The financial system has adapted to the economic model that has prevailed in Venezuela since the beginning of the last decade. Excess liquidity caused by issuing money without solid backing combined with rigid exchange controls that have applied in the country since 2003 have spurred sharp rises in deposits and loans, and at the same time allowed banks to achieve high rates of return.
However, the deterioration of the Venezuelan economy is changing this favorable scenario to one marked by high risks for banks in the short and medium term. The severe imbalances that have accumulated in the economy have been exacerbated since the last quarter of 2014 by the steep decline in oil prices, a resource that provides more than half of government revenues and about 95% of foreign exchange.
In line with the drastic contraction in GDP projected for this year, credit demand is likely to fall and delinquency levels could rise. In addition, there is uncertainty as to whether the government of President Nicolás Maduro will be able to continue to meet debt commitments given the country's economic plight. This is a key concern for Venezuela's banks, which have high exposure to government securities.
The consensus among analysts is that the sharp growth in liquidity - a key factor driving the expansion of the banking sector in recent years - will slow in the coming years if Venezuela seeks to break the current inflationary spiral. To this we can add the expectations of a steep devaluation of the bolívar currency, which would impact banks as a whole, but especially foreign-owned banks.
In any case, economic uncertainty is not the only factor increasing risks for private banks. The political decision to prioritize the growth of public entities is beginning to affect, albeit moderately at present, the levels of profitability of private sector banks.
In this report we describe the state of the financial system in Venezuela, and the factors that have allowed it to grow in recent years despite the economic situation facing the country. Furthermore, we analyze how the new scenario of falling oil prices and their impact on the economy could affect the future performance of banks, in addition to weighing up the impact on private sector banks of the political decision to favor the growth of state banks.