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Global Risk Insights

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Too Little, Too Late For Venezuela?

Too Little, Too Late For Venezuela?

Rapidly declining world oil prices, a lack of basic goods in supermarkets, insecurity, and a more united opposition look set to make 2015 the most difficult year yet for Venezuela’s Nicolas Maduro and the late Hugo Chavez’s Bolivarian Revolution.

Venezuela is in recession and experiencing one of the highest rates of inflation in the world. Its economy contracted by 2.8 percent in 2014, with inflation now running at 64 percent. World oil prices have fallen to below $50 a barrel, with Venezuela hit especially hard due to the lower price its heavy-oil trades at on the world market.

These economic factors, combined with fixed exchange have resulted in shortages of most basic goods. Queues stretching for blocks outside the state-run supermarkets are now a daily (and nightly) occurrence throughout the country.

Those most affected happen to be the poor – the core constituency of Maduro and the ruling socialist party (PSUV) – explaining the president’s 22 percent approval rating.

In an effort to boost falling oil prices Maduro recently embarked on a whirlwind tour of OPEC countries, although there is little evidence so far that he managed to secure any benefits for the country’s economy, and the price of oil has continued to plummet. Related: U.S. Pushes Energy Exports to Undermine Venezuela

With the national budget built on the strength of oil exports, which account for 96 percent of export revenues, the falling price of commodities is particularly devastating. For every $10 decline in oil prices, Venezuela’s trade balance worsens by 3.5 percent of GDP. Economists have argued that oil needs to be trading at $120 for Venezuela to balance its budget and the IMF has predicted a 7 percent contraction of the economy in 2015.

The difficulty for Maduro is that the economic decision-making of the Bolivarian Revolution has been based on policy and for short term electoral gain. Any macro-economic restructuring would come at a significant social cost and would likely further alienate Maduro’s core supporters who have benefitted from social programmes funded by oil revenues.

With legislative elections scheduled later in 2015, it is unlikely that Maduro will implement drastic economic reforms and veer from Chavez’s time-honored tradition of winning over support with massive subsidies and government spending.

The high social costs of adjusting macro-imbalances combined with legislative elections later in 2015 will make a meaningful economic reform both difficult and unlikely.

“God will provide”

In his annual State of the Nation address on 21 January, Maduro confirmed that no cuts would be made to social programs. He did however hint that gas prices — for years the lowest in the world at $0.02 a liter, thanks to large government subsidies — would have to be raised, calling them a “distortion.”

This is not without risk as it could lead to further disillusionment against the government, with gas prices long considered a politically charged policy area. Similar increases in the price of gas in 1989 led to higher bus fares, which kicked off violent protests in Caracas. The “Caracazo” as it came to be known, was a pivotal moment in the gradual collapse of Venezuela’s then two-party system.

Maduro’s vague rhetoric – blaming the financial troubles on the political opposition and currency speculators and declaring “God will provide” – does not suggest that any major economic reform is likely.

The artificially fixed exchange rate of 6.3 Bolivars to the dollar for basic goods such as food and medicine will be kept, although two other rates (SICAD I and SICAD II) will be combined, with another third rate created to allow private sector participation. It is still unclear what the exchange rate will be and whether it will have an effect on diminishing the rampant black market.

Some commentators have seen this as an undercover devaluation of the bolivar, forcing companies to pay more for their dollars. This would avoid a full-blown devaluation and the inevitable social unrest that would follow in the wake of further inflation

The announcement that the minimum wage increase by 15 percent is unlikely to have a significant effect. Increasing inflation combined with the unlikely prospect of buying goods at the official exchange rate will ensure life remains difficult for the people queuing for goods in Venezuela.

Lack of basic goods

The dollar is currently trading at above 180 bolivars on the black market and has been part of the reason for the chronic shortage of basic goods in Venezuelan supermarkets.

Queues outside grocery stores have reached lengths unseen before in Venezuela, with shoppers waiting hours at a time to buy flour, milk, toilet paper and nappies among other essential goods that are in short supply.

Police and National Guard units have been deployed to maintain order, whilst more units have been deployed since 2014 on the border with Colombia to quell the rampant smuggling of cheap goods from Venezuela to its neighbor. Related: The 8 Major Geopolitical Catalysts Of 2015

This prompts the question – what resources are left to combat the rapidly surging crime rate in the country? Venezuela, and specifically Caracas, is experiencing some of the highest levels of violent crime in the world. Any reductions in social spending are likely to further complicate the situation in 2015, leading to higher levels of insecurity.

Finally, a united opposition?

In the wake of Maduro’s annual address, crowds gathered in Caracas to protest the government on January 24 in scenes similar to the early days of the 2014 protests, albeit on a smaller scale.

What could be a defining factor in 2015 is a more united opposition. Henrique Capriles did not give his backing to the protests in 2014, instead demanding that the people wait until the economic effects of bad macro-economic policy are felt amongst the wider population.

It appears that Capriles believes that time is now, and there is a possibility that the opposition will be more united come the legislative elections later in the year.

In the meantime, it remains to be seen whether there is a repeat of the social unrest that rocked Venezuela in early 2014. Even if Maduro attempts macro-economic reforms, it may be a case of ‘too little, too late’, with oil prices now so low that further economic hardship is almost inevitable.

By Oliver Sheldon

Source - http://globalriskinsights.com/ 

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  • John Scior on February 04 2015 said:
    If the Venezuelans could shift their petro dollars into a sovereign wealth fund, like Norway, they might have a chance to reign in inflation and then stabilize the economy. Market based reforms would be a good idea as well. someone might want to inform them about the collapse of the Soviet Union as communism as it turns out was a horrible idea. PS can you send me a few hundred litres of petrol, heres 2.00 dollars.

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