TEXT-Fitch says Venezuelan policy continuity likely after Chavez victory
Oct 8 - Venezuelan President Hugo Chavez's re-election victory on Oct. 7 will likely pave the way for economic policy continuity, even as the sovereign credit profile weakens, according to Fitch Ratings. In light of the president's comfortable 10-point victory margin over opposition candidate Henrique Capriles and the rapid recognition of the electoral outcome by the challenger, concerns over a possible increase in post-election social unrest have subsided. Still, the re-elected government faces a challenge in adjusting its exchange rate policy, and considerable uncertainty remains over the government's ability to rein in the fiscal deficit, while at the same time maintaining economic growth and fighting inflation. Rapid expansion in public spending prior to the election led to a large increase in the fiscal deficit (now forecast at 6.9% of GDP for 2012 at the central government level), and contributed to a decline in Venezuela's international reserves, as oil revenues were channeled to opaque off-budget funds. Continued excess demand for foreign exchange assets in the local market, real appreciation of the bolivar fuerte, and a large fiscal imbalance are likely to lead to an adjustment in the official exchange rate. This could complicate efforts to manage the inflation rate, running on average above 22% in 2012. We believe that in the absence of policy adjustments, government indebtedness is likely to continue to increase. Consequently, interest to revenue, which has risen significantly since 2008, will continue its climb, thus undermining fiscal flexibility. Fitch's April 4 revision of the sovereign Rating Outlook to Negative ('B+' issuer default rating) reflected Venezuela's weakening policy framework and its increased vulnerability to commodity price shocks. While oil prices remain high, any rapid decline in global energy demand could hit Venezuelan export revenues hard, limiting the government's policy flexibility further. In addition, the country's sizable gold reserves position (68% of total international reserves in June 2012) exposes the country to another dimension of commodity price risk. The question of President Chavez's health remains relevant in light of ongoing uncertainty over his ability to serve a full six-year term. Under Venezuelan law, the departure of an elected president within four years of an election would force the vice president to call new elections. As a result, political uncertainty has not been eliminated completely by the president's re-election victory.
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