Low oil prices, high inflation and a poor business environment will see Venezuela's recession stretch into its third year in 2016.
Major political gains on the part of the opposition in December's legislative elections will result in a gradual turn towards more orthodox economic policy, although the pace of change will be substantially hampered by the institutional strength of the PSUV and the power of the executive branch.
Political risk will remain elevated due to deteriorating living standards and lack of confidence in leadership to competently govern.
Inflation will remain elevated, at the highest level in Latin America, and the operating environment will remain very precarious for foreign multinationals in the country.
Major Forecast Changes
We have downgraded our real GDP growth forecasts for 2016 and 2017, due to a further downgrade to our oil price forecasts, an upgrade to our inflation expectations and our expectations that policymaking will still be inhospitable to private investment.
Following inflation of 180.9% y-o-y in 2015, we expect inflation will accelerate, rather than slow, in 2016. We forecast average over 250.0% over the course of the year, and remain above 200.0% at year-end.
Upside Risks: If the Maduro administration were to decide to take steps towards meaningful economic reforms, investor sentiment would rebound relatively quickly, lowering financing costs and increasing FDI inflows.
Downside Risks: The potential for elevated political tensions to materialise in a wider political crisis could result in a further deterioration of investor sentiment and lower economic growth. Although we have already downgraded our oil price forecasts, downside risks still exist, due to abundant supply and subdued global demand for crude.
|Real GDP growth, % y-o-y||-3.9||-5.7||-6.5||-0.6|
|Nominal GDP, USDbn||577.3||229.2||292.3||589.0|
|Consumer price inflation, % y-o-y, eop||68.5||180.9||236.3||130.0|
|Exchange rate VEF/USD, eop||6.29||47.39||75.38||128.78|
|Budget balance, % of GDP||-11.2||-10.2||-13.8||-13.6|
|Current account balance, % of GDP||0.6||-4.3||-2.6||-1.1|
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