 0.61 0.60 0.59 0.58 0.57 -

- % of manpower fit for military services 0.82 0.74 -

Source: ISIS, BMI


VENEZUELA Q3 2013

and diverse in the sources it relies on for those purchases. Future

purchases are likely to follow in the pattern of the announce-

ments mentioned above – bought for durability of value rather

than immediate low-cost acquisition, and purchased from a

diverse range of foreign suppliers. The announcement of a

procurement programme and growing tensions with Colombia

has led observers to expect an increase in defence expenditure

over the period of this forecast.

Chávez’s government was negotiating a deal with Spain’s

state-backed Navantia in October 2010 to add to its navy and

upgrade its shipyards, according to El Mundo. The EUR1.2bn

(US$1.68bn) deal includes the manufacture and delivery of four

ocean surveillance ships and four coastal surveillance boats.

Defence spending and industry may also depend on another ex-

ternal factor – the development of Colombia’s internal conflict.

Cross-border tensions related to events in Colombia, and how

the two countries respond to those events, as well as how they

handle border concerns, could greatly influence the intensity and

duration of the Colombia-Venezuela strategic rivalry.

For the wider state of Venezuela’s fiscal environment, while a

currency devaluation will offer some respite to the Venezuelan

government’s fiscal account, inefficiencies in the country’s oil

sector will keep fiscal revenue growth constrained. Accordingly,

we forecast Venezuela’s fiscal shortfall to fall from 11.6% of

GDP in 2012 to 7.9% of GDP in 2013, but still keeping the

country’s fiscal account at critical levels.

The sizeable increase in social spending by the Venezuelan

government ahead of the October 2012 presidential election

has created significant fiscal challenges for the country in 2013.

Indeed, we estimate the fiscal deficit to have widened from

8.7% of GDP in 2011 to 11.6% of in 2012, in large part due to

increased spending in the run-up to the election. While a devalu-

ation of the Venezuelan bolívar, which is reflected in our 2013

forecasts , will bolster fiscal revenue modestly, it will not fix the

government’s financial problems. Indeed, even with a weaker

currency, which implies that the government will receive more

bolívars for each dollar received from its oil sales, we forecast

the fiscal deficit to narrow to only 7.9% of GDP in 2013, a slight

revision from our previous 8.3% forecast, but still leaving the

government with a precariously large fiscal shortfall.

We are revising up our real GDP growth forecast for Venezuela

from to 3.5% for 2012 and to 2.2% for 2013. Stronger-than-

expected credit fuelled private consumption and government-

financed investment has seen real GDP growth come in above

our expectations in H112. However, we believe growth will

peak in 2012 and slow over the next few years given persisting

economic imbalances and the political risks associated with

the country.

Market OverviewAn arms race in the region is likely to intensify due to ‘copycat’

weapons buying, which has been triggered by recent upped mili-

tary spending in some countries and reactions of their neighbours.

Defence spending grew by 91% in Latin America in the five

years from 2003. The overall rise in military spending in the

region is being viewed as a destabilising factor after several years

of relative stability. Venezuela and other left-leaning countries

are trading more with Russia. But they are not alone in upping

their weapons imports; in September 2009, Brazil ordered

US$7.2bn-worth of French fighter jets and attack submarines.

It is likely that so long as Chávez remains at the helm, he will

make attempts to catch up with Colombia, Brazil and Chile in

the region’s big military spenders’ league.

Historically speaking, Venezuela is an insignificant player in the

world arms market. It imports nearly all its weapons, and in fact

has almost no indigenous defence production capability. This

trend, in keeping with the general direction of Latin American

defence industry development, has seen minimal change since

the end of the Cold War. Venezuela’s marked dependence on

weapons imports has traditionally been somewhat offset by the

TABLE: VENEZUELA’S MANPOWER AVAILABLE FOR MILITARY SERVICES, 2010-2017 (AGED 16-49, UNLESS OTHERWISE STATED)

2010 2011e 2012f 2013f 2014f 2015f 2016f 2017f

Males 7,513,845.60 7,622,673.20 7,725,465.00 7,823,544.00 7,919,148.00 8,013,787.80 8,109,810.40 8,204,197.40

Females 7,422,407.00 7,530,625.00 7,632,389.00 7,729,069.60 7,823,037.40 7,915,897.40 8,010,246.20 8,102,820.00

Total 14,936,

252.60

15,153,

298.20

15,357,

854.00

15,552,

613.60

15,742,

185.40

15,929,

685.20

16,120,

056.60

16,307,

017.40

- % population 51.54 51.48 51.38 51.26 51.13 51.01 50.91 50.82

- % change on 10 years previously

21.11 20.22 19.24 18.23 17.24 16.32 15.50 14.71

e/f = BMI estimate/forecast. Source: BMI


KEY SECTORS

diverse suppliers from which the country purchases its arms. For

example, a 1998 contract for an advanced trainer to replace the

T-2D Buckeye (originally awarded in 1982 to BAE Systems, but

scrapped after the fallout from the Falklands conflict) garnered

responses from seven companies.

Imports

Venezuela has traditionally been a net importer of weapons

systems, purchasing its arms from a variety of South American,

European, and Middle Eastern companies. Added to its recent

purchases from Russia, in August 2009 Chávez announced he

would buy dozens of Russian tanks in response to US plans

to increase its military presence in Colombia, having already

bought more than US$4bn-worth of helicopters, fighter jets and

Kalashnikov assault rifles from Russia since 2005. The 92 Rus-

sian tanks ordered in September will add to, and modernise, the

inventory of about 40 tanks in each battalion and the sale will

involve an offer of credit from Russia. A further order for three

submarines and anti-aircraft missiles – to create a multilayer air

defence shield – using a US$2.2bn loan from Russia will follow.

However, this is set against a decline in oil exports in the first

half of 2009, despite a recent increase in the value of petro-

leum – coupled with a drop in officially declared imports of

non-military items.

According to SIPRI data, the volume of international arms

transfers to South America in the period 2003-2007 was 47 per

cent higher than in 1998-2002. In contrast to a general trend of

arms diversification throughout Latin America, the diversifica-

tion of Venezuela’s defence purchases has remained relatively

constant over the past five years, although the forecast period

may see a slight increase due to the procurement programme.

The focus on imports is likely to continue under Venezuela’s new

procurement programme. As in the past, tenders for contracts

are usually overt, open to international competition, and likely

to be won by foreign companies.

Venezuela reportedly imported US$1.9bn of conventional

weapons in 2005, ranking it the fifth-largest purchaser among

the developing countries.

Exports

Coupled with this high diversification, Venezuela ranks among

the countries worldwide with the lowest dependency on arms

exports (under 10%), a feature which has remained relatively

constant since the end of the Cold War.

Industry Trends And Developments

Domestic defence producer CAVIM saw setbacks to its

manufacturing in January 2011 after explosions and fire. The

company’s Maracay depots, west of Caracas, led to the death of

one employee and the evacuation of 10,000 inhabitants.

Venezuela has not yet developed a competitive defence industry,

and remains import-dependent for its weapons purchases, par-

ticularly from Russia. This flow of Russian arms – to its leftist

allies in the region – has partly resulted from long-standing US

restrictions on arms sales, leading to some nations to widen their

options. Indeed, Venezuela’s defence expenditure will receive a

major boost from a US$4bn loan from Russia in October 2011.

The deal, which comes in exchange for oil and gas projects, will

provide half the funds in 2012 and the remaining half in 2013

It is also diverse in the sources it relies on for those purchases.

Developments – such as the Israeli Elbit Systems’ upgrade of

the Venezuelan navy’s Lupo-class frigates and growing defence

ties with Russia – establish a pattern of being supplied by diverse

foreign companies.

Strengthening security ties with Europe has led to agreements

over major weapons purchases. In mid-February 2005, the

Spanish and Venezuelan governments reached an agreement to

forge stronger military ties. Spain’s then deputy prime minister

Maria Teresa Fernandez de la Vega stated that the two sides

agreed that increasing military cooperation would ‘be of major

economic importance’ and of interest for ‘Spanish shipyards

and aeronautical companies’.

It is reported that military transport aircraft and navy ships will

be the focus of the sales. State-owned Spanish shipbuilding firm

Izar was expected to tender bids for light corvettes or offshore

patrol boats. The Spanish government, in an attempt to pre-empt

diplomatic discord with other Latin American countries, has

offered to sign similar agreements with Chile and Colombia.

However, in 2006 EADS-Casa cancelled a contract to supply

12 transport aircraft to Venezuela, as a result of US pressure,

leaving Venezuela to rely on Russia and China.

In June 2006, Russian defence export agency Rosoboronexport

confirmed that it had been in discussions with the Venezuelan

government regarding the opening of facilities to manufacture

Kalashnikov assault rifles in Venezuela. Russia may build two


VENEZUELA Q3 2013

factories in Venezuela to manufacture under licence the AK-103

and AK-102 assault rifles, as well as 100,000 AK-47s ordered

by Caracas in October 2004. The factory was opened in 2010.

Procurement Trends And Developments

South America is in the process of armed forces modernisation

and upgrades, following a dearth of military spending in the years

following the end of the Cold War. However, observers such

as Johanna Mendelson Forman, of the Center for Strategic and

International Studies, quoted in the Christian Science Monitor in

October 2009 , say that some of Venezuela’s purchases – such

as Russian Sukhoi fighter jets – are sophisticated systems that go

beyond building for defence against external threats and could

enhance competition, with unintended results for the region.

Venezuelan arms acquisitions are, in fact, outpacing all other

South American countries. Proportionate to GDP, however, its

spending is being matched by Colombia, which has reportedly

received over US$6bn in aid from the US since 2000 and whose

defence spending as a percentage of its GDP is greater than that

of the other three regional league leaders, Brazil, Chile and

Venezuela. According to some US spectators, such as Larry

Birns, director of the non-profit Center on Hemispheric Affairs,

despite the recent spate of weapons acquisitions Venezuela is

still ‘at best, a second-rate regional power’.

Some countries question enhanced military priorities, and this

may create more unevenness in the region. Uruguayan President

Tabare Vazquez was quoted in the Christian Science Monitor in

October 2009 saying: ‘Not only is our country worried, but we

have already expressed time and again our position against an

arms race. To make things worse, our region is the region that

has the worst distribution of wealth. Under those conditions, it

is worse still to be devoting those resources to weapons.’

The order of a new batch of 24 Su-30 fighters, 92 Soviet-era

T-72 tanks and the anti-aircraft weapons pushes Venezuela fur-

ther towards the Russians, who are trying to supplant its falling

arms sales to China and India with exports to Venezuela and

others. Indeed, Russia has now loaned Venezuela US$4bn for

it to spend on arms, strengthening their ties further.

In August 2007, Stephen Johnson, the US deputy assistant secre-

tary of state of defence for Western hemisphere affairs, claimed

that Venezuela’s regional neighbours should be concerned about

its military build-up, which could be used ‘to intimidate rather

than for self defence’. He was speaking in the context of Wash-

ington’s often-expressed concern over Venezuela’s purchases of

Russian fighter jets, attack helicopters and Kalashnikov rifles.

A variety of earlier press reports had said that Venezuela had

committed to buy 100,000 Kalashnikov AK-103 rifles, 24 Suk-

hoi fighter jets, and 53 Russian helicopters as part of a US$3bn

long-term arms contract.

The Venezuelan air force was allegedly considering the procure-

ment of 14 Sukhoi SU-25 and 12 SU-27 ground attack jets from

Russian Rosoboronexport to replace its fleet of US-made F-16s,

which are becoming increasingly difficult to service and maintain

under embargo. However, in July 2006 Venezuela confirmed

it had placed a US$1bn contract with Rosoboronexport to buy

24 Sukhoi Su-30 fighter-bombers to replace the F-16s, with the

full order being delivered in 2008.

On April 26 2006, Spain’s Navantia received the initial pay-

ment from Venezuela for eight warships ordered in a US$1.5bn

contract signed in November 2005. Construction of the vessels

started in January 2007 with the final delivery slated for 2012

for the Venezuelan warships.

Latest Developments

The Venezuelan Army took delivery of 25 tanks, among hun-

dreds of additional units of military equipment, in August 2011,

according to Venezuelan generals as cited by RIA Novosti. The

tanks and weaponry add to a string of deals with Russia, which

supplied the arms and vehicles. The government also allocated

VEB155mn (US$36mn) to acquire some 300 multipurpose

Tiuna military vehicles from domestic firm National Center

for Heavy Vehicle Reconditioning (CENAREC) in July 2011,

with VEB150mn (US$34.8mn) set aside for vehicle support.

An additional VEB84.9mn (US$19.7mn) was earmarked for

other equipment and uniforms for the Army.

In September 2009, Chávez ordered 92 tanks and anti-aircraft

missiles using a US$2.2bn loan from Russia, with three sub-

marines to follow. The US$2bn credit to buy Russian weapons

follows substantial business worth US$4bn under way between

the two countries’ ministries of defence, including Russian

fighter jets, military helicopters, rifles, patrol boats, ammunition,

radar systems for military air operations, and other systems. As

well as signing extensive arms acquisition deals with Russia,

President Chávez on his September tour forged relations with

Libya, , Spain, Turkmenistan, Belarus, Italy and Syria.

Equally controversial has been a recent acquisition of 100,000


KEY SECTORS

AK-103 rifles, which is of a weapon type that closely resem-

bles guns held by the FARC, given Colombia’s accusations of

Venezuelan collusion with the guerrillas.

Freight Trasnport

Executive SummaryWe forecast real GDP growth of 2.2% in Venezuela in 2013.

Our GDP forecasts remain under 3% per year throughout our

five-year forecast period. BMI’s negative macro outlook for

Venezuela feeds into our view on the country’s freight transport

sector, which continues to be bearish, due to concerns about

lack of import demand, and slowing oil exports.

In particular, the chronic mismanagement of the country’s port

facilities since they were nationalised in 2009 has damaged

their international reputation and their profit-making abilities.

We do not expect any significant recouping of lost throughput

levels over the medium term. Over a longer period, investments

from China could see the facilities begin to regain some of their

former glory.

On the downside, however, a possible economic slowdown in

China, a close trading partner of Venezuela, could negatively

affect the country’s freight transport volumes. Over the 2013-

2017 forecast period growth will average only 2.5% per annum,

well below the country’s real potential.

By transport modes, air freight will lead the way, followed by

shipping (Venezuela lacks reliable data on railfreight and road

haulage volumes). BMI does not expect any transport mode to

see volume growth exceeding 4%, however.

Headline Industry Data

• Air freight volume carried in 2013 will expand by 7% to

6.2mn tonnes-km, with average growth of 5.8% to 2017.

• 2013 Puerto Cabello tonnage throughput growth forecast at

1.9%. Slow growth is expected to continue over the medium

term, averaging 1.6% to 2017.

• 2013 Puerto Cabello container throughput to grow by 4.3%,

and forecast to average 3.9% over our forecast period.

Key Industry Trends

Freight Transport Network Underdeveloped, Chinese In-vestments To Alleviate Problem: Venezuela’s freight transport

network continues to struggle with poor infrastructure and badly

managed facilities, which limit the volumes which can be carried,

and discourage international companies from operating there.

In 2012, there was some movement from the Venezuelan gov-

ernment towards improving the state of the country’s neglected

ports, an effort which could be helped by Chinese investment.

The Asian Dragon has become a regular investor in Venezuelan

freight transport projects, as part of its wider efforts to help revive

Venezuela’s mining sector. BMI believes that the involvement

of Chinese firms in the development of the Venezuelan transport

network will ensure that demand for Venezuelan iron ore exports

remains robust, thereby helping it to secure access to a huge and

growing trading partner. Furthermore, the involvement of China

will facilitate much-needed transport network improvements.

Key Risks To Outlook

Due to Venezuela’s reliance on oil exports to finance govern-

ment expenditure and stimulate private consumption, the risks to

the country’s long-term outlook are predominantly linked to oil

prices. Despite not being our core scenario, a global slowdown

triggered by a Chinese hard landing or a double-dip recession in

the US and Europe would severely hit demand for oil and lead

to a decline of oil export receipts, which could be catastrophic

for the government’s expansive expenditure plans, as well as

having knock-on effects for the transport sector. Further, the

high costs of exploiting Venezuelan oil – notably in the Orinoco

field – means we foreign investment and oil output could fall,

if prices were to decline below a certain level.

Industry ForecastAir Freight

The airfreight sector has performed poorly in recent years, in-

fluenced by low demand, a lack of investment and difficulties

in importing the necessary spare parts for aircraft maintenance.

Cargo volumes suffered two consecutive years of double-digit

percentage contractions in 2009 and 2010. However, BMI ex-

pects volumes to pick up somewhat in the 2013-2017 forecast

period, in line with a general increase in air cargo volumes car-

ried across Latin America. We estimate growth of 2013, 7%,

which will take total cargo flown to 6.2mn tonnes-km. This will

grow to 7.68mn tonnes-km by 2017, at the end of our forecast

period, which will be well above the pre-crisis level of 2.17mn

tonnes-km achieved in 2008.


VENEZUELA Q3 2013

Maritime Freight

Port Volumes Remain Underwhelming: At the Port of Puerto

Cabello, Venezuela’s largest, we forecast yet another standstill

year in 2013. Cargo growth will total only 1.9% to 5.7mn tonnes,

marginally up on the estimated 0.5% growth seen in 2012. This,

in turn, followed two catastrophically bad years in 2009 and

2010, when cargo throughput fell respectively by 58.9% and

7.7%, before reovering in 2011.

Over the forecast period to 2017, we believe volumes will grow

by an annual average of 1.6%.This will lag significantly behind

GDP. Consequently, we just do not see the port recovering its

pre-recession volumes of business. To put this in context, in 2008

Puerto Cabello handled 9.48mn tonnes. We are predicting that

after the recession of 2009/10, and after six subsequent years

of sluggish growth, the port will still be handling no more than

6mn tonnes in 2017. The story is not significantly different at the

smaller Port of La Guaira. That facility will see volume growth

of 3% in 2013 to 499,000 tonnes, achieving an annual average

of 3%, also less than GDP, in the period running to 2017.

Trade

Trade Growth Hit By Weak Oil Exports And Slow Imports: In real terms Venezuela’s foreign trade will expand by a mod-

est 2.6% in 2013, a fraction slower that the estimated 2.8% of

2012. One of the main reasons for this will be weak oil export

revenues and weaker imports: total exports will grow contract

by 2%, while imports will expand by 15%.

In nominal terms exports will total US$100.7bn, while imports

will be US$63.98bn, with Venezuela running its traditional trade

surplus. In future the country’s trade will expand slowly at an

average annual real terms rate of 2.5% over the five years to 2017.

Market OverviewDisappointing Growth Levels Ahead: We expect relatively

weak growth for the Venezuelan economy in 2012 and this means

that freight demand will also be muted. We forecast Venezuela’s

current account surplus to narrow from US$29.9bn in 2012 to

US$25.9bn in 2013, but widen in terms of percentage of GDP

from 7.4% to 7.8% due to a sharp contraction in nominal GDP

in US dollar terms on account of the 54.8% devaluation we are

forecasting in 2013. Even with a weaker bolívar, we believe

exports will contract in 2013, as Venezuela relies heavily on

oil exports which are priced in US dollars. In addition, the

country’s reliance on oil, has resulted in weak non-oil productive

capacity, ensuring non-oil exports remain uncompetitive despite

a weaker currency. This means little demand for containerised

exports through the country’s ports.

We believe that imports in Venezuela will follow a similar trend

in 2013 as they did during the 2010 currency devaluation. Indeed,

a weaker bolívar will see an erosion of household purchasing

power, ma king imports virtually unaffordable However, given

Venezuela’s poor domestic productive capacity, residents have

little alternative to importing many basic goods. As such, while

we expect the bolívar to weaken by 54.8% on average in 2013,

we believe consumers will resort to credit to purchase essential

goods. We therefore forecast imports of goods to contract only

by 2.1% in 2013, similar to the 2.6% contraction experienced

in 2010, benefiting Venezuela’s already large current account

surplus. This will to an extent support import volumes of con-

tainerised goods, they will come under increasing pressure.

Road Freight Streets Ahead Of Rail: Road haulage is the

principle domestic form of freight movement in Venezuela.

Like the road network itself, traffic is concentrated on the cen-

tral and coastal areas of the country. The highway network was

largely built without ring-roads, meaning that the main routes

lead straight into city centres, slowing traffic and causing severe

congestion problems. The World Economic Forum’s Global

Competitiveness Index ranks Venezuela’s road infrastructure

113th out of 142 countries.

The rail system is relatively small and geared to serving the

freight needs of the mining industry, largely in eastern Ven-

ezuela. Rail is used to carry iron ore in Guayana and coal in

Anzoátegui. The network is operated by the state-run Instituto

Autónomo Ferrocarriles de Venezuela (FERROCAR or IAFE).

The World Economic Forum’s Global Competitiveness Index

ranks Venezuela’s rail infrastructure 112th out of 142 countries.

Efforts have been made to improve the accessibility of Ven-

ezuela’s rivers and waterways for freight transport. Venezuela

may benefit from Colombian attempts to make the Magdalena

River, which runs through Colombia into Venezuela, easier to

navigate as a freight transport route. Another focus for develop-

ment has been the Apure River, which runs through the fertile

and mineral-rich hinterland into the Orinoco basin. The Apure

is used to bring goods and raw materials from the interior to the

Caribbean coast. Parts of the Apure have been dredged and made

navigable, and handling capacity has been expanded at Puerto

Nutrias to around 650,000 tonnes a year. The Instituto Nacional

de Canalizaciones (INC) has been carrying out dredging work at


KEY SECTORS

the mouth of the Orinoco and in Lake Maracaibo. Venezuela’s

seaports have a poor reputation for efficiency. Throughput at

the ports nose dived since they were nationalised and there is

little prospect for growth in the sector. The World Economic

Forum’s Global Competitiveness Index ranks Venezuela’s road

infrastructure 136 out of 142 countries.

Investment And Development Outlook

According to our Key Projects Database, there is around

US$1.9bn worth of transport infrastructure projects planned or

under way in Venezuela. Several of the projects involve Chinese

companies. BMI notes that despite its rich natural resources,

Venezuela’s poor operating environment makes FDI difficult.

BMI believes that a move away from using fiscal resources to

expand the government’s reach overseas and towards improv-

ing the country’s ailing physical infrastructure, which would

act as a complement to private investment, would also help the

country to grow over the long term. This would need to be ac-

companied by a move by the government to encourage private

sector enterprise by strengthening property rights. Finally, a

government that made progress on strengthening the country’s

institutions and reducing government corruption would lay the

groundwork for sustainable economic expansion.

TABLE: AIR FREIGHT2010 2011e 2012e 2013f 2014f 2015f 2016f 2017f

Air Freight Tonnes/Km (mn ton km) 5.00 5.19 5.79 6.20 6.59 6.97 7.39 7.68

Air Freight Tonnes-km % Change y-o-y 169.25 3.89 11.47 7.16 6.28 5.70 6.02 3.92

Source: World Bank Indicators; e/f = BMI estimates/forecasts

TABLE: MARITIME FREIGHT2010 2011e 2012e 2013f 2014f 2015f 2016f 2017f

Port of Puerto Cabello throughput, tonnes ‘000 3,600 5,520 5,546 5,651 5,746 5,832 5,922 6,009

Port of Puerto Cabello throughput, tonnes, % y-o-y -7.69 53.33 0.47 1.90 1.67 1.50 1.54 1.48

Port of La Guaira throughput, tonnes ‘000 587 431 434 449 464 479 493 507

Port of La Guaira throughput, tonnes, % y-o-y 13.76 -26.63 0.84 3.45 3.30 3.24 2.87 2.78

Source: Venezuela Logistics Association (ALV) e/f = BMI estimates/forecasts


KEY SECTORS

Other Key Sectors

Latest Forecast DataBelow are the latest forecast tables for our other core key sectors:

TABLE: AUTOS SECTOR KEY INDICATORS 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Vehicle production, units [1] 104,357 102,409 104,019 83,237 88,992 98,878 109,157 118,219

Vehicle production, units, mn [1] 0.10 0.10 0.10 0.08 0.09 0.10 0.11 0.12

Passenger car production, units [1] 73,757 69,115 67,226 54,722 58,548 65,332 72,753 79,914

Passenger car production, units, mn [1] 0.07 0.07 0.07 0.05 0.06 0.07 0.07 0.08

Commercial vehicle production, units [1] 30,600 33,294 36,793 28,515 30,444 33,547 36,404 38,305

Commercial vehicles production, units, % chg y-o-y [1] -23.0 8.8 10.5 -22.5 6.8 10.2 8.5 5.2

Vehicle sales, units [2] 125,202 120,689 130,553 138,653 146,545 155,839 167,403 180,170

Vehicle sales, units, % chg y-o-y [2] -8.3 -3.6 8.2 6.2 5.7 6.3 7.4 7.6

Passenger car sales, units [2] 87,641 84,482 91,960 95,822 100,231 105,560 112,312 119,713

Passenger car sales, units, % chg y-o-y [2] -20.6 -3.6 8.9 4.2 4.6 5.3 6.4 6.6

Commercial vehicle sales, units [2] 37,561 36,207 38,593 42,831 46,314 50,279 55,091 60,457

Commercial vehicle sales, units, % chg y-o-y [2] 44.0 -3.6 6.6 11.0 8.1 8.6 9.6 9.7

Notes: f BMI forecasts. Sources: 1 OICA/BMI; 2 Cavenez/BMI.

TABLE: FOOD AND DRINK SECTOR KEY INDICATORS 2010 2011 2012e 2013f 2014f 2015f 2016f 2017fFood consumption, US$bn [1] 13.2 17.0 22.0 17.1 16.5 16.9 19.0 21.8Food consumption VEFbn [2] 56.1 73.1 94.4 121.1 156.6 194.8 232.7 272.7Food consumption, US$ per capita [1] 455.2 578.0 735.3 564.4 535.5 542.5 599.9 679.7Confectionery sales, US$mn [1] 567.3 740.0 968.9 755.5 729.1 750.6 843.7 971.8Confectionery sales, VEFmn [1] 2,411.03 3,177.92 4,161.05 5,341.14 6,926.62 8,631.54 10,335.46 12,147.00Alcoholic drinks sales, US$mn [3] 1,621.5 2,055.8 2,580.1 1,987.2 1,887.3 1,913.2 2,115.1 2,394.3Alcoholic drink sales, VEFmn [3] 6,891.4 8,828.9 11,080.6 14,049.4 17,929.7 22,001.7 25,909.6 29,929.0Soft drinks sales, US$mn [4] 812.6 1,067.3 1,357.2 1,080.8 1,035.7 1,054.0 1,160.9 1,308.4Soft drink sales, VEFmn [4] 3,453.69 4,583.72 5,828.89 7,641.10 9,839.25 12,121.29 14,221.57 16,354.81Total mass grocery retail sales, US$bn [5] 2.6 3.4 4.5 3.5 3.4 3.4 3.8 4.4Total mass grocery retail sales, VEFbn [6] 11.2 14.8 19.5 24.7 32.3 39.4 46.8 54.7Exports of food and drink, US$mn [7] 79 77 74 71 69 66 63 61Imports of food and drink, US$mn [7] 2,396 2,647 2,665 2,633 2,691 2,753 2,816 2,883Food and drink trade balance US$mn [8] -2,316.6 -2,569.9 -2,590.5 -2,561.2 -2,622.8 -2,686.7 -2,753.1 -2,822.1

Notes: e BMI estimates. f BMI forecasts. Sources: 1 National Institute of Statistics, BMI/BMI calculation; 2 National Institute of Statistics, BMI; 3 Central Bank of Venezuela, INE, Venezuelan Food Industry Association, BMI/BMI calculation; 4 Central Bank of Venezuela, INE, Venezuelan Food Industry As-sociation, BMI; 5 Central Bank of Venezuela, INE, ANSA, BMI/BMI calculation; 6 Central Bank of Venezuela, INE, ANSA, BMI; 7 United Nations Confer-ence On Trade and Development (up to 2006), BMI; 8 United Nations Conference On Trade and Development (up to 2006), BMI/BMI calculation.

TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Construction industry value, VEFbn [2] 57.70 66.22 76.44 88.24 113.45 140.81 174.36 206.88 240.57

Construction industry value, US$bn [2] 26.9 15.6 17.8 20.5 16.0 14.8 15.2 16.9 19.2

Construction industry, real growth, % y-o-y [1,3] -0.22 -6.95 4.75 16.60 7.57 3.12 1.60 1.38 1.28

Construction industry value, % GDP [3] 8.2 6.5 5.6 5.2 5.3 5.2 5.3 5.3 5.4

Notes: e BMI estimates. f BMI forecasts. 1 http://www.bcv.org.ve/EnglishVersion/c1/index.asp?secc=publications&Codigo=8832&Operacion=2&Sec=True, http://www.bcv.org.ve/EnglishVersion/c2/index.asp?secc=statistinf (macroeconomic aggregates tab). Sources: 2 BMI calculation, BCV; 3 BCV.


VENEZUELA Q3 2013

This report is abstracted from BMI’s industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables

showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find

out about BMI’s other 1,113 industry reports, please contact [email protected]

TABLE: PHARMA SECTOR KEY INDICATORS 2011 2012e 2013f 2014f 2015f 2016f 2017fPharmaceutical sales, US$bn [2] 8.449 10.119 8.746 9.077 9.828 9.269 9.139Pharmaceutical sales, US$bn, % chg y-o-y [2] 23.10 19.77 -13.56 3.79 8.27 -5.68 -1.40Pharmaceutical sales, VEFbn [2] 36.285 43.456 53.352 64.902 78.622 95.009 114.240Pharmaceutical sales, VEFbn, % chg y-o-y [2] 24.40 19.77 22.77 21.65 21.14 20.84 20.24Health expenditure, US$bn [3] 16.320 20.197 17.917 19.043 20.918 19.916 19.703Health expenditure, US$bn, % chg y-o-y [3] 28.82 23.76 -11.29 6.28 9.85 -4.79 -1.07Health expenditure, VEFbn [3] 70.088 86.742 109.295 136.157 167.344 204.141 246.291Health expenditure, VEFbn, % chg y-o-y [3] 30.18 23.76 26.00 24.58 22.91 21.99 20.65Communicable, maternal, perinatal and nutri-tional conditions, DALYs [1,4]

581,421 576,331 571,265 566,224 561,207 556,215 551,248

Non-communicable diseases, DALYs [1,4] 2,467,328 2,498,567 2,528,596 2,557,415 2,585,021 2,611,415 2,636,595

Notes: e BMI estimates. f BMI forecasts. 1 Data is DALYS, disability-adjusted life years. Sources: 2 PhRMA, IMS Health, BMI; 3 World Health Organiza-tion (WHO), BMI; 4 WHO, World Bank, IMF, BMI research.

TABLE: TELECOMS SECTOR KEY INDICATORS 2011 2012e 2013f 2014f 2015f 2016f 2017f

Number of Main Telephone Lines in Service ('000) [1] 7,332.0 7,552.0 7,569.3 7,593.6 7,515.0 7,369.7 7,161.0

Number of Main Telephone Lines in Service, % change y-o-y [1] 3.5 3.0 0.2 0.3 -1.0 -1.9 -2.8

Number of Main Telephone Lines/100 Inhabitants [1] 24.9 25.3 24.9 24.7 24.1 23.3 22.3

Number of Cellular Mobile Phone Subscribers ('000) [1] 29,344 30,576 30,973 31,438 32,047 32,668 33,300

Number of Cellular Mobile Phone Subscribers, % change y-o-y [1] -0.4 4.2 1.3 1.5 1.9 1.9 1.9

Number of Mobile Phone Subscribers/100 Inhabitants [1] 99.7 102.3 102.1 102.1 102.6 103.2 103.8

Number of Mobile Phone Subscribers/100 Inhabitants [1] 99.7 102.3 102.1 102.1 102.6 103.2 103.8

Number of Mobile Phone Subscribers/100 Inhabitants, % change y-o-y [1] -2.0 2.6 -0.2 0.0 0.5 0.5 0.6

Number of Internet Users ('000) [1] 11,774 12,553 13,155 13,694 14,131 14,723 15,488

Number of Internet Users, % change y-o-y [1] 14.6 6.6 4.8 4.1 3.2 4.2 5.2

Number of Internet Users/100 Inhabitants [1] 40.0 42.0 43.4 44.5 45.3 46.5 48.3

Number of Internet Users/100 Inhabitants, % change y-o-y [1] 12.8 5.0 3.2 2.6 1.7 2.8 3.8

Number of Broadband Internet Subscribers ('000) [1] 3,037.0 3,553.5 3,983.1 4,318.8 4,515.2 4,765.7 5,077.7

Number of Broadband Internet Subscribers, % change y-o-y [1] 28.5 17.0 12.1 8.4 4.5 5.5 6.5

Notes: e BMI estimates. f BMI forecasts. Sources: 1 World Bank (International Telecommunications Union – ITU), BMI research, Conatel.

TABLE: FREIGHT SECTOR KEY INDICATORS2011 2012 2013 2014 2015 2016 2017

Port of Puerto Cabello container throughput, TEU 734,202 844,220 831,732 809,454 790,000 400,000 1,053,333

Port of Puerto Cabello container throughput, TEU, % y-o-y 163.33 4.52 4.34 4.12 3.95 3.81 3.59

Source: BMI


Chapter 6: BMI Global Assumptions

TABLE: GLOBAL ASSUMPTIONS2012e 2013f 2014f 2015f 2016f 2017f

Real GDP Growth (%)

US 2.2 2.1 2.7 2.6 2.4 2.4

Eurozone -0.6 -0.1 1.1 1.5 1.7 1.8

Japan 1.9 1.4 1.3 1.0 0.9 1.1

China 7.7 7.5 6.7 6.0 5.8 5.8

World 2.7 2.9 3.4 3.4 3.4 3.5

Consumer Inflation (ave)

US 2.1 2.1 2.1 2.1 2.1 2.1

Eurozone 2.3 1.8 1.8 1.9 2.1 2.2

Japan 0.0 0.0 0.6 1.3 1.8 2.3

China 2.7 2.8 2.9 2.8 2.7 2.7

World 3.5 3.4 3.3 3.2 3.2 3.2

Interest Rates (eop)

Fed Funds Rate 0.00 0.00 0.00 0.00 1.00 2.25

ECB Refinancing Rate 0.75 0.75 0.75 0.75 1.00 1.50

Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.25 0.50

Exchange Rates (ave)

US$/EUR 1.27 1.34 1.27 1.23 1.20 1.20

JPY/US$ 79.85 91.00 94.00 97.00 98.50 100.50

CNY/US$ 6.31 6.27 6.38 6.45 6.55 6.60

Oil Prices (ave)

OPEC Basket (US$/bbl) 109.50 104.40 101.00 95.20 93.25 93.30

Brent Crude (US$/bbl) 111.70 110.00 105.00 102.50 101.00 99.00

e/f = estimate/forecast. Source: BMI

Global Outlook

Lowering Our US And Eurozone Growth ForecastsOur global real GDP growth estimates are unchanged since our

last Global Assumptions update, at 2.9% for 2013 and 3.4%

for 2014. In line with our view, global economic activity has

picked up modestly in the past few months, following near-

recessionary conditions in parts of 2012. Growth momentum

in the US and China, especially, has impressed in the first two

months of 2013 and suggest that a global recovery is still on. The

eurozone remains a lingering concern, although we believe that

the crisis has migrated from an acute to a more chronic phase

that suggests tail risks of disintegration have been reduced and

that output will begin to stabilise towards the end of the year.

We continue to foresee a renewed slowdown in Chinese eco-

nomic activity in the second half of the year, but for now, the

global economy appears to be on more solid ground. For the

time being, loose monetary policy and the removal of some

major tail risks mean that risks to global growth are more tilted

to the upside than they were in 2012.

The most notable changes to our forecasts include a downgrade

to 2013 eurozone growth to -0.1% (from 0.0% previously),

which incorporates a downward revision to our projections for

key eurozone members including the Netherlands and Italy.

Developed StatesOur developed state aggregate growth estimate for 2013 has

fallen slightly to 1.2% from 1. 3%, while we continue to expect

a rebound in 2014 to 1. 9%. We have downgraded our US fore-


VENEZUELA Q3 2013

TABLE: DEVELOPED STATES, REAL GDP GROWTH, %2012e 2013f 2014f 2015f

Developed States Aggregate Growth 1.2 1.2 1.9 2.0

G7 1.4 1.4 2.0 2.1

Eurozone -0.6 -0.1 1.1 1.5

EU-27 -0.4 0.2 1.3 1.8

Selected Developed States

Australia 3.6 2.1 1.8 2.5

Austria 0.4 0.9 1.5 1.9

Belgium -0.5 0.4 1.6 1.9

Canada 2.0 1.9 2.5 2.5

Denmark -0.1 1.2 1.4 1.6

Finland -0.4 0.8 1.5 1.9

France 0.1 0.4 0.9 1.6

Germany 0.7 0.8 1.9 1.8

Ireland -0.5 0.3 1.4 2.0

Italy -2.4 -1.3 0.1 0.7

Japan 1.9 1.4 1.3 1.0

Netherlands -1.1 -0.6 0.9 1.5

Norway 3.2 2.8 2.5 2.5

Portugal -3.2 -2.4 0.3 0.7

Spain -1.4 -1.7 0.3 1.1

Sweden 0.8 1.0 2.5 3.2

Switzerland 0.7 1.5 1.8 1.6

UK 0.0 1.1 1.4 2.0

US 2.2 2.1 2.7 2.6

e/f = estimate/forecast. Source: BMI

TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %US Eurozone Japan Brazil China Russia India

2013 Bloomberg Consensus 1.9 -0.1 1.2 3.4 8.1 3.4 5.4

BMI 2.1 -0.1 1.4 3.5 7.5 3.4 6.2

2014 Bloomberg Consensus 2.7 1.1 1.3 4.0 8.0 3.8 6.5

BMI 2.7 1.1 1.3 3.6 6.7 3.6 6.7


cast for 2013 to 2.1% from 2.3%, due mainly to negative base

effects from late 2012. Nonetheless, our core view remains the

same, which is that US economic activity is likely to pick up

as the year progresses, led by business and residential invest-

ment. Our 2014 growth forecast of 2.7% for the US represents

a major bounce from 2013, and is an upgrade from our previous

projection of 2.5%.

With US macro data looking strong, the Cyprus-triggered un-

certainty in the euro area stands in stark relief. We have made

downgrades to our 2013 real GDP growth forecasts for Italy,

the Netherlands and Portugal, which translate to a downward

revision to our 2013 eurozone growth forecast, to -0.1% from

0.0% previously, and to 1.1% in 2014, from 1.2% previously.

With leading indicators in Japan showing improvement, we

believe the optimism associated with a fiscal and monetary

regime change will help to drive a pickup in economic activity

in 2013. As such, we have revised up our forecast for Japanese

real GDP growth in 2013 to 1.4% from our previous forecast of

0.9%. That said, we maintain our view that the government’s

policies will not return the Japanese economy back to the path

of recovery, but rather heighten the risk of a fiscal crisis.

Emerging MarketsWe estimate emerging market (EM) real GDP growth of 4.9%

in 2013, and forecast a slight acceleration in 2014 to 5.1%.

Our forecasts for most EM countries have remained relatively

stable since our last update, with downgrades to our forecasts


BMI GLOBAL ASSUMPTIONS

TABLE: EMERGING MARKETS, REAL GDP GROWTH, %2012e 2013f 2014f 2015f

Emerging Markets Aggregate Growth 4.7 4.9 5.1 5.0

Latin America 2.8 3.5 3.7 3.8

Argentina 2.0 1.6 3.0 3.9

Brazil 0.9 3.5 3.6 3.9

Mexico 3.9 3.6 3.8 3.5

Middle East And North Africa 4.8 3.9 4.5 4.0

Saudi Arabia 6.8 4.1 3.7 2.3

UAE 3.9 3.7 3.8 3.8

Egypt 2.2 2.6 3.7 5.6

Sub-Saharan Africa 4.3 5.8 5.8 6.1

South Africa 2.3 2.8 3.4 3.5

Nigeria 6.6 6.8 7.2 7.3

Emerging Asia 6.1 6.3 6.1 5.6

China 7.7 7.5 6.7 6.0

Hong Kong 1.4 3.3 3.6 3.7

India* 5.0 6.2 6.7 6.6

Indonesia 6.2 6.1 6.4 6.5

Malaysia 5.6 4.6 4.4 4.2

Singapore 1.3 2.5 3.2 3.2

South Korea 2.1 3.0 4.6 4.6

Taiwan 1.3 3.0 4.0 4.1

Thailand 6.4 4.0 4.5 4.4

Emerging Europe 2.5 3.0 3.7 4.3

Russia 3.6 3.4 3.6 4.1

Turkey 2.6 4.0 4.7 5.2

Czech Republic -1.2 0.5 1.9 2.4

Hungary -1.7 -0.2 1.9 2.7

Poland 2.0 1.9 3.0 4.1

e/f = estimate/forecast; *Fiscal years ending March 31 (2012 = 2011/12). Source: BMI

for Thailand and Turkey representing the most notable changes.

Emerging Asia will remain an economic outperformer, with

real GDP growth of 6.3% in 2013 reflective of a strong but

temporary bounce in Chinese activity in H113 (the 2014 and

2015 projections for emerging Asia mark a deceleration to 6.1%

and 5.6%, respectively). China’s economic recovery continues

to gain traction, and we expect this to remain the case over the

coming months. Signs of an early tightening cycle have faded

in recent months, and inflation, although picking up, is of no

real concern yet. However, we remain bearish on the country’s

growth prospects over H213, as rising inflation is set to put

pressure on the People’s Bank of China to cool the economy

once again. Meanwhile, growth in Latin America, Sub-Saharan

Africa and emerging Europe is also set to pick up the pace in

2013, with reasonably steady growth going into 2014.

BMI is below consensus on growth in China (compared with

the Bloomberg survey of analysts) for 2013 and 2014. However,

we are more optimistic on the growth prospects of India in 2013

and 2014, and the US in 2013. We are in line with consensus

on the eurozone.

Analyst: Elijah Oliveros-RosenKey Sector Analysts: Lyndsey Anderson, Michelle KaraviasEditor: Mark SchaltuperSub-Editor: Olly MorrisonSubscriptions Manager: Yen Ly, Nuria Bernardez, Shineade Nicol-Sey,Mandeep SahoteMarketing Manager: Joanna AshtonProduction: Neil Murphy, Reema PatelPublishers: Richard Londesborough, Jonathan Feroze

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venezuela business forecast report q3 2013

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