Venezuela's has lived through several economic crises, but always in connection with a significant decline in oil prices, never the other way around. The most dramatic situation is the shortage of US dollars, which paralyzes the economy, when the oil markets signals an average price over the $100 per barrel.
The key to understand the problem is the economic legacy of Chavez’ social and political agenda, which after allowing Chavismo to remain in power, is now hunting the government.
Minister Nelson Merentes, a pragmatist now taking over the economy from ideologist Minister Giordani, has recently stated: “Chavismo has not yet scored an economic success”. And this comes from the man whose first task, in trying to achieve that success, is to win the fight against the US dollar shortage that has brought products scarcity and higher inflation, in the verge of an inescapable new devaluation of the Bolivar (not so “Fuerte” anymore).
The situation is complex. Venezuela is currently more dependent to oil than ever. But the oil industry production is declining. In addition, a significant portion of the exportable production is committed to programs with Cuba and other Latin American allies, and close to 500,000 barrels per day go to repay borrowings from China under an Oil for Credit facility that undervalues the barrel of oil. This leaves Venezuela with probably half of the dollar cash from exports it could receive, which comes to the close to 800,000 barrels per day exported to the US “Imperio”, the fictitious enemy of the “chavista” rhetoric.
But it doesn’t stop there. Because the government has used the “official controlled rate of exchange” administered through CADIVI as an anti-inflationary tool, the controlled US dollar is the cheapest commodity in the market, making almost impossible to compete against imported goods; while creating all incentives to a foreign exchange arbitrage given the gap with the alternative official market of SICAD, or the black market that covers the supply deficit from the government controlled system.
To resolve the country’s economic illnesses, the powerful Minister Merentes has implemented a dialogue with the private sector, in search for moderation and compromise, but without addressing the fundamentals. This might result in more expediency with CADIVI and SICAD, decriminalization of the proscribed “bonds swaps”, and perhaps another devaluation by the end of the year or during the first quarter of 2014 (once the municipal elections ofDecember 8th are passed), which will bring the official rate to probably no less that 9 VEN x 1 USD.
In the meanwhile, amidst the economic dialogue and moderation, the political front continues to be radicalized with prospects of escalation. One plausible explanation is that the government needs to destroy and persecute the existing opposition to reaffirm itself in this difficult economic environment. Indeed, a recent poll by IVAD shows growing discontent with 65% saying the economic situation has gotten worse than last year, bringing President Maduro’s approval rate to 46%, but where 19,0% gives him a lukewarm support.
Therefore, in this weak political support scenario faced by the government their strategy is to harass and degrade the opposition, banking on Merentes’ the pragmatist, whom is expected to deliver the economic success owed to the people by the revolution.
For the opposition, the challenge is to transform the December 8th municipal elections in a national referendum against Maduro.