Venezuelan Inflation Unlikely to Fall

We expect Venezuela’s inflation to start showing some upward pressure on food prices due mainly to production and distribution disruptions to agricultural products as a result of heavy rainfall at the end of 2010 and the devaluation in early 2011. However, government price controls will likely prevent inflation from spiking and lead to a gradual correction in prices. We expect the Caracas CPI headline to hover around 2.2% m/m (27.1% y/y) in January. Additional pressures from sectors such as education, restaurants and health will also be present in January and should keep core inflation around similar levels (2.2% m/m, 29% y/y), according to our core estimate.

Caracas Headline, Core and Food Inflation (% y/y)

image001_512_78.jpg

Source: Central Bank of Venezuela & RGE

Venezuela’s Export Volume Continues to Slip

Venezuela’s oil exports shrunk by an additional 1.8% y/y in December 2010, according to audited data published by Reuters, accumulating to a 6.5% y/y fall in the average volume of oil exports in 2010. Venezuela’s declining oil production is one of our main concerns regarding the economic stability of the country, as oil revenues constitute the pillars of the economy, representing the primary source of hard currency into the economy, 95% of the country’s exports and more than a third of the government’s revenues. Venezuela should close 2010 with exports bordering US$65 billion and a trade surplus of US$27 billion. For 2011, the external outlook should remain positive as long as oil prices remain elevated, which is the most likely scenario. However, they should remain stable relative to current prices. Imports will increase in 2011 led by government purchases, while oil production will likely remain compressed and oil prices, although high, should remain stable, limiting a major surge in exports and leading to a contraction of the trade surplus in 2011.

Venezuela’s Chavez Requests Special Powers

Venezuela’s President Hugo Chavez has sent a bill to the National Assembly requesting special powers in the light of the recent heavy rains that have struck Venezuela, which have left over 30 people dead and generated material losses. The Enabling Law will allow Chavez to rule by decree, bypassing the Assembly in matters as housing, land and finances. The President has requested such powers for a period of 12 months. These powers have been requested to reassign funds for housing and infrastructure damaged by recent rains and address the reconstruction of damaged zones. However, opposition members have protested, denouncing such a move as an attempt to weaken the newly elected assembly, set to be sworn in on January 5. Chavez has asked for such powers three times in the past, with which he has passed nearly 100 laws.

Venezuela’s GDP to Remain Negative in Q3

RGE expects Venezuela’s Q3 GDP to remain in negative territory, with a 1.87% y/y contraction. Although September elections accelerated growth during Q3 2010, it will not suffice to offset a sharp reduction in oil production and depressed private activity. While government spending should show stronger gains than in previous quarters, a negative trade balance (in real terms) will anchor growth; oil exports have continued to fall in yearly terms in Q3 2010 while the Venezuelan oil basket price remained constant. Consumption is still under distress due to high inflation levels, although it may show spillover effects from increased government spending and move higher with respect to Q2 2010. With respect to investment, it is unlikely that the government will be able to boost fixed capital formation in the same manner as in Q2 2010, when it recovered to zero growth after three quarters of double digit contractions thanks to investments in the energy sector infrastructure.

Venezuela’s Inflation Forecast Revised to 27.5%-30% y/y

The Caracas CPI for October was in line with expectations (consensus, 1.4% m/m; RGE, 1.6% m/m) at 1.5% m/m, reaching 27.6% y/y and summing to 23.7% year-to-date. Food prices recovered from last month’s lows, printing a 1.9% m/m rise, and alcoholic beverages printed a 2.4% m/m increase. Transport prices and other goods and services pushed on the upside by 1.4% m/m and 2.08% m/m, respectively. Rent and health-care costs also helped to the upside. On the downside, education services dropped to 0.8% m/m from the yearly high of 11.88% m/m in September due to seasonal effects. Apparel soothed to 1.77% m/m from 2.3% m/m in September, a dynamic mirrored by restaurants and hotels and home appliances. Core inflation of the Caracas CPI remained high, gaining 1.6% m/m in October and printing a 29% y/y gain. Year-to-date, core inflation accumulated to 24.2%. With respect to the new National CPI, October’s inflation was also 1.5% m/m, which translated into 27.5% y/y and 23% year-to-date readings. RGE has revised its inflation forecast towards the 27.5%-30% y/y range for 2010 from the 30-35% y/y.

Venezuela’s Chavez Needs the Opposition

The results of the September 26, 2010, National Assembly elections in Venezuela were very interesting for the country’s future. Although claiming over 52% of the votes, the opposition managed to obtain only 38% of representation in the Assembly. This disparity was a result of the new electoral law, which re-allocates vote representation in the different states. Without two thirds of the Assembly, President Hugo Chavez will have to reach consensus with the opposition in order to approve major laws, enhancing political debate in the country and addressing concerns of a greater share of the population.

Venezuela’s GDP Surprises on the Upside

Venezuela’s results are a big surprise as they show a dramatic improvement in the country’s economic conditions, which is difficult to digest given the current dynamics the country is undergoing.

Venezuela contracted 1.9% y/y in Q2 2010, after a 5.2% y/y contraction in Q1 2010 and surprising markets to the upside. In Q2 2010, Venezuela’s government consumption printed a positive 3.1% y/y, compared with 0.2% y/y in Q1 2010, and investment recovered from a dramatic -39.5% y/y in Q1 2010 to a positive 0.1% y/y in Q2, with fixed capital investment rebounding to -0.8% y/y from -23.8% y/y in Q1 and aided by an over 200% spike in inventories. Consumption remained in the negatives at -2.4% y/y. Exports summed to US$16 billion (US$15.2 billion in oil exports) and imports totaled US$9.9 billion. Oil sector GDP contracted by 2% y/y, while non-oil sector fell by 1.7% y/y.

Latin American CDS: Fully Recovered, What are the Risks?

Editors Note: The Following RGE premium content, “Latin American CDS: Fully Recovered, What are the Risks?” is available to paid clients. Bertrand Delgado, Elisa Parisi-Capone and Alejandro Rivera, take a close look at Latin America’s 5 year CDS fundamental and counterparty risk dynamics.  They examine the extent to which counterparty risks explain the sharp movement […]