Exercise country analysis and country risk Venezuela Hypump, a US company producing hydraulic pumps used in oil producing industry, likes to investigate the possibility of starting a new subsidiary in Venezuela, and asked you to make a country analysis and country risk report. The facts, key indicators and back ground information of Venezuela you found after research are presented in the Appendix. Use that information to answer the following questions: Moderate poverty and inequality have decreased from 1998 onwards due to the program called ‘Missiones’ according to the World bank (see appendix). 1. Use the fact sheet Venezuela whether this can be confirmed with figures. Assess: a. Level of development b. Income inequality 2. Assess Venezuela’s export structure. What is it based on? Use GDP and expenditure components for Q 3 and Q4 to assess Venezuela’s attractiveness from the table: 3. How can you see 2014 and 2015 are forecasts? 4. Characterize the phase of business cycle Venezuela has faced in 2013 and 2014 (Explain which key indicator(s) are used to answer the question) 5. Make a ‘first level analysis’ of the aggregate components of GDP to explain the economic (GDP) growth during 2013. 6. Explain the influence of imports on GDP in 2013. 7. Make a ‘second level’ analysis of the aggregate components of GDP to find some reason(s) for the movement of the various components. ‘The decrease in revenues from exports, mainly oil is consistent with lower oil production’ According to an internal government report, international reserves even plummet 33% in a year. 8. Which external position indicator has directly been influenced by the decrease in revenues of oil exports? 9. Explain whether the development this indicator shows, affects the transfer risk for the pump company and if so how. 10. The score on ease of doing business index is very low. Explain what could have caused this low number. 11. Does the pump company face a nationalization risk? Explain. The Economist Intelligence Unit (EIU) defines several risks a company can meet doing business abroad. The next different risks are defined as: a) Sovereign risk: risk of default on public, domestic and external debt b) Currency risk: risk of a maxi devaluation c) Banking risk: risk of a systematic banking crisis d) Political risk: credit risk posed by the political system e) Economic structure risk: risk posed by structural economic indicators Assess Venezuela on the following risks: 12. Sovereign risk 13. Currency risk 14. Political risk 15. Economic structure risk. 16. Jot down your overall advise to the pump company Hypump to start a subsidiary in Venezuela. Explain with facts what your decision is based on.

Appendix Venezuela Facts Venezuela

Major exports 2012 | % of total | Major imports 2012 | % of total | Oil & gas | 96.4 | Intermediate goods | 56.7 | Other | 3.6 | Capital goods | 26.3 | | | Consumer goods | 17.1 | Leading markets 2012 | % of total | Leading suppliers 2012 | % of total | US | 36.7 | US | 44.6 | China | 13.5 | China | 23.6 | India | 11.3 | Brazil | 12.8 | Netherlands Antilles | 7.3 | Colombia | 6.8 | Key Indicators Venezuela | 2012 | 2013 | 2014p | 2015p | | Year | 1 Qtr | 2 Qtr | 3 Qtr | 4 Qtr | Year | Year | Year | GDP | 5.6 | 0.8 | 2.6 | 1.1 | 1.0 | 1.3 | -1 | -1 | Government consumption | 6.3 | 4.1 | 2.9 | 2.8 | 3.6 | 3.3 | 3 | 4,2 | Private consumption | 7.0 | 3.3 | 5.3 | 4.3 | 5.8 | 4.7 | -1,4 | 1,8 | Fixed capital investment | 23.3 | 4.3 | -5.5 | -12.1 | -16.6 | -9.0 | -4 | 1 | Exports of goods & services | 2.1 | 7.5 | 1.6 | -8.4 | 0.3 | -9.9 | -2,1 | 2,2 | Imports of goods & services | 24.4 | 2.3 | -3.3 | -13.8 | -20.3 | -9.7 | 1,5 | 2,9 | Inflation | | | | | | 41 | 65 | 43 | Govt balance (%) | | | | | | -10,5 | -12 | -10 | Government Debt (%) | | | | | | 54 | 53 | 52 | Current account to GDP ratio | 2,5 | | | | | 1,7 | 2,1 | 2,2 | Debt service ratio | 6 | | | | | 5,4 | | | Total reserves (% of external debt) | 41 | | | | | | | | Import cover | 4 | | | | | 3 | | | Foreign exchange reserves ($) | 28424 | 29888 | 26850 | 26500 | 23000 | | 20969(April) | | | | | | | | | | | Source: GDP and expenditure components: Banco Central de Venezuela; and ABN Amro (update 17 april 2014); World Bank. | Structure of the external public debt: 65% of total amortisations on external debt fall due after 2019. The amortisation profile of domestic debt (50% of total debt) is shorter term, but immediate rollover needs are manageable
Venezuela at a glance
A country rich in natural resources, with the largest oil reserves in Latin America and the Caribbean – and among the world’s largest— Venezuela has immense potential. Export revenues fund huge social programmes; shortages and high inflation have hit some consumers
Politics: President Hugo Chavez died in March 2013. He led a self-styled socialist revolution but polarised domestic opinion. Following the death of President Hugo Chávez and the calling of new elections, Nicolás Maduro became the new president of Venezuela in April 2013.
(Economic) Policy issues: Political radicalisation has been reflected in increasingly heterodox economic policymaking in recent years, including an acceleration in the nationalisation of industries deemed “strategically important”. However, distortions created by state interventionism (controls on foreign exchange, prices, margins imports and credit) have become increasingly evident, with the economy growing well below potential and inflation remaining high in spite of price limits imposed on a number of consumer and durable goods, reflecting import restrictions and weakening productivity.
The fixed exchange rate is sharply overvalued and capital controls have generated a rampant black market. Failure to invest part of the oil boom has led to a startling decline in the country’s physical infrastructure, resulting in recurrent electricity shortages.
Fiscal and monetary policy is extremely expansionary: Central bank prints additional banknotes to to meet the needs of the government that injects money into the economy through payments to contractors and welfare programs, thus boosting demand.

Among the most important programs that oil resources have helped to finance are the broad-based social programs called Misiones. Economic growth and the redistribution of resources associated with these missions have led to an important decline in moderate poverty, from 50% in 1998 to approximately 30% in 2012. Likewise, inequality has decreased strong from 1998 onwards, and is nowadays among the lowest in the region. Source: bbc.com and World bank (last updated: April 24th)

Venezuela in the news:
Venezuela sees a pragmatic revolution By Andres Schipani in Bogotá, April 21st, FT.com
After a year in office, Nicolás Maduro has made little headway in correcting the economic distortions bequeathed by his Comandante. Recent social unrest highlights the weak mandate of the new president.
Since Hugo Chávez died in March last year, Venezuelans have suffered rapidly deteriorating economic conditions, from a yawning budget deficit to galloping inflation and widespread shortages of goods, from milk to toilet paper. But the people have pushed back. As Mr Maduro’s approval ratings have fallen, there are signs that the socialist government is taking orthodox steps to ease the country’s severe macroeconomic imbalances. Recent rallies in Venezuelan debt have pushed yields down.
Extra article (Economist, Sept. 2014)
Venezuela’s economy
Of oil and coconut water
Probably the world’s worst-managed economy
Sep 20th 2014 | CARACAS | From the print edition

A BIG oil producer unable to pay its bills during a protracted oil-price boom is a rare beast. Thanks to colossal economic mismanagement, that is exactly what Venezuela, the world’s tenth-largest oil exporter, has become.
At the end of the second quarter Venezuela’s trade-related bills exceeded the $21 billion it currently holds in foreign assets (see chart), almost all of which is in gold or is hard to turn into cash. Over $7 billion in repayments on its financial debt come due in October. The government insists it has the means and the will to pay foreign bondholders. Few observers expect it to miss the deadline. Even so, the dreaded word “default” is being bandied about.

On September 16th Standard & Poor’s, a ratings agency, downgraded Venezuelan debt, assessing the country as “vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments”. Reports that the government is seeking to sell Citgo, an American refining subsidiary of Petróleos de Venezuela (PDVSA), the state oil firm, have fuelled talk of cash-flow problems.
Even if it stays current on its financial dues, Venezuela is behind on other bills. Earlier this month two Harvard-based Venezuelan economists, Ricardo Hausmann and Miguel Angel Santos, caused a stir by criticising the government’s decision to keep paying bondholders religiously while running up billions in arrears to suppliers of food, medicine and other vital supplies. “To default on 30m Venezuelans rather than on Wall Street”, they wrote for Project Syndicate, a website, “is a signal of [the government’s] moral bankruptcy.” President Nicolás Maduro branded Mr Hausmann a “financial hitman” and threatened him with prosecution.
Another Venezuelan economist, Francisco Rodríguez of Bank of America Merrill Lynch, thinks that scarcities of basic goods stem from the government’s refusal to adopt sensible exchange-rate policies. On the black market a dollar trades for over 90 bolívares; “official” dollars are worth between 6.3 and 50 bolívares, depending on which of the country’s multiple exchange rates you use. Exports of oil and its derivatives, which are dollar-denominated, account for 97% of Venezuela’s foreign earnings. Using an overvalued official rate means that the country is not making as much money as it could: the fiscal deficit reached 17.2% of GDP last year.
The government has been bridging that gap in part by printing bolívares. That has caused the money supply almost to quadruple in two years and led to the world’s highest inflation rate, of over 60% a year. Food prices, by the government’s reckoning, have nearly doubled in the past year, hitting the poor, its main constituency, hardest of all.
Even worse than inflation is scarcity. The central bank stopped publishing monthly scarcity figures earlier this year, but independent estimates suggest that more than a third of basic goods are missing from the shelves. According to Freddy Ceballos, president of the federation of pharmacies (Fefarven), six out of every ten medicines are unavailable. The list runs from basic painkillers, such as paracetamol, to treatments for cancer and HIV. One unexpected side-effect has been a sharp increase in demand for coconut water, which Venezuelans normally buy to mix with whisky. Nowadays it is sought out more for its supposed anti-viral and anti-bacterial properties.
Unable to obtain what they need through normal channels, people are having to improvise. Social media are packed with requests for urgently required medicines, while some highly sought-after goods—babies’ nappies, say—are offered in exchange for others, like spare parts for cars. Those lucky enough to have friends or relatives abroad arrange for emergency relief. “My cousin in Panama sends my mother’s Parkinson’s treatment,” says one Caracas resident. “It costs $30 a time there, compared with a few bolívares here, but here you can’t get it.” An opposition political party has even asked the Red Cross to help relieve the scarcity of medicines.
The mess is a reflection not just of import-dependence and a shortage of dollars, but also the mismanagement of domestic industry. Some food producers have been nationalised; price controls often leave manufacturers operating at a loss. Some price rises have recently been authorised, but manufacturers say it is impossible to maintain normal output with such stop-go policies. For its part, the government blames what it calls an “economic war” and the contraband trade. It has instituted a nightly closure of the border with Colombia, and plans to fingerprint shoppers to prevent “excessive” purchases.
The prospects for a change of course are gloomy. On September 2nd Mr Maduro replaced the vice-president for economic affairs, Rafael Ramírez, with an army general; Mr Ramírez also lost his job as chairman of PDVSA in the reshuffle, which saw him moved to the foreign ministry. Under Mr Ramírez, PDVSA has not thrived. Oil exports have fallen by over 40% since 1997 because of lack of investment, offsetting the benefit from price gains. Nonetheless, Mr Ramírez was seen as the only man in the cabinet arguing for exchange-rate unification, a cut in fuel subsidies and a curb on the burgeoning money supply.
Venezuela’s streets are calmer now than earlier this year, when clashes between opposition protesters and government forces left more than 40 people dead. The reshuffle appears to have strengthened Mr Maduro’s position. Bondholders may well keep getting paid. But the price of the revolution’s survival seems to be the slow death of Venezuela.