The hobbled Venezuelan economy may inch out of recession in 2011 according to some forecasts, but most indicators promise very little good news beyond that modest boon.

Skyrocketing inflation, declining oil production and fleeing capital plagued the oil-rich nation in 2010, a trend that seems poised to continue into the new year.

That's even after the government took a widely anticipated move to devalue its currency Thursday, in a bid to shore up finances. Market watchers said the move fell short of expectations and won't tackle the dollar shortage in the country, nor the overall picture for the Venezuelan economy.

"Foreign exchange shortages will likely remain problematic, and the government will continue to rely on debt issuance to finance spending and address foreign exchange shortages," said Daniel Kerner, an analyst with the Eurasia Group.

Despite ongoing economic troubles and President Hugo Chavez's socialist policies stifling foreign investment, investors continued buying Venezuelan debt in the secondary market throughout 2010.

In an environment where U.S. Treasury bonds, along with those across advanced economies, offered near-record-low rates, many investors put money toward Venezuelan sovereign debt and bonds from the country's state-run oil giant Petroleos de Venezuela SA, or PDVSA.

Investors who withstood the volatility in Venezuelan debt were well-rewarded, taking in a 14.5% return on the year, according to J.P. Morgan's Emerging Markets Debt Index Global, the benchmark measure for the developing-world government bonds. The broader index took in around 11.8% during the year.

"There's still a lot of liquidity out there chasing yield and there are just very few options for high yield at the moment," said Siobhan Morden, a Latin America sovereign debt strategist at Royal Bank of Scotland .

Debt securities from the country are among the highest-yielding in the developing world and continued to offer higher premiums than those from countries like Argentina and Ecuador , which unlike Venezuela , have defaulted on their obligations in past years. Yields on Venezuela 's bonds range anywhere from 14% to 17%.

The deteriorating economic situation is likely to support juicy bond yields and as long as oil prices remain stable, Wall Street analysts continue to recommend buying the securities.

"As long as the government believes that non-payment on the debt could jeopardize the country's ability to export oil....they should continue to pay," Scotia Capital strategists said in a recent note to clients.

It's easy to see why they yield so much. Chavez's state interventionist policies, which included the nationalization of more than 200 companies in 2010, have helped to keep investors wary.

"As the government's popularity declines, quite significantly, its institutional control has risen," said Javier Corrales, chairman of the political science department at Amherst College and an expert on Venezuela . "In terms of a functioning economic market, this is a market in decline. It's remarkable how much capital flight there has been. And it's because of the arbitrary policies of the government."

Betrand Delgado, senior research analyst for Roubini Global Economics, estimated that the Venezuelan economy would grow about 2% in 2011 after two years of contraction. According to the Central Bank of Venezuela the economy contracted 1.9% in 2010 after a 3.3% output loss during 2009.

In the central bank's 2010 annual report, bank president Nelson Merentes attributed the shrinking economy to a 2.2% drop in petroleum-sector activity. Oil and natural gas extraction slid 2.8%, the bank said.

The bank projected Venezuela would end 2010 with an annual inflation rate of 26.9%, among the highest in the world. Inflation at the end of 2009 was reported at 25.1%.

With tight government regulation of the foreign exchange market, a scarcity of dollars persists in the country. The U.S. currency easily fetches more than 8 bolivars in the black market, nearly double the state-set exchange rate of VEF4.3 to $1.

The government has justified its actions by saying they are essential for fostering Chavez's socialist revolution, aimed at improving the lives of the country's poor through large-scale social programs.

To improve its own revenue, the government has discussed an increase in the value-added sales tax in the new year from the current 12%. It is also counting on the latest currency devaluation to help turn around the economy.

Thursday, the government simplified its famously confounding multi-tiered, fixed exchange-rate system, dumping its lowest rate of VEF2.60 per $1, and setting the VEF4.3-per-$1 rate for most transactions.

Tamara Herrera, an economist at Venezuelan economic forecasting group Global Source Partners, said the move is a small step in the right direction but still does not address the artificially overvalued bolivar.

"The government will continue to tightly ration foreign dollars to guard reserves," she said. Herrera said that a true correction of the exchange rate would approach VEF6 per $1. According to government figures, Venezuela 's international reserves in the first half of 2010 hovered around $29.351 billion, the lowest level since 2004.

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