April 29, 2011 -
PRLog -- The situation in Venezuela has continued to worsen recently, reflected in the country's position firmly at the bottom of our Risk/Reward ratings. Food shortages coupled with the rising cost of living are one of the most serious threats to President Hugo Ch·vez's popularity and in response the government has nationalised large parts of the food industry. The spiralling cost of consumer goods has eliminated many of the benefits of Ch·vez's wealth-redistribution programmes and is reflected in our lacklustre forecasts for food and drink consumption. Key Forecasts * 2011 per capita food consumption (US$) = +7.5%; forecast to 2015 = -36.2% * 2011 alcoholic drink sales (US$) = +4.4%; forecast to 2015 = -32.4% * 2011 soft drink sales (US$) = +2%; forecast to 2015 = -42.2% * 2011 mass grocery retail sales (US$) = +3.9%; forecast to 2015 = -38.7% Key Company Trends and Developments Currency Devaluation Increases Risk of Food Appropriations - In line with our expectations, the Venezuelan government devalued the bolÌvar at the start of 2011 by unifying the 'essential goods' rate of VEF2.6000/
US$ with the higher 'non-essential' VEF4.3000/US$
rate. This has implications for the food and drink sector, weaker currency potentially putting more pressure on margins, with producers no longer able to import raw materials at the 'essential goods' rate and the possibility of higher inflation putting further pressure on the government to take control of production through appropriations. FEMSA Strike Highlights Burdens of High Inflation - The problems for companies operating in areas of high inflation have been brought into focus in Venezuela, where Coca-Cola FEMSA has been struggling to reach an agreement with its workers over wage increases. Workers at FEMSA's plant in Valencia have been striking since mid-January, with FEMSA suggesting that the union had made demands for a 210% pay increase that would jeopardise the viability of their business. In 2010 inflation in Venezuela averaged 34%, but the recent currency devaluation is likely to put upwards pressure on inflation over the short term, particularly in the areas of food due to Venezuela's reliance on imports. Key Risks to Outlook Inflationary unrest - With one of the highest rates of inflation in the world, we expect worker strikes within the private sector to be a persistent feature of Venezuela's landscape in the medium term. The recent strikes at both Coca-Cola FEMSA and Heinz plants highlight this negative aspect of the country's risk profile. While we are a forecasting improvement in the rate of inflation, from 27.4% y-o-y in December 2010 to 25.0% by end-2011, we believe the rapid pace of price rises will still be enough to fuel a considerable amount of worker discontent over the coming quarters. Politically motivated spending - We see 'pump-priming' in the run up to the 2012 election as the other major risk to our outlook. While we have already factored a certain amount of politically-
motivated expenditure into our forecasts, if Ch·vez felt particularly threatened by the opposition over the coming quarters he could easily up the ante and drive the budget deeper into deficit than we are currently anticipating.
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