BMI's Executive Summary

[TOP]

From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Venezuela's overall CBBER is 49.2. The equivalent figures for the US and eurozone are 84.8 and 81.4, respectively. Venezuela's CBBER is lower than all except two of the eight countries surveyed by BMI in Latin America. Indeed Venezuela's CBBER is poor in comparison to the 59 countries for which BMI has calculated a CBBER, with 38 countries scoring higher.

Within the CBBER, the most important aspect is the (banking) market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Venezuela's rating for this element (51.3) is higher than the overall CBBER, and notably higher than the country element of the limits of potential returns (31.9). This indicates a banking sector that is on the whole overdeveloped relative to the general wealth, stability and financial infrastructure in the country. On the back of recent oil-driven GDP growth, growth in the total assets, client loans and client deposits in Venezuela were ranked first, second and first, respectively for the 59 countries surveyed. This growth has in turn contributed to the quick recent growth of the banking sector, especially when seen in light of the poor score for the country elements of the limits to potential returns.

Nevertheless, the CBBER highlights the factors that are holding back Venezuela's banking sector. The country's financial infrastructure remains poor, as is the legal framework within which the commercial banking sector operates.

Venezuela posted its lowest quarterly real GDP figure in two years in Q207, at 8.9% year-on-year (y-o-y). While this remains very high, it is further evidence of the direction that the economy is heading. The reduction in growth was largely the result of a continued contraction in the oil sector, where output fell for the fourth consecutive quarter in Q207. Real estate, construction, and trade and repair services, which have helped drive the recent growth boom, all slowed on a y-o-y basis. The risks to the Venezuelan growth outlook appear to be heavily weighted to the downside. The increasing pressure on the official exchange rate leads us to believe that a devaluation may occur in 2008, in which case, the slowdown of the economy will likely be exacerbated, and inflationary pressures will grow.

A major cause of the moderation in growth in Q207, aside from falling oil production, has been the pullback in growth of government spending and the subsequent reduction in liquidity in Q207. In 2006,public spending surged by 45%, resulting in the highest level of inflation in Latin America. The government has, of late, actively tried to demonstrate its capacity to restrain its lavish spending to ease inflationary pressures. Although the headline growth figure is still impressive, we believe that high inflation, a large fiscal deficit, weakening balance of payments, falling international reserves, and considerable supply side constraints, will continue to weigh heavily on the economic growth outlook over the forecast period.