Venezuela - The Economist Forecast

Mar 22nd 2006
From the Economist Intelligence Unit

The Economist Intelligence Unit expects the president, Hugo Chavez Frias, to be re-elected in December 2006. Beyond the election, a lack of checks and balances could bring the problems of corruption and inefficiency to the fore, while emerging internal divisions within the government, centring on whether and how to radicalise economic policy, have the potential to erode governability. Fiscal profligacy will keep the public finances in deficit, despite record high oil prices in 2006. In 2007, although oil prices will remain high by historical standards, we do expect some retrenchment from the extraordinary levels of fiscal spending in 2006. Investment inflows to exploit Venezuela’s abundant energy reserves will be maintained, even in the face of more difficult operating conditions. Much non-oil investment will continue to be put off by the uncertain legal and regulatory regimes and by price and exchange controls, which will be maintained through the outlook period. Fiscal spending will help to underpin economic activity, but growth will soften more markedly from 2007 as investment falls.

Key changes from last update

Political outlook
Recent opinion polls suggest Mr Chavez’s popularity is falling. With the presidential election due in December, this may prompt the government to pause in its expansion of the state-led development model, so as not to alienate undecided voters.

Economic policy outlook
A significant upward revision to our oil price forecast for 2006 and 2007 (to US$60/barrel and US$55/b respectively), implies higher fiscal oil revenue, but we expect any extra income to be spent rather than saved, and still project a fiscal deficit in 2006.

Economic forecast
Oil price revisions have had a significant impact on our forecasts for the external balance and for growth. Most significantly, we have revised GDP growth for 2006 up to 8%, from 6.5% last month, based on the extremely large fiscal stimulus, which will help to maintain private consumption at levels similar to 2005.