Type to search

Venezuelan election should bring changes in economic policy

Venezuelans go to the polls on April 14 to elect a successor to recently deceased President Hugo Chávez. Polls show the likely winner will be Nicolás Maduro, Chávez’s appointed heir from the United Socialist Party and the current interim President. His all but assured victory will no doubt have important consequences for the Venezuelan economy.

Venezuela currently faces an acute foreign currency shortage, exacerbating the scarcity of goods and services in its import-based economy. Moody’s Investors Service (MCO) reports that the fiscal debt has reached 11 percent of GDP following a massive increase in public expenditure during last year’s electoral campaign. This influx of cash, coupled with a devaluation of 32 percent in February, has propelled the country’s inflation rate, which some say could go as high as 35 percent by year’s end.

Though Maduro has vowed to continue enforcing the economic plan presented by Chávez during last year’s elections, analysts consulted by Latin Business Chronicle believe Venezuela’s many economic distortions may force him to bend the Bolivarian dogma to better serve reality.

Changes might start with reforms to Venezuela’s state-owned oil company Petroleos de Venezuela (PDVSA).

Luisa Palacios, Managing Director at Medley Global Advisors, says the next government needs to boost PDVSA’s production capabilities and open joint venture opportunities for foreign oil companies interested in developing the country’s fields.

“The oil market has changed. The energy revolution propelled by the United States and a change in global consumption patterns are pressing down on the price of this commodity,” says Palacios, who adds “PDVSA needs to stop incurring debt and delaying its payments. Recent changes to the windfall profit taxes and the state-controlled foreign exchange market are helpful, but not sufficient to boost the company’s revenue.”

Revisions to oil trade agreements such as Petrocaribe, or to the national gasoline subsidy are also not out of the question says Asdrubal Oliveros, director of Econanalítica, a Venezuelan economic consultancy.  Venezuelans currently enjoy some of the world’s cheapest gasoline, at a cost to the government of US$ 12 billion a year – costs made worse after an accident in a refinement facility last year forced the country to import gasoline from the United States to cover the internal demand.

Regarding the current shortage of foreign currency, Palacios says the recent devaluation of the bolívar along with the creation of a new system to auction dollars among the private sector are steps in the right direction. Yet, she adds, benefits brought by such modifications could be limited if the new government maintains the rigid price controls created during the Chávez era.

Former director of Venezuela’s Central Bank, José Guerra, coincides with Palacios but considers that more needs to be done to end the foreign currency shortage. “Only one auction has been held and it was not enough. Venezuela’s economy is paralyzed and it is not clear how the issue will be solved. If Maduro wins we can only hope they improve the auction method,” he says.

As for Venezuela’s high inflation rate, Guerra expects Maduro to tame it by tightening price controls and expanding them to cover even more goods. A report made by the Ministry of Finances and the Central Bank, leaked to the Venezuelan press this week, confirms that Maduro’s team has recommended studying how an expansion on price controls would affect the market.

In the matter of the reduction of public expenditure, there is disagreement between the analysts on whether Maduro would be willing to pay the political price that comes with it. Economist Jesús Casique thinks the entitlement culture embedded in the Bolivarian ideology will prevent any cuts from happening; while Guerra says he expects a moderate reduction of expenditure in social programs in the next year.

“Reality is catching up with the Venezuelan government so no matter which party wins we would see modifications to its economic policy,” concludes Palacios.

To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Previous Article
Scroll to top of page
Begin Zoho Tracking Code for Analytics