BofA: Oil Price Drop will Lead Venezuela to Deep Recession

Bank of America Merrill Lynch said that the economy of Venezuela will face a deep recession next year with the decline of oil prices and the reduction of government spending after the October elections.

Francisco Rodriguez of Bank of America stated in a report that Venezuela’s GDP will be 3.5%. He also changed his outlook for the country’s per barrel oil price this 2012 from $107.6 per barrel to $100.8 per barrel. Moreover, he said that the government has to reduce the nation’s currency by a staggering 74%.

In the report, Rodriquez wrote that the fiscal condition of Venezuela keeps on deteriorating because of decreasing oil prices, increasing state expenditures and growth in foreign currency exchange issues. To be able correct the current fiscal gap, an important adjustment on fiscal policies and exchange rate needs to be done in the early parts of 2013. As a consequence of this, deep recession may occur in the country and it could further worsen with declines in crude oil prices.

Since March, crude oil prices in Venezuela have fallen by 19% to an average cost of $94.05 per barrel in the past week. Further drops may occur. If Greece leaves the euro, Venezuela’s crude oil price will drop to around $74.40 per barrel, which can trigger a 5.5.% contraction in the economy, said Rodriquez. Further, a wider disruption of the euro zone could lead to $55 per barrel oil price and 7.4% GDP decline for the nation.

The forecast of Bank of America is opposite to that of the World Bank, which sees a growth of 2.7% in Venezuela’s economy in the coming year.

GDP widened by 5.6% in quarter one of this year, a rate not seen since 2008. The expansion is caused by high oil revenues that let President Hugo Chavez finance a growth in residential real estate development way before the October election. Chavez, currently fighting cancer, is trying to extend his current term of 13 years to another six years.

By: Chris Termeer