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Latam Macro Insights
Venezuela: Unexpected Turn

Merrill Lynch

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Highlights of This Issue:

The most tumultuous week in Venezuela’s recent history ended with the dismissal and later reinstatement of President Chavez to power.

The political situation is likely to remain very fluid over the next few weeks. While we hope that President Chavez’s conciliatory tone on Sunday continues to be followed with actions that will create a minimum of national unity, we fear that the divisions in the Venezuelan society run very deep.

The final developments of last week turn out to be a severe setback for the opposition, and most likely it will give new life to the President. His survival will depend on how he behaves over the intermediate term.

The events of the last week, and what can be expected in the weeks ahead are suggestive of a deepening recession. It is hard to imagine a private investment recovery over the intermediate term given the political uncertainty.

With the high level of uncertainty, we expect capital flight to resume in the not so distant future, and pressures on the exchange rate to resume. In our view, capital controls cannot be ruled out over the intermediate term.

It is hard for us to envision the Chavez government implementing increased fiscal discipline under the current context, and we would assume that it will in fact pay the 20% increase in the minimum wage it promised, along with other populist measures likely to be in the works over the next few weeks.

We believe a strategy favoring Venezuela exposure looks risky.

Venezuela uncertainty will remain high and we are likely to see a sizeable deterioration in country risk going forward, which is likely to be a significant overhang for the equity market. We are removing our exposure in Venezuela, taking CANTV (VNT; D-3-1-7; $19.20)

out of our model portfolio and putting the money back into our cash pile.

   Latam Macro Insights

Latam Macro Insights ZIP





Miguel Palomino
(212) 449-2463

Latin America Strategy

Robert Berges
(212) 449-2477


Roberto Guevara
(54) 11 4317-7605

Santiago Lima Quintana
(54) 11 4317-7565


Marcelo Audi
(5511) 3175-4010

Tais Lange
(5511) 3175-4301


Carlos Peyrelongue
(525) 201-3276

Raul Morales
(525) 201-3273


April 19, 2002

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