Regime's unwilling reforms may
stop Venezuelan economic debacle
Venezuela Vice President Delcy Rodriguez, says that the economic reforms recently implemented by President Nicolás Maduro are consistent with the administration's guiding principles of Bolivarian socialism. She spoke exclusively in Caracas with Bloomberg's Erik Schatzker. -Watch Video
- Government, some private forecasters anticipate growth in 2021
- Policy reversals being led by VP Rodriguez, adviser Rivera
Patricia Laya, Alex Vasquez, and Erik Schatzker/Bloomberg
Petroleumworld 06 23 2021
After the worst economic collapse in modern history, Venezuela's economy has finally bottomed out.
The hyperinflation of past years is still, well, hyper, but it has decreased dramatically from levels that exceed hundreds of thousands of percentage points a year. And President Nicolas Maduro is confident that production, which has contracted by about 80% since 2012, will expand slightly in 2021, a forecast shared by some private analysts.
The change is mostly due to a combination of reforms straight out of economic conservatism: eliminating price controls, reducing subsidies on essential gasoline, and removing several restrictions on foreign exchange. Today, almost everything in the country is priced in dollars, not bolivars. Even a sign in the largest slum in the capital city, Caracas, advertises a haircut for $2.
Behind it is Vice President Delcy Rodriguez, who also serves as Minister of Finance. Along with former Ecuadorian economy minister Patricio Rivera, who has been advising him since 2019, he has borrowed from the capitalist playbook to revive an economy damaged by US sanctions that effectively prevented Venezuela from exporting oil.
The result is a policy mix that bears little resemblance to the neo-Marxist “socialism of the 21st century” that Venezuela adopted under Maduro's predecessor, the late Hugo Chávez. That system created a Byzantine set of currency controls and preferential rates, primarily for the benefit of those with government ties, not to mention a huge black market for the dollar. Bolivar lost 99% of its value and inflation spiraled out of control.
“You can't say there was socialism at that time, no,” Rodriguez said in an interview with Businesshala television on June 11 in a poor neighborhood in southwest Caracas. “It was going directly against the people, against the purchasing power of the people.”
The ad hoc dollarization of the economy has caused prices to rise at a much slower rate, with severe limits on lending and currency-printing by the central bank. Annual inflation has declined from over 300,000% in 2019 to 2,266% per annum; On a monthly basis, the price gains in May slowed even further to around 20%.
One challenge is to keep enough US currency in circulation. Since last year, the central bank has been sending millions of dollars – and, to a lesser extent, euros – in cash to local lenders to exchange with customers. This helped prevent Bolivar from falling into the parallel forex market that most Venezuelans use.
The reforms have also helped boost domestic demand, according to a Credit Suisse Group AG note in April. The Swiss bank has forecast GDP growth of 4%, excluding any major COVID-19 lockdowns. Caracas-based consultancy firm Econometrica sees GDP growth of up to 8%, said director Henkel García.
In a further shift away from socialism, private companies have displaced the state as the dominant force in many parts of the economy. According to government data, Venezuela's raw material and food imports accounted for 92% in 2020, compared to 25% in the previous year. This has allowed the Maduro government to close part of its vast fiscal gap.
To be sure, the green shoots are only a small respite. The country still grapples with two decades of economic mismanagement and four years of crippling sanctions. Most of the population does not have access to dollars.
“The reality is that almost everyone in the country is living through poverty and extreme hardship,” said Sergi Lanou, deputy chief economist at the International Finance Institute, by telephone from Washington.
His forecast for Venezuela's growth is a more modest 0.3% this year, rising to 1.3% in 2022. While some growth is positive after so many years of suffering, there is a “complete disconnect” between the day-to-day living of ordinary people. And there is assurance from the government that the economy is recovering, he said.
In addition, it is still impossible to attract the necessary capital to rebuild Venezuela's vital oil industry. Not only is the country locked out of dollar-based financial markets because of sanctions, Lanau also cited the current state of political uncertainty and the need for the involvement of the International Monetary Fund.
Other economists are even more pessimistic: Asdrubal Oliveros of Ecoanalytica sees GDP shrink by 4.4% this year.
Oil production, the country's biggest source of revenue, continues to be a big swing factor.
In 2019, the Trump administration imposed de facto sanctions on US imports of Venezuelan oil. Production fell to just 310,000 barrels per day in August 2020, the lowest level since the 1940s, but has since risen to more than 500,000.
After months of severe fuel shortages, the state last year began selling the fuel equivalent to 50 US cents a liter at gas stations nationwide. Decades later it was a landmark move in which Venezuelans essentially filled their tanks for free. Now, the new income could allow the national state's own producer Petroleos de Venezuela SA, or PDVSA, to recover the millions lost in subsidies.
Venezuela has little resemblance to the days when production routinely topped 2.5 million barrels a day, billions of dollars poured into the public treasury and Chávez nationalized hundreds of companies in the name of the Bolivarian Revolution. Now, though reluctantly, the state has no option but to depend on the capitalists if it wants growth, employment and rising wages.
“Today the Venezuelan private sector is becoming less dependent on oil income,” Vice President Rodriguez said. “It's becoming an area that Venezuela invests in, produces and finds where it can develop its potential.”
No crying of revolutionary rally at all.