In Venezuela, the economy may yet do what the opposition couldn’t
This South American nation is edging toward the economic brink after an internationally condemned election last month created an all-powerful congress loyal to Maduro. Since the July 30 vote, the value of the local currency, the bolívar, has fluctuated more wildly than ever, a significant feat for a country saddled with the world’s highest inflation rate. As a result, street prices for staples such as bread and tomatoes have doubled in less than two weeks.
New estimates from the large Venezuelan data firm Ecoanalítica suggest that the economy could shrink 10.4 percent this year, exacerbating a four-year nosedive that some economists already call worse than the United States’ Great Depression. Potentially more dangerous, analysts say, is the prospect of a sovereign debt crisis that could bring the country to a whole new level of economic pain.
The deteriorating situation comes as President Trump on Friday said that he would not exclude a “military” option in Venezuela. The spiraling economic crisis is sending a fresh jolt of panic through crisis-hardened Venezuelans, who are increasingly blaming Maduro.
“It was after the vote that things went out of control,” said Miguel Gonzalez, a 94-year-old retiree in sticker shock this past week while shopping at a Caracas grocery store. In only a few days, he noted, the price of white cheese had jumped 21 percent, while stewing meat surged 31 percent. Like many other shoppers, he had a near-empty cart.
The government normally adjusts pensions and the minimum wage to compensate for inflation. But in a possible sign of empty coffers, it hasn’t done that yet. As anxious Venezuelans bought up U.S. dollars in the week after the vote, the local currency depreciated 45 percent against the dollar. In the past week, the bolívar clawed back lost ground — but price increases on the street remained in place.
“It’s the government’s fault,” Gonzalez said bluntly before leaving the store with only a bag of potatoes. Nearby, 62-year-old Margarita Rivero, who lives on the equivalent of $15 a month, sounded a note of despair. A kilo of meat — 2.2 pounds — now costs about $2.50, or 16 percent of her monthly wage.
“God save us,” she said. “We will all disappear if we keep going like this.”
Venezuela has sunk into financial malaise on the back of a socialist experiment launched by Hugo Chávez, the leftist firebrand who died in 2013 after nationalizing gold mines and rice mills, among other enterprises, and bringing more of the energy sector under state control. Since then, the economy has suffered a far more profound collapse under Maduro, Chávez’s anointed successor, the result of plummeting oil prices, mismanagement and failed economic policies including price and currency controls.
Yet after a four-month street uprising in which more than 100 people were killed and thousands arrested, the opposition appears fractured and in disarray. Analysts say Maduro’s longevity in office may now depend less on surviving an opposition challenge than on his ability to sidestep a catastrophic debt crisis.
Already, Venezuelans are facing half-day-long bread lines and shortages of basics from toilet paper to antibiotics. But a default on the national debt could generate even harsher domestic conditions, potentially damaging Maduro’s support within the armed forces, his ultimate line of defense.
Signs of discontent among low- and mid-ranking officers have begun to surface. On Sunday, a group of civilians and soldiers, apparently led by a former commander, attacked a military base in the city of Valencia after releasing a video pledging rebellion against the government.
The crumbling economy, experts say, could fan such flames. And in the wake of last month’s vote, some analysts increasingly see default as not only possible but likely.
“Default is inevitable. The question is timing,” said Siobhan Morden, managing director and Latin America expert at Nomura Holdings. “Do they run out of money [on their own]? Or do U.S.-sector sanctions force them to run out of money sooner?”
Venezuela has managed to avoid a default largely for two reasons. First, it is a huge exporter of oil. And second, Maduro’s hard-left government has, ironically, been willing to work with Wall Street capitalists on creative bond deals that have kept it afloat.
But Maduro’s defiant decision to proceed with last month’s vote could prove a game changer.
Critics decried the election as a sham meant to bring all branches of government under his control, and the United States, along with countries in Europe and Latin America, have refused to recognize the new Constituent Assembly. As Venezuela begins to resemble a pariah state, experts say that traders may be loath to accept more of the risky debt swaps — the paying off of old debt with new and higher-yielding bonds — that have thus far kept default at bay.
It will also be harder, meanwhile, for Venezuela to cover its foreign debts using cash. National reserves have hit a 15-year low of about $10 billion, most of it in gold bars, not cash. Any U.S. action to target the country’s oil industry through sanctions — a step the Trump administration is considering after a string of sanctions on individual officials — could force a default-triggering cash crunch.
Even if the U.S. government stops short of that, Venezuela’s oil industry, battered by corruption, mismanagement and disrepair, has already seen its output drop by 20 percent in two years.
Analysts suggest a default is likely within 18 months, possibly much sooner. This year, Venezuela’s big test will be in October and November, when it must scrape together $3.8 billion in payments.
Robert Wood, the Economist Intelligence Unit’s regional manager for Latin America and the Caribbean, puts the chances of a military coup this year or next, because of extreme economic conditions, at about 40 percent.
“We no longer expect that the December 2018 presidential election will be held as scheduled,” he wrote in an analysis note. “We still expect that the opposition will take power, but that the fall of the government and consequent transition will be disorganized, triggered by economic difficulties such as a default and/or hyperinflation.”
Some observers argue that ceasing to pay the debt could actually give the government more to spend on desperately needed imports of food and medicine, although any windfall would probably be short-lived, given that foreign investors are poised to quickly seize Venezuelan assets across the globe.
There is also reason to believe that Maduro could survive a worst-case economic crisis by unleashing still more official repression — as he is showing signs of doing.
Since July 30, the pro-government supreme court has issued arrest warrants for five local mayors for supporting protests. Meanwhile, the Constituent Assembly has vowed to back Maduro’s public calls to imprison more opponents, creating a “truth commission” this week that observers fear will be used to persecute government critics. Last weekend, it sacked chief prosecutor Luisa Ortega Díaz, the most important anti-Maduro voice left in the administration.
Maduro is also singling out ordinary citizens. On Sunday, a pro-government election official was shouted at by shoppers in a Caracas supermarket. A video of the scene went viral, prompting Maduro to call for those responsible to be jailed for “hate crimes.” A pro-government newspaper later published a list of their names.
Anthony Faiola & Rachelle Krygier