Royal Bank of Scotland Predicts Venezuela Recession to Continue

RBS Lowers Venezuela GDP Forecast on Devaluation, Electricity

By Daniel Cancel

March 26 (Bloomberg) -- Royal Bank of Scotland Plc lowered its forecast for Venezuelan economic growth this year as an electricity shortage causes a drop in output and restricted dollar sales curb imports, RBS analyst Boris Segura said.

RBS now expects Venezuela’s economy to shrink 3 percent in 2010 rather than post zero growth. Consumer prices may rise less than the bank expected at an annual rate of 30 percent, down from a previous forecast of 40 percent, Segura said.

Venezuelan President Hugo Chavez devalued the bolivar by as much as 50 percent on Jan. 8 in a bid to narrow the country’s budget deficit which is projected to be 3.2 percent of GDP, according to Morgan Stanley. Venezuela’s foreign exchange administration commission, known as Cadivi, has failed to allot sufficient dollars to importers to boost production and pull the South American country out of a recession, Segura said.

“After the devaluation I was expecting zero growth if Cadivi stepped up to the plate, which of course they haven’t done,” Segura said yesterday in a telephone interview from Stamford, Connecticut. “The second whitecap is the electricity crisis, which is taking a toll on manufacturing and retail activity.”

As part of currency controls implemented by Chavez in 2003, companies must seek approval from the government to buy dollars at the official rates, now 2.6 and 4.3 per dollar depending on the use of the money. When they don’t get approval, companies turn to the unregulated currency market where the bolivar traded at 7.05 per dollar today unchanged from yesterday, the highest since Aug. 4.

Export Plunge

Venezuela’s economy contracted 3.3 percent last year and fell into recession for the first time since 2003 as oil output and exports plunged. The economy may contract 7 percent in the first quarter of this year, Segura said.

http://www.bloomberg.com/apps/news?pid=20601086&sid=aBArNiT6MNLg

"The Venezuelan economy is likely to continue to take in water as we enter 2010, with the government in no position to offset the significant lull in activity.....Stubborn inflationary pressures are unlikely to vanish as long as monetary aggregates continue to swell amid sagging private production. The latter phenomenon will persist unless price distortions and the government’s nationalistion drive are rolled back. Thus
far, President Hugo Chávez has shown few signs of wanting to revise his populist policies, and, if anything, looks like he is trying to accelerate his ‘Bolivarian revolution’.

Although we believe that Venezuelans are becoming increasingly disillusioned with Chávez, something which will complicate his palpable desire to get re-elected in 2012, the risk is that his administration could do serious damage to the economy in the meantime.

President Chávez has continued to consolidate his power, with opposition forces finding it increasingly difficult to make their voices heard. Although we do not foresee any major political upheaval, the slowdown in the economy and stubborn inflationary pressures are likely to complicate the government’s social spending programmes, which in turn could create fissures in Chávez’s traditional

support base. Simmering societal tensions will keep the risk of political turbulence elevated, as reflected in Venezuela’s low score (37.5 out of 100) in the ‘social stability’ component of our short-term political risk ratings. The poor score is attributable to the country’s very high level of inflation and a serious risk of public unrest."

http://www.reportlinker.com/p0158423/Venezuela-Business-Forecast-Report-Q1-2010.html