Two experts give their views on the implications of another round of Chávismo on Latin America’s biggest oil producer
Chávez’s anti-market stance and isolationist policies have deterred investors from Venezuela in recent years, despite the country’s status as Latin America’s largest oil producer. Prices on Venezuela’s credit default spreads widened in the days after Chávez’s election victory to 800 basis points, equivalent to a 50% probability of default.
However, some argue that revenues generated from the country’s vast oil reserves could be enough to offset the inefficiencies of Chávez’s polices. Indeed, the widening of Venezuelan bonds after the election was less than what many analysts expected.
Euromoney asked two members of Euromoney Country Risk’s panel of expert economists for their opinions on the outlook for Venezuela’s economy.
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Public debt has more than doubled between 2008 and 2011. As public spending surges in 2012, the budget deficit is likely to deteriorate further and public debt to increase further, despite the high oil prices.
On the positive side, Venezuela’s external debt remains at a moderate level, as well as the external debt service, which mitigate somewhat the high country risk. Nevertheless, if Venezuela continues to rely on [state oil company] PDVSA as a source of external funding, external debt is likely to increase, deteriorating the ability of the country to pay off its external debt.
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Since 1999, Chávez has gradually taken steps to transform the Venezuelan economy to match his vision of 21st-century socialism, meaning that he has increased government intervention in the economy, eroded private property rights and nationalized companies in various sectors such as oil, steel, telecom, electricity, financial, food and construction. Any improvement in the above mentioned criteria would improve business confidence in the country.
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This article was originally published by Euromoney Country Risk.