Emerging Markets Daily
Latin American Edition, July 14, 2010
Resumo do boletim do Citibank:
Focus on Venezuela
Prognosis negative: weak activity, high prices. We have downgraded our 2010 real GDP growth forecast to -3.7% from -2.8%, as the recession and the slump in domestic demand continue. The details of our new growth outlook led us to revise our 2010 inflation forecast to 36% from 40%.
Completo:
Venezuela: Prognosis Negative: Weak Activity, High Prices
Venezuela’s ongoing recession is strong, and shows no signs of a recovery in the short run. Activity data released for 1H’10 does not bode well for the economy in general terms. Earlier in 2Q’10 new industrial production (IP) and retail sales (RS) data showed the former falling 13.3% year over year in March, while the latter presented an 11.8% annual decline for the same month, the twelfth and fourteenth straight monthly negative prints, respectively. Furthermore, 1Q’10 GDP showed a 5.8% year over year decline. This print accounted for a public sector GDP decline of 2.8% and a 0.2% fall in government expenditures, the first fall since 4Q’02 in this category. In that quarter, fixed capital formation declined 27.9% as total investment fell a considerable
44.6%. On the external front, exports showed an 8.1% fall, while imports presented a 39.74% decline.
In addition, the undersupply of foreign currency under the new scheme poses a threat for activity going forward. The parallel exchange market that operated until mid May, though unofficial, served as a means for providing the market with the USD it demanded when they were unavailable or too troublesome to obtain through CADIVI, the official foreign currency distributor. Therefore, it allowed importers of raw materials and other inputs needed for production to access hard currency to undertake their transactions, and thus their production processes. After being closed for over a fortnight, the market reopened under a new scheme with new regulations that further hindered availability of greenbacks for firms and individuals; these new regulations
include trading limits and an implicit exchange rate band. The new system has witnessed an average exchange rate of USD/VEF5.30, compared to a parallel rate close to USD/VEF8.00 when the old market ceased its operations, but volumes are well below those registered in the old parallel market. Hence, we expect activity to face additional hurdles in quarters to come, as it becomes harder for producers to carry out their production processes.
As a result of recent data and FX innovations, we have revised our GDP growth forecast to -3.7% for 2010 from -2.8% before. We expect the economic downturn to continue this year, with the first positive GDP growth print to be seen until 1Q’11. For 2Q’10, the added stress on economic growth resulting from energy consumption restrictions on a national scale, that were in place through the quarter, are expected to take their toll on activity, leading to a - 6.0% year over year growth print. For 2H’10, in spite of parliamentary elections coming up in September, which should indicate greater government
expenditures as a means for boosting popularity, we do not expect a considerable upturn in this category’s growth.1 In this light, declines in consumer spending and private investment, as confidence backtracks, should be the main drivers for negative GDP prints in upcoming quarters.
The fall in domestic demand should ease pressures on inflation, though shortages stemming from FX undersupply should have the opposite effect. The economy has been shrinking at a greater-than-originally-expected rate, and, in our view, this situation should continue through 2010. This suggests that domestic demand growth should not enter positive territory until 2011, and thus inflationary pressures should not be as pressing this year as we originally believed. However, this should not signal a great improvement on the inflation front, as the new FX scheme and the shortfall in USD availability leads to shortages of both imported consumer goods and locally produced goods that use imported inputs, which in turn should lead to increases in the national
price level. It is worth pointing out that the new FX system only allows access to official USD at the low USD/VEF2.60 or USD/VEF4.30 rates, or the USD/VEF5.30 rate through the Central Bank’s new SITME FX platform.
Therefore, we believe inflationary pressures are not a direct result of a higher USD/VEF, but rather of a lack of supply of products in the local market.
As a result, we have downgraded our inflation forecast for 2010 to 36% from 40% before. The latest inflation print released for June stood at 31.9% year over year, and 16.7% year to date. June’s monthly print stood at 2.0%, surprising on the downside, just as May’s print did, standing at 2.2% month over month. In our view, the previous two month’s inflation prints have begun to show a slowdown in inflationary pressures resulting from further domestic demand weakening. We expect this situation to carry on for the rest of 2010 as the economy remains in recession, leading us to expect a somewhat lower inflation print for year-end 2010. Nevertheless, inflation should still end the year at an elevated 36.0% given the aforementioned upward pressures on
prices caused by local good shortages.
Thus, the overall outlook for the Venezuelan economy remains pretty grim. On the back of a falling economic activity outlook for the rest of the year, coupled with the highest inflation rate in Latin America, the Venezuelan government has continued with its policy of nationalizations and threats to private producers, something that could weaken output and increase inflation even further. Until now, the Venezuelan government has taken advantage of the additional source of revenues stemming from the oil sector. This revenue generation capacity has provided the sources to fulfill payment obligations, something we do not think should change in the short run. Nevertheless, going forward, the government is in need to revise its current strategy or else risk ending up with a significant reduction in the size of the Venezuelan economy. This contraction would not be compatible with an increasing population, in addition to being a transition period in which a lot of social unrest could be created.
The government acknowledges the risks from USD undersupply. In our view, the fact that the government is considering a bond issuance either through the sovereign or PDVSA, only responds to the fact that more dollars are needed in order to keep production levels from falling even further. In that sense, we consider such an issuance as a step in the right direction. However, more important changes are in order, as the government needs to determine what is the sustainable growth strategy that it wants to develop in the years to come, as the outcome of the current one has clearly sent the nation into a long recession, just when the rest of Latin America is heading towards a strong recovery.
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