Economist Intelligence Unit - Venezuela Forecast

Economic data
Jul 3rd 2007
From the Economist Intelligence Unit
Source: Country Data

The Economist Intelligence Unit’s forecast is based on the assumption that the president, Hugo Chavez, will stay in power throughout the outlook period. His victory in the presidential poll in December 2006 extends his term of office to 2012, and there is little meaningful organised opposition. The political environment will remain polarised, particularly in the context of government policy radicalisation, which also has the potential to intensify conflicts within the broad government alliance. In the medium term, this could reduce support for the president and further erode political stability and governability.
The radical economic policy agenda of the government, which is centred on expanding the state-led development model, will exacerbate deficiencies in the business environment, and Venezuela will remain a challenging place in which to invest. Investment in most sectors is unlikely to thrive against a background of distortionary macroeconomic policy (with price and exchange controls expected to be retained), rising threats to property and contract rights, unpredictable state intervention, and a growing bureaucratic burden. Even in the dominant energy sector, foreign investment will be below potential, as a result of legal uncertainty and an emerging emphasis on links with investors from“friendly”countries. The burden of oil investment will fall increasingly on the public sector, but here there are questions over efficiency and technical capacity.
A steady decline in oil prices from record highs is projected in the medium term, but the rise in essentially permanent spending commitments makes a fiscal retrenchment unlikely. The result will be a widening fiscal deficit and a rise in the public debt stock (although this is from modest levels by regional standards). The long-standing structural problems of oil dependency (which requires a comprehensive reform of the non-oil tax system) and an inefficient and costly state (which would require large-scale redundancies to reverse) are unlikely to be tackled within the forecast period.
Venezuela is at the peak of another oil-fuelled boom. In the past, oil-fuelled booms have been followed by spectacular crashes in the wake of oil price falls. However, with world oil prices expected to remain high (by historical comparison) for a prolonged period, the economic cycle is likely to prove to be more drawn out in this case. Our assumption of a gradual decline in oil prices, combined with an unfavourable climate for private enterprise, implies a gradual deceleration of investment growth and of the fiscal stimulus. Growth will slow to around 3% over the medium term as a result. Our oil price forecast also implies yearly step devaluations of the bolivar from 2008.

Key indicators 2006 2007 2008 2009 2010 2011
Real GDP growth (%) 10.3 5.2 2.8 3.1 2.9 2.8
Consumer price inflation (av; %) 13.7 18.2 22.9 15.6 14.0 13.6
Budget balance (% of GDP) 0.0 -4.1 -4.4 -2.1 -1.6 -0.8
Current-account balance (% of GDP) 14.9 7.6 5.0 2.5 0.6 -1.5
Commercial banks' prime rate (%; av) 15.5 15.5 15.7 16.0 17.0 17.0
Exchange rate Bs:US$ (av) 2,147.0 2,147.0 2,700.0 3,204.2 3,662.5 4,158.3
Exchange rate Bs:€(av) 2,695.9 2,920.2 3,732.8 4,213.5 4,678.8 5,239.5