Venezuelan Forecast

Mar 6th 2008
From the Economist Intelligence Unit
Source: Country Forecast

Outlook for 2008-09

- Hugo Chavez’s defeat in the December 2007 referendum on constitutional reform will give a boost to the beleaguered opposition. However, its internal divisions will prevent a major political realignment in the near term.

- The government will continue to use the state’s wealth of energy resources as leverage to deepen diplomatic and commercial relations with countries it considers“friendly”within and outside the region.

- The government is unlikely to move towards full state control of the economy, but concerns about further nationalisation will curb private-sector investment.

- The central government deficit is forecast to widen in line with falling non-oil revenue, but the true fiscal position will be worse, as an increasing burden of expenditure will be placed on PDVSA and Fonden.

- Deficiencies in the policy environment and a stabilisation of fiscal revenue will combine to produce a deceleration of GDP growth in the forecast period.

- Assuming that oil prices remain high, the authorities are unlikely to devalue the bolivar until 2009. Sales of US dollar-denominated assets will increase, but the gap between the premium and official exchange rates will remain large.

Monthly review

- In January seven opposition parties signed a pact indicating their intention to choose a single candidate for at least the most important posts in the November local elections.

- A dispute between the government and a US oil company, ExxonMobil flared up in early February, with Mr Chavez threatening to halt crude supplies to the US in retaliation for Exxon’s legal actions abroad.

- In February the finance ministry placed a reported US$100m-150m in structured notes (backed by Argentine and Ecuadorian bonds held at Fonden) at 15 local banks in an attempt to drain excess liquidity.

- Following a wage dispute with Sidor, the country’s largest steelmaker, workers went on a series of strikes in late January.

- GDP growth slowed marginally to 8.5% year on year in the fourth quarter of 2007. This brought full-year growth to 8.4%, representing a slowdown from growth of 10.3% in 2006.

- The current-account surplus fell to US$5bn in the fourth quarter of 2007, largely on the back of strong import growth.

Economic data

- Following his victory in the December 2006 presidential election, Hugo Chavez is expected to remain in office throughout the outlook period. He will retain a firm grip on power, owing to his complete control over the legislature and extensive influence over other institutions. However, the opposition has the potential to capitalise on its victory in the December 2007 referendum on constitutional reform. This will keep the political environment 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, these factors could combine to reduce support for the president and 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 (characterised by price and exchange controls), 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. The burden of oil investment will fall increasingly on the public sector, but here there are questions over efficiency and technical capacity.

- Double-digit GDP growth in 2004-06 will not be sustainable in the outlook period, and growth is forecast to slow towards 3.5% in the medium term, as the fiscal stimulus weakens and the deficiencies of the present policy framework are reflected in a slowdown in private investment. The long-standing structural problems of oil dependency and an inefficient and costly public bureaucracy are unlikely to be tackled. Economic distortions will persist, as exchange controls trap excess liquidity in the economy, resulting in double-digit inflation throughout the outlook period. Forecast annual step devaluations of the fixed exchange rate from 2009 will place further pressure on prices.

- Venezuela is at the peak of another oil-fuelled boom. In the past, these have been followed by spectacular crashes in the wake of oil-price falls. However, with world oil prices expected to remain high for a prolonged period, the economic cycle is likely to prove to be more drawn out. But with little achieved in the way of structural reform and the policy environment increasingly unconducive to private investment, sustainable development of the non-oil economy over the medium term appears unlikely.

Chavez can't control Chavez

To be honest I've been a little out of the loop during the past couple of weeks, since I have been dealing with work, and unfortunately it has nothing to do with the topic of my blog.

Anyways, by now most people are aware of the confrontation going on between Colombia, Ecuador, and Colombia, if not please click on the links on the right. What I think is bizarre about the whole thing is that Chavez on Sunday was ready to declare war on Colombia when in fact this whole issue didn't affect Venezuela. If Chavez were a statesman and truly wanted to be a leader of South America he could have tried to diffuse the situation and ask all parties to keep cool. I'm sure Lula is shaking is head at this moment and will have to try and diffuse the situation. I wonder if Lula ever gets tired of cleaning up Chavez's messes? Note that said Lula and not Insulza the president of the OAS, reports I have read say he is more concerned with running for president in Chile in 2009 than running the OAS.

So what should we make of Chavez sending battalions to the Colombian boarder? eh.. not much we are still waiting for Chavez to stop selling oil to the US.

“This is just another of Chávez’s orders made without thinking, and without any military advice,” said Miguel Aparicio, a retired general and security analyst in Caracas. “We are getting used to his impulsiveness and instability – it is an empty threat.”

In addition, Venezuelan military strength is no match to that of Colombia's.

While Mr Chavez’s order to send tanks and fighter jets to the Colombian border had the aura of a declaration of war, few are taking the threat seriously. Analysts say Venezuela’s army would be no match for an adversary with 254,000 people on active service – more than twice the size of Venezuela’s 115,000-strong force – who have been in permanent training for the past four decades in a war against various insurgent groups.

“Chávez has spent a lot of money on expensive [military] toys, it’s true, but instead of serious training, soldiers seem to spend much of their time carrying out tasks like manning government market stalls,” said Mr Aparicio, in reference to Mr Chávez’s policy of giving the military an increasing role in civil society.

Analysts note that many in the ­Venezuelan army, particularly commanders, would be loath to enter into open conflict with what they consider a “brother” nation.

Probably the thing I find most interesting is how Uribe and Chavez are completely opposite in their personality. While Chavez is used to the Venezuelan opposition getting into a tizzy over any little thing he would says, Uribe is very different. In every verbal conflict that has occurred between the two, Uribe has clearly shown that he knows how to deal with Chavez, mainly by not engaging in his verbal insults, not falling for his provocations, and acting in a calm and coordinated fashion. This might be part of the reason why Uribe is not sending additional troops to the boarder with Ecuador and Venezuela, even though both of these countries are doing this.

It's apparent that this conflict will be around for while especially since Colombia claims to have evidence linking Chavez and Correa to the FARC. Namely the claim that Chavez gave the FARC $300,000 and the FARC giving Chavez $50,000 back during the 1990's.

This claim of money transfer between Chavez and the FARC poses two interesting questions. If in fact Chavez received money in the 1990's I'm sure other people are aware of this say Jose Vicente Rangel, which I'm sure would never say anything. But perhaps Luis Michelena might know more about this. I also wonder if the $300,000 given to the FARC is a business deal, in other words Chavez gets his five or six hostages released making him look like a saviour and a peace maker, and the FARC get $300,000. Not a bad deal from what I can see.