Venezuela country risk analysis Essay Example

4Venezuela

Venezuela country risk analysis

In order for A Ltd to acquire an oil company in Venezuela, the country must have a level of risks that is bearable and that which cannot hinder its expansion. The strong growth experienced in 2012 slowed down in 2013 because after all, it was a burden to public finances (Roth 2013). The oil sector is expected to sustain growth with 11 percent of GDP and 95 percent of exports since the high world prices are stimulating it. Venezuela’s national oil company (PDVSA) must give its nod before any new project of oil extraction begins. This company does not have the technical resources to install modern infrastructure and other technical installations (Global Edge 2013). This is because part of its revenue is used for social spending. As the oil sector develops, the private sector and other sectors suffer because they have no capital flight and their productivity is constantly going down (U.S Energy Information Administration 2013).

The construction industry is on an upward trend. Public and social housing and the financial service sectors register continuous growth. Inflation is high in the continent but it 2012 it fell a little because the government introduced price controls before the elections. 2013 is expected to come with some relaxation because the price control policy may not last for long for the government must subsidize imported products. Inflation may rise again after this and consequently, private investment may be damaged (U.S Energy Information Administration,

Improvement in public finances and growth of off the budget spending

It was projected that 2013 will have a drop in the fiscal deficit. Revenues are high because the high prices for hydrocarbons have been maintained. Expenditure is expected to fall back to the average level seen in the last 10 years. However, there is a big risk because spending through the National Development Fund, PDVSA and off budget funding that play the role of masking the fiscal limitations (Global Edge 2013). The way public institutions are behaving is a subject of close scrutiny because there is evidence of opacity in public accounts, oil management returns are managed in an unorthodox manner and President Hugo Chavez was very unpredictable before his death in 2013. In 2012, there was an increase in public debt. This was as a result of bond issues belonging to public entities and the state so as to offset the deficit. It is expected to remain in a stable condition in 2013 at a level that is sustainable if there will be no drop in the prices of oil (U.S Energy Information Administration 2013).

2013 Devaluation

There will be a surplus in the current account balance because there are many hydrocarbon exports. This is in spite of the repatriations in dividends and the services done by foreign companies. The surplus may be reduced since oil production has stagnated and the former president’s (Hugo Chavez) unorthodox policies that have limited non-oil exports and increased the importation of consumer products (Roth 2013). Foreign exchange reserves, increased interest on debt and unending capital flights maintain high external public debt. The PDVSA also incurs this debt with countries such as Russia and China. There is rising pressure on the Bolivar which is shown by the dependence on parallel markets to supply foreign currency. Towards the end of 2012, 1 $ went for 14 Bolivars although the official rate was 4.3 Bolivars going for a dollar (Global Edge 2013). Devaluation would increase oil revenues in 2013, limit capital flights and attract more FDI but the end result would be higher inflation and reduced private consumption. The true crude oil prices will determine this (Carbaugh, 2012, p. 16).

Strengths and weaknesses

The country has huge gas and oil resources; the Orinoco river belt has large crude oil deposits, it has a wide future political influence in the region because of oil revenues and it is a member of Mercosur. However, its weaknesses lie in the fact that its economy depends on hydrocarbons a half of which are purchased by the U.S. The way in which oil revenues are managed is opaque and unrestricted and there has been stagnant production at PDVSA because of no investments. The business environment is weighed down by corruption and the intervention of the state. Finally, the country lack sufficient electric power supply.

Conclusion

It is not wise for A Ltd to acquire the smaller oil company in Venezuela at the moment. The important issues discussed in this paper must be born into consideration before any such action is taken. Alternatively, A Ltd can wait to see if things will change in the political and economic environment of Venezuela before moving in.

Bibliography

Carbaugh, R. 2012. International Economics. Cengage Learning.

Global Edge 2013. Venezuela: Risk assessment. Michigan State University. Viewed October 2, 2013 from http://globaledge.msu.edu/countries/venezuela/risk

Roth, C. 2013. Venezuela’s Economy Under Chavez, by the Numbers. The Wall Street Journal. March 6 2013. Viewed October 2, 2013 from http://blogs.wsj.com/economics/2013/03/06/venezuelas-economy-under-chavez-by-the- numbers/

U.S Energy Information Administration 2013. Venezuela. Viewed October 2, 2013 from http://www.eia.gov/countries/cab.cfm?fips=ve.