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Venezuela__Q1_2016 (1)
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Transcript of Venezuela__Q1_2016 (1)
Industry Risk/Reward Index - Venezuela - Q1 2016
29 Oct 20 15 Ve ne z ue la Powe r
Venezuela's precarious macroeconomic and political conditions, coupled with its unattractive investment climate and inefficient power infrastructure, ensures
that the country remains at the bottom of our RRI for Latin America this quarter. We do not expect s ignificant improvements in the country's score over the
coming quarters , as the state-controlled power sector will remain secluded from private investment and low g lobal oil prices will continue to constrain
government investment in the market. Nevertheless , we highlight that government efforts to improve the state of Venezuela's power infrastructure will create
business opportunities for providers of eng ineering , procurement and construction (EPC) services. Major international EPC companies already operating in
the market include US-based General Electric and France's Alstom.
Rewards
Industry Rewards
Venezuela boasts good market coverage, with a commitment to extending access to the grid even in remote areas such as the is lands in the state Nueva
Esparta. However, current generation capacity does not meet Venezuela's demand and attempt to reduce outages has produced mixed results . Yet,
inefficiencies in the power network remain widespread, as proven by the numerous blackouts that have hit the country in the past two years . Most
opportunities for investment exist in hydroelectric power projects and we note increasing interest from Chinese and Russian players , owing to deals related
to the oil sector.
Country Rewards
While Venezuela's score for Country Rewards is comparatively more elevated than the Industry component, we note near recess ionary economic conditions
could prevail, therefore presenting a marked risk. In addition, our Country Risk team believes, despite the extensive price control system and successive
interest rate hikes , that inflation will be dangerously high - the highest level in Latin America. Further erosion of domestic productive capacity is likely to raise
inflationary pressure in the economy, possibly resulting in hyperinflation.
Risks
Industry Risks
Venezuela scores badly on many fronts in this segment: the country's business environment is unattractive with an opaque tendering process and low levels
of liberalisation within the power market. Access to finance is also problematic and the fact many private industries were nationalised, creates uncertainty for
investors and there is limited government investment in energy infrastructure to raise capacity - a lack of finance is a considerable barrier to energy projects
at risk of delay because of gaps in funding . Further, electricity output from successfully commissioned plants is at the mercy of Venezuela's ageing and
inefficient transmiss ion and distribution (T&D) infrastructure - with power outages still a press ing concern for the majority of the population.
Country Risks
Venezuela underperforms in all aspects of Country Risks. Factors such as political continuity remain a key concern as proven by the student-led protests . Our
Country Risk team expects that over the longer term the political s ituation could deteriorate even further if the government does not do enough to address
soaring inflation and worsening shortages, which affect all segments of society. The country also suffers from high levels of corruption, reflected in
Transparency international's 2014 Perception Index, in which Venezuela ranks only 161 out of 175 countries .
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