We have made extensive changes to our risk scores for Venezuela following a recent review of the operating risk model. There are no upgrades in any category, but eight scores have been downgraded in light of recent events.
The security risk category has seen its score rise from 61 to 64, where a score of 100 represents the highest level of risk. An adjustment to the indicator for hostility to foreigners and private property accounts for this change. This reflects a growing hostility on the part of the ruling political class towards private ownership, but not broad public support for such a position. However, as the rhetoric increases, public sentiment may shift.
Our score for government effectiveness has been raised from 86 to 96. There are three factors which have contributed to this. Government policy is now becoming explicitly and vociferously anti-private sector.
The opportunities for cronyism are increasing and enforcement is becoming non-existent in practice. And finally there are few safeguards or sanctions against corrupt officials which is exacerbated by a distinct lack of checks and balances. In many cases they are only accountable to the executive.
The risks for legal and regulatory issues are also numerous in Venezuela. The likelihood of confiscation and expropriation is
increasing as the government has announced the nationalisation of CA Nacional Telefonos de Venezuela(CANTV), the country’s major telecoms company. There is a high possibility of future nationalisations.
However, there is no indication as yet as to how this might occur and what level of compensation, if any, there may be. Unfair competitive practices have also registered on this downgrade. Strictly speaking, competition legislation does exist. However, current government policy is moving in direct opposition to it. To make matters worse, the government has significant influence over the relevant enforcement agencies which are essentially powerless.
The protection for private property is extremely low. Companies in a growing number of sectors could be under threat because of this. And their positions are dependent on increasingly arbitrary policy decisions of the government. It has stated that it would like to move eventually towards predominantly state ownership, although this is certainly not the reality at the moment. Our downgrade also rests on the likelihood of further price controls in the future. They would almost certainly be
extended in times of crisis. This brings our total score for the legal and regulatory risk category to 83, up from 73 previously. It also pushes the category into the very high-risk “E” band rating.
Our score for the macroeconomic risk category has also been downgraded, from 50 to 65, which moves it from the moderate-risk “C” band rating into the high-risk “D” band rating. The risk of volatility in the black market exchange rate has increased as expansionary fiscal policy and exchange controls combine to create huge pressures on prices and imports. Based on reliable forecasts, the chance for interest rate volatility has also increased.
We have downgraded the score for the foreign trade and payments risk from 71 to 75 after the fall of financial markets on the announcement of CANTV’s nationalisation. Exchange controls are likely to be tightened in response to possible capital flight and as a policy of import substitution.
Due to steadily falling oil prices there is also an increasing possibility of devaluation of around 15% (which is still below
inflation) in the first half of 2007, although this is still not our baseline forecast. A larger devaluation would become more likely only in the event of a sharp and sustained drop in the Venezuelan basket to below US$40/barrel, combined with a collapse in private investment. In light of this, our score for the financial risk category has been downgraded from 63 to 71.
The possibility of discriminatory taxes has also increased. The government may put a greater tax burden on some firms in certain “strategic” sectors as an alternative to nationalisation. Consequently, our score for tax policy risk has been
downgraded from 75 to 81 which also pushes it into the very high-risk “E” band rating.
The final downgrade was influenced by the Venezuelan government setting the national minimum wage without any reference to productivity. There may also be a possibility of broader wage controls in the future. This has prompted the downgrading of our score for labour market risk from 64 to 68.
The score for Venezuela’s overall assessment has itself risen from 67 to 73, but the country has not moved out of the high-risk “D” rating band.
Current Previous
R I S K C A T E G O R Y
Rating Score Rating Score
OVERALL ASSESSMENT D 73 D 67
Security risk D 64 D 61
Political stability risk D 65 D 65
Government effectiveness risk E 96 E 86
Legal & regulatory risk E 83 D 73
Macroeconomic risk D 65 C 50
Foreign trade & payments risk D 75 D 71
Financial risk D 71 D 63
Tax policy risk E 81 D 75
Labour market risk D 68 D 64
Infrastructure risk C 59 C 59
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