Venezuela- Food firms are likely to see profit margins squeezed because of price controls and inflation

Perils: Regulatory Risks
Sectors, Assets or Individuals Affected: Food Industry/All Sectors

Analysis:
On 3 May 2011, the Central Bank announced that annual inflation had reached 22.9% in the first quarter of 2011. Although Planning Minister Jorge Giordani portrayed this as a victory, stating that the government had planned to lower annual inflation to 20% by 2012, there are worrying signs that lead us to believe that this year’s inflation will increase further than the 28.8% recorded last year, and above 30% in 2012. A 4 May opinion poll placed President Chávez in third place in terms of approval rating (45%) behind opposition leaders Henrique Capriles Radonski (54.6%) and Lepoldo Lopez (49.1%) This has made the government nervous and President Chávez is likely to significantly increase public spending, at the cost of inflation, to secure his re-election in the 2012 presidential elections.

The government has already started to prepare the grounds for this. On 4 May, it lowered the bank’s minimum reserve requirement by 3%, and on 8 May it signed a deal with private banks for the granting of favourable loans for the purchase of consumption goods. This, combined with scarcity of products, existing price controls and plans to use the revenues collected by a recently passed increase on a windfall tax on oil companies, are likely to exacerbate inflationary pressures in the two-year outlook.


Risk Implications:
The increased inflation will hurt food companies the most. They are currently subject to strict price controls that limit their profitability and facing strong competition from cheaper products imported by the government. There is a high risk of inflation increasing drastically. Other sectors will be significantly affected if the government decides to go ahead with its plan of setting up profit margin limits for businesses across all economic sectors in the country. On 3 May 2011, the government said it planned to create a body in charge of inspecting the cost structure of businesses to unilaterally set the price of their goods and services.


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