Venezuela: A Tale of Potential and Peril

Venezuela presents a major challenge for MNCs who recognize the country’s market potential and high profit margins, but are troubled by the risks associated with any significant presence in the country. The upcoming elections in 2012 and recent concerns over Chavez’s health has renewed speculation over medium-term political and economic scenarios for Venezuela.

Advantages of Venezuela

Attractive demographics offer long-term prospects

  • 90% of Venezuelans live in cities and half of Venezuela’s 30 million people are under 25
  • GDP per capita is fifth highest in the region

Oil profits allow government to encourage domestic demand

  • Government maintains lending rate below inflation to encourage consumption

Business tax system is competitive with the region

  • Corporate and ordinary income tax rats are 34%
  • Attractive incentives such as non-taxable dividends for distribution of earnings and profit

Major Challenges

The operating environment is opaque and unpredictable

  • Little separation between executive, legislative, and judicial branches
  • Currency devaluation and expropriation are constant risks

Consumers behave differently than those in free market economies

  • Consumer spending is volatile as it is dictated by government spending policies
  • Price controls, inflation, and shortages alter consumer purchasing habits

Major structural challenges hinder growth prospects

  • Drought has led to shortages and rationing of electricity
  • Crime remains rampant, and a source of disillusionment with the Chavez regime
  • Oil production is rapidly declining

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