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How Much Longer Can Venezuela Keep The Wolves At Bay?

How Much Longer Can Venezuela Keep The Wolves At Bay?

Venezuela is facing a severe economic crisis, one that could get worse before it gets better.

Venezuela’s GDP is expected to contract by a staggering 9.1 percent this year, according to a Barclays report, as plummeting oil prices have hollowed out the South American nation’s economy. Venezuela depends on oil for more than 95 percent of its export revenue. With oil prices trading at a fraction of what they were in early 2014, the Venezuelan economy is crumbling. The contraction in GDP could stretch to 16.5 percent between 2014 and 2016. Related: Colorado Court Will Decide Fate Of Local Fracking Bans

The shattered economy could present serious political problems to the government of Nicolas Maduro with congressional elections looming in December. After more than a decade of control for the ruling party (mostly under the late President Hugo Chavez), Maduro may struggle to maintain his grip over the country as the public becomes increasingly restless. Related: Canadian Oil Trapped Without More Pipeline Capacity

The government is selling off assets to raise cash as its resources continue to dwindle. With an eye on the December elections, Maduro is looking to patch over the country’s fiscal problems, to at least make it into 2016. But while Maduro may survive 2015, there is “a very uncertain scenario for 2016,” Barclays concludes in its report. Related: Winners And Losers Of Iran’s Return To The Oil And Gas Markets

In a separate report in early September, Bank of America asserted that the markets were overestimating the chances that Venezuela would default, arguing that the government is willing to pay a high price to avoid such an outcome, even if that requires the liquidation of state assets. At the same time, Bank of America concluded, the markets are underestimating the chance of a political transition.

The ongoing problems will continue to affect the heart of the country’s economy: its oil sector. The government routinely diverts the financial resources of state-owned oil company PDVSA to pursue political and social objectives. Consequently, it is likely that PDVSA will continue to underinvest in its oil resources, and production could continue to stagnate. That is a poor recipe for both the country’s economic and oil picture over the long-term. In short, Venezuela could paper over its problems for the rest of 2015, but that approach will become increasingly difficult to maintain next year.

By Charles Kennedy of Oilprice.com

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