Venezuela Faces ‘Deep’ Recession as Oil Prices Fall, BofA Says

Venezuela’s economy will go into a “deep recession” in 2013 as oil prices decline and the government curbs spending following elections in October, according to Bank of America Merrill Lynch.

Gross domestic product will contract 3.5 percent, Bank of America’s Francisco Rodriguez said in a report, revising down his forecast for Venezuelan crude oil prices this year to $100.8 a barrel from $107.6. The government will need to devalue the bolivar by 74 percent, he said.

“Venezuela’s fiscal situation continues to deteriorate due to declining oil prices, an acceleration in central government spending and exchange rate appreciation,” Rodriguez wrote in the report. “Correcting this fiscal gap will require a substantial fiscal and exchange rate adjustment in early 2013. The result will be a deep recession, which could be exacerbated by further oil price declines.”

Venezuelan crude oil prices have declined 19 percent since March to an average of $94.05 a barrel last week. The drop may deepen. Should Greece exit the euro, the country’s crude will decline to about $74.4 a barrel, triggering an economic contraction of 5.5 percent, Rodriguez said. A broader collapse of the euro-zone would result in oil prices of $55 a barrel and a GDP decline of 7.4 percent, he said in the report.

Bank of America’s forecast contrasts with the World Bank’s, which expects Venezuela’s economy to grow 2.7 percent next year.

GDP expanded 5.6 percent in the first quarter of 2012, the fastest pace in almost four years, as record oil revenue allowed President Hugo Chavez to finance a boom in housing construction ahead of the Oct. 7 vote. Chavez, who is battling cancer, is seeking to extend his 13 years in power with another six-year term.

Debt Concern

Should Chavez win re-election and then resign due to worsening health, an interim government would delay a fiscal and exchange rate adjustment that would deplete foreign reserves and lead to concerns about Venezuela’s ability to honor debt payments, Rodriguez said.

The bolivar, which is pegged at 4.3 bolivars per dollar for “priority” imports and 5.3 bolivars per dollar in a central bank-administered currency market, has tumbled to a record low in an unregulated market as individuals and companies seek to buy a shrinking number of dollars.

The government last devalued the bolivar in January 2011 by weakening the exchange rate on so-called essential goods such as food and medicine by 40 percent.

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