Venezuela GDP May Shrink 6.2%, Morgan Stanley Says

By Daniel Cancel

June 7 (Bloomberg) -- Morgan Stanley slashed its forecasts for Venezuela’s economy, saying it may contract this year and next as higher oil prices fail to stimulate business and a tightening of controls restricts access to foreign currency.

Morgan Stanley now forecasts gross domestic product will shrink 6.2 percent this year and 1.2 percent in 2011, compared with an earlier prediction for 0.3 percent growth this year and 3.5 percent expansion next year.

“While most of Latin America, in line with the globe, has been in recovery mode since last year, Venezuela has seen an intensifying downturn in activity,” Daniel Volberg and Giuliana Pardelli said in a report today. “Our new baseline of at least three years of economic contraction suggests the risks to Venezuela’s ability to honor its international financial commitments may be on the rise.”

Venezuela’s economy contracted 3.3 percent last year as investment dried up following nationalizations and oil revenue plunged on waning output and production cuts in line with OPEC quotas. Morgan Stanley, based in New York, expects investment to plunge 28.1 percent this year while private consumption drops 5.8 percent.

President Hugo Chavez on May 18 closed the unregulated currency market that companies used to buy dollars and ordered the central bank to oversee the trading of dollar-denominated securities that will be used to obtain currency at a government- set exchange rate.

Bolivar Devaluation

Chavez devalued the bolivar as much as 50 percent on Jan. 8 to close a budget deficit and to slow capital flight, creating a multi-tiered exchange system.

The government’s Foreign Exchange Board pared dollar sales at the official rates of 2.6 and 4.3 per dollar last year and during the first three months of 2010, causing imports to plummet 38 percent in the first quarter.

While Venezuela may be successful in slowing capital flight through the new currency market, imports will likely continue to fall, Volberg and Pardelli said.

“Given that imports have been essential in offsetting the multi-year deterioration in domestic supply in Venezuela, the restrictions may prove a significant negative supply shock for the Venezuelan economy,” the analysts said.