Low oil prices, high inflation and a poor business environment will see Venezuela's recession stretch into its third year in 2016, and persist until 2018.
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
Due to increased political gridlock which has diminished the probability of meaningful and timely economic reform, we have downgraded our real GDP growth forecasts for 2016 and 2017. We forecast the economy to contract by 7.0% in 2016 and by 1.6% in 2017.
Following our Oil & Gas team's upgrade to oil prices, we believe that current account shortfall will be slightly narrower than we previously forecast, although still very wide by historical and regional standards, at 7.1% of GDP in 2016.
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||-7.6||-7.0||-1.6|
|Nominal GDP, USDbn||577.3||218.6||279.3||357.8|
|Consumer price inflation, % y-o-y, eop||68.5||180.9||236.3||130.0|
|Exchange rate VEF/USD, eop||6.29||47.15||101.01||206.96|
|Budget balance, % of GDP||-11.8||-12.2||-15.1||-11.8|
|Current account balance, % of GDP||0.6||-8.1||-7.1||-2.9|
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