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18 Apr 2013
Forex Flash: Venezuela outlook worsens as election widens the divide - BBH
FXstreet.com (Barcelona) - Win Thin, Global head of Emerging Market Currency Strategy at Brown Brothers Harriman notes that the election last weekend in Venezuela spells continued problems for the troubled nation.
The hand-picked successor to Hugo Chavez, Nicolas Maduro, won with only 50.8% of the vote vs. 49% for opposition candidate Henrique Capriles, a mere 270,000 votes out of the total 14.8 mln cast, and all the votes have yet to be counted. Capriles is challenging the result, and some protests have already turned violent and, in some cases, deadly. Rather than provide a sense of closure after the death of Chavez, Thin notes that the close election shows just how divided the country remains and how difficult it will be to govern, no matter who is president.
Thin adds that Maduro seems to be doubling down on his predecessor’s inflammatory rhetoric, and accused the US of being behind the violence and protests that are meant to bring him down. Further, he notes that Maduro’s behavior has been erratic, to say the least, as he cut into regular TV programming several times this week to make these accusations. Newswires are now reporting that there is an arrest warrant out on Capriles, which if verified will only fan the flames more. A planned march by Capriles and his supporters was called off today due to threats of a government crackdown.
He notes that the polarization of Venezuelan society has only worsened in recent years. He writes, “Chavez first came to power in 1998 with 56% of the popular vote. Chavez was re-elected in 2000 with 60% of the vote to a 6-year term under the new constitution that he helped install, and was re-elected again in 2006 with 63% of the vote. In 2012, he won with only 55% of the vote, his smallest margin of victory ever, and now his successor Maduro has barely won a majority. With an almost equal number of Chavismo supporters as detractors in the country, policymaking will be very difficult ahead.”
On top of political instability, he notes that a continued slide in oil prices will really expose the problems in the economy as Chavez and now Maduro have ramped up spending to retain the support of the country’s poor, and this will continue to exert stress on the budget. That was one factor behind the devaluation, as it gave the government more bolivars to spend for every dollar of oil sold.
Thin continues to note that IMF forecasts virtually flat growth for the economy this year and 2.3% next year, but he sees that the risks are clearly to the downside as oil prices slide. He adds that over the course of 2012, CPI inflation had eased from near 30% at the end of 2011 to a trough of 18% in November 2012. But, it was already showing signs of pickup to 21.6% y/y in January, and headed higher to 22.1% y/y in February and 24.2% y/y in March after the devaluation took effect. Venezuela imports most of its consumer goods, and so the pass-through of devaluation to inflation is pretty quick.
He sees that the fiscal accounts, weakened by a pre-election spending spree, should improve since the devaluation, but the narrow margin of Maduro’s win suggests fiscal largesse will continue in order to shore up popular support. He writes, “IMF forecasts the budget deficit narrowing to -13% of GDP in 2013 and -10% in 2014 from nearly -19% of GDP in 2012. This remains problematic, and risks are tilted towards a negative surprise now.”
Further, with inflation running near 30% over the last several years, the real exchange rate has appreciated sharply, and will continue to necessitate periodic devaluations. IMF PPP for VEF is 5.19 in 2013 and 6.09 in 2014. Thin thought the devaluation in February (from 4.3 to 6.3) should have been larger in order to prevent persistent overvaluation, as high inflation will make VEF overvalued again by next year. Venezuela rarely allows overvaluation to persist, and so we think it is likely to devalue again in 2014.
Finally, Thin finishes by noting that the Venezuela 5-year CDS price has jumped to near 830 bp today from around 675 bp last week and lows near 570 bp when the year began and spreads on the country’s USD-denominated debt have widened out in a similar fashion. He writes, “The Venezuelan stock market is up over 35% YTD in bolivar terms, with a big jump seen after the February devaluation. However, in dollar terms, the equity market is down -7% YTD. Venezuelan assets are likely to continue performing poorly in the coming months, as it appears that the country is entering a prolonged period of political risk and policy paralysis.”
The hand-picked successor to Hugo Chavez, Nicolas Maduro, won with only 50.8% of the vote vs. 49% for opposition candidate Henrique Capriles, a mere 270,000 votes out of the total 14.8 mln cast, and all the votes have yet to be counted. Capriles is challenging the result, and some protests have already turned violent and, in some cases, deadly. Rather than provide a sense of closure after the death of Chavez, Thin notes that the close election shows just how divided the country remains and how difficult it will be to govern, no matter who is president.
Thin adds that Maduro seems to be doubling down on his predecessor’s inflammatory rhetoric, and accused the US of being behind the violence and protests that are meant to bring him down. Further, he notes that Maduro’s behavior has been erratic, to say the least, as he cut into regular TV programming several times this week to make these accusations. Newswires are now reporting that there is an arrest warrant out on Capriles, which if verified will only fan the flames more. A planned march by Capriles and his supporters was called off today due to threats of a government crackdown.
He notes that the polarization of Venezuelan society has only worsened in recent years. He writes, “Chavez first came to power in 1998 with 56% of the popular vote. Chavez was re-elected in 2000 with 60% of the vote to a 6-year term under the new constitution that he helped install, and was re-elected again in 2006 with 63% of the vote. In 2012, he won with only 55% of the vote, his smallest margin of victory ever, and now his successor Maduro has barely won a majority. With an almost equal number of Chavismo supporters as detractors in the country, policymaking will be very difficult ahead.”
On top of political instability, he notes that a continued slide in oil prices will really expose the problems in the economy as Chavez and now Maduro have ramped up spending to retain the support of the country’s poor, and this will continue to exert stress on the budget. That was one factor behind the devaluation, as it gave the government more bolivars to spend for every dollar of oil sold.
Thin continues to note that IMF forecasts virtually flat growth for the economy this year and 2.3% next year, but he sees that the risks are clearly to the downside as oil prices slide. He adds that over the course of 2012, CPI inflation had eased from near 30% at the end of 2011 to a trough of 18% in November 2012. But, it was already showing signs of pickup to 21.6% y/y in January, and headed higher to 22.1% y/y in February and 24.2% y/y in March after the devaluation took effect. Venezuela imports most of its consumer goods, and so the pass-through of devaluation to inflation is pretty quick.
He sees that the fiscal accounts, weakened by a pre-election spending spree, should improve since the devaluation, but the narrow margin of Maduro’s win suggests fiscal largesse will continue in order to shore up popular support. He writes, “IMF forecasts the budget deficit narrowing to -13% of GDP in 2013 and -10% in 2014 from nearly -19% of GDP in 2012. This remains problematic, and risks are tilted towards a negative surprise now.”
Further, with inflation running near 30% over the last several years, the real exchange rate has appreciated sharply, and will continue to necessitate periodic devaluations. IMF PPP for VEF is 5.19 in 2013 and 6.09 in 2014. Thin thought the devaluation in February (from 4.3 to 6.3) should have been larger in order to prevent persistent overvaluation, as high inflation will make VEF overvalued again by next year. Venezuela rarely allows overvaluation to persist, and so we think it is likely to devalue again in 2014.
Finally, Thin finishes by noting that the Venezuela 5-year CDS price has jumped to near 830 bp today from around 675 bp last week and lows near 570 bp when the year began and spreads on the country’s USD-denominated debt have widened out in a similar fashion. He writes, “The Venezuelan stock market is up over 35% YTD in bolivar terms, with a big jump seen after the February devaluation. However, in dollar terms, the equity market is down -7% YTD. Venezuelan assets are likely to continue performing poorly in the coming months, as it appears that the country is entering a prolonged period of political risk and policy paralysis.”