Venezuela’s economy will close this year with inflation of 30 percent and growth of only 1.8 percent. Can that forecast be altered? Opposition will not be in power in 2013.
“We’re capable of ensuring stability, democracy and peace in this country, whatever any threats we might face, and we can say that absolutely for sure,” Nicolás Maduro, Venezuela’s vice-president, said in an interview with the journalist, José Vicente Rangel. And he added: “This year will be an extraordinary one. Economic growth will be at least 6 percent for everyone.”
Despite Maduro’s claims, the climate of political and social uncertainty appears to be generating a malignant growth in the Venezuelan economy that seems heading for a profound crisis. That is a view in which financial and political analysts, the rating agencies, the World Bank, and others all agree. With or without Chavismo, Venezuela’s economic future would appear to be a labyrinth for which the sole exits are the unpopular measures of a devaluation, a removal of exchange controls, increases in taxes and reductions in subsidies in the domestic economy, not to mention cuts in the external subsidies. According to the Washington Post, Venezuela hands out $500 million a year to Nicaragua, the equivalent of 7 percent of the Central American nation’s gross domestic product. It provides Cuba 100,000 barrels a day of oil, the equivalent of 5 percent of its GDP.
As a result, it comes as no surprise that the credit rating agencies have pointed to the increase in risks facing Venezuela. As Aaron Friedman of Moody’s says: “We have a negative perspective on Venezuela that points to an increasing probability of a downgrade in the rating for the current period. What usually happens is that the negative perspective increases the likelihood of it changing. The perspectives are not only founded on political uncertainty. The rating incorporates the weakness of institutions, the concentration of power in the hands of Chávez. Uncertainty brings with it a deterioration of the economy.”
Many experts point out that the next Venezuelan government will have to confront drastic adjustments in order to return the country to economic health. Will that be possible?
Setting the scene
Taking a look at the economic panorama on five fronts, first is the paradox of Venezuela’s oil: The country has the biggest reserves on the globe — 17.9 percent of all the crude in the world — but it has to import gasoline. That is due to inefficient management of resources and the government’s big spending. This includes the delivery of subsidized Venezuelan oil to the Caribbean and Latin America, in particular to Cuba; the loan to China — money that has already been spent — paid by Venezuela in exchange for oil; imports of gasoline at high international prices following the explosion of one of its major refineries; and a reduction in demand from the leading customer of Venezuela’s oil, the United States, thanks to new discoveries in the land of Uncle Sam. According to the Washington Post, in the 13 years in which Chávez has run Venezuela’s government, oil exports have halved. Oil exports generate 94 percent of Venezuela’s dollar earnings. “For the government, the cost has been high and the economic distortions substantial,” Barclays said in a January 18 report. And, while the official rate for the dollar is 4.3 bolivars, it is running at 17.5 in the unofficial market. Barclays reckons that inflation this year will close at 30 percent.
The third point is that total imports have risen from $13 billion in 2003 to $54 billion, according to Coindustria, the Venezuelan confederation of private industry.
Venezuela gives Nicaragua $500 million a year, the equivalent of 7 percent of Nicaragua’s GDP. It sends Cuba 100,000 barrels a day of oil, 5 percent of its GDP.
Fourthly, the nation’s production has slowed down for a range of factors. On the one hand, there were price controls and the availability of cheap imports; on the other, the nationalization of a thousand companies, according to the Christian Science Monitor. As a result, people have adapted to a constant shortage of basic food supplies, such as sugar, flour, chicken, beef, milk and others. Week after week, many of these products have been missing at family meal times in Venezuela.
Finally, the fiscal deficit is reported to have stood at the close of 2012 between 11 and 20 percent. “The indicators deteriorated in 2012. Our best estimate is 11 percent of GDP (it’s our estimate because of the lack of transparency in last year’s fiscal results). The lack of transparency seems to be getting worse. Government spending was the principal reason for its increase in GDP… but this level of spending is not sustainable. Chávez recognizes that,” says Aaron Friedman of Moody’s.
World Bank reports show that Venezuela’s economy will grow by only 1.3 percent this year. The “Doing Business 2013” report by the World Bank and the International Finance Corporation rated Venezuela as number 180 of 185 countries in the global ranking of the ease of doing business. That marks a significant drop in competitiveness.
Devising a way forward
With this as the background, it is worth checking out the possible scenarios for Venezuela’s short-term future. The big question is: What happens if Chavismo continues in power?
Experts reckon that this is a highly probable scenario. The question then is whether there would be more of the same or a change of direction. “The fact that Chávez has appointed Nicolás Maduro will reduce the competition for the leadership of Chavismo and makes it hard for other sectors of the movement to reject the legacy,” says Cynthia Aronson, director of the Latin American program for the Woodrow Wilson Center. Despite being the heir, critics of Maduro believe that he lacks the charisma to achieve the unity he needs to impose himself within the Chavismo factions, that his relationship with the government is weak and, given the large number of problems that the regime has to tackle, the difficulties in imposing his leadership will represent a serious political deficit.”
For his part, Michael Shifter, president of the Inter-American Dialogue says: “In this scenario, Chavismo will continue, the power quotas will be shared out as well as the resources. With oil prices remaining high, the movement will take moderate measures, sufficient to provide room for maneuver and hang on. This scenario cannot be ruled out,” says Shifter.
But what happens if the country faces a thorough economic crisis and takes drastic measures to manage it? In Shifter’s view, “This would create an enormous level of disorder. Obviously, there are several factions within Chavismo. There would be in-fighting for the resources, and a lot of trouble. Some economists suggest that the next government is going to make adjustments for devaluation. Drastic measures generate major social upheavals.”
And, what if elections are held and the opposition wins? “I don’t see that as a major possibility, but I wouldn’t rule out such a scenario,” says Shifter. “Governance would face a complex situation and, in economic terms, moderate and gradual measures would have to be implemented.”
In terms of the transition alone, the nation is very polarized, with Chavismo the dominant political force and the opposition representing 40 percent or more of the population, which means that tensions are running very high. Any economic measure will have to take into account that perspective.
In the words of Cynthia Aronson, “The terms of the Constitution have been interpreted with such creativity by the Supreme Court that nobody knows the next step in the transition. In Venezuela, the only certainty is uncertainty.”
Ángela María Riaño reported from Washington, D.C.
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