Venezuela Weekly: Venezuela’s Two Governments Seek to Defend Tenuous Economic Positions

The battle for political power in Venezuela has economics at its center. It is control over Venezuela’s vast resource wealth and revenue that funds Nicolas Maduro’s network of corruption and clientelism and explains his staying power. And it is here that the U.S. government has focused its efforts to push him out. It has used far-reaching sanctions to handcuff Venezuela’s oil industry, and has recognized National Assembly (AN) President Juan Guaidó as Venezuela’s legitimate president, thereby giving him control over Venezuela’s U.S. based assets, such as gasoline refiner and retailer, Citgo.

However, U.S. efforts to pull the economic rug out from under Maduro are leading to a number of contradictions and complex situations. First, the Maduro government is in no position to pay the $913 million corresponding to the PDVSA 2020 bonds this month. They were backed by 50.1% of Citgo, which means the latter could be lost to creditors. Last week, the U.S. Treasury Department extended by three months a temporary shield over Citgo, protecting it from seizure. This week Guaidó’s U.S.-based legal team filed suit in the U.S. claiming that the PDVSA 2020 bonds were invalid because they did not have the National Assembly’s approval, and bondholders cannot therefore exercise their rights over the collateral.

A second contradiction is that U.S. sanctions have led Maduro to strengthen ties with Iran, Turkey and Russia. This is one of the considerations involved in the U.S. Treasury Department’s decision to renewed the Chevron license to continue operating and drilling in Venezuela for another three months until January 2020. The U.S. also granted a license to Adobe software, allowing the company to continue offering its services in Venezuela.

Last week Venezuela’s Central Bank released data showing the scale of the country’s economic collapse. Gross Domestic Product declined by 26.8% from first quarter 2018 to first quarter 2019, including sectorial contractions ranging from 74.1% in construction to 56.4% in manufacturing, to 12.1% in communications. The oil sector contracted by 19.1%. All of this was before U.S. oil sanctions fully took hold in April of this year. State imports actually increased by 16.5% from first quarter 2018 to first quarter 2019; but this simply reveals that the government continues to expand its role in the economy as the battered private sector contracts. Total non-oil imports actually shrunk by 3% during this same period.

In the first nine months of 2019, inflation was 4679,5%, which is lower than 2018. It has been reduced through the imposition of draconian capital requirements on banks that have reduced how much they can lend. In the past week the BCV announced it would also be indexing loans to the official price of the dollar in order to prevent their use for currency speculation. This could succeed in slowing the climb of the dollar, but will also be recessionary and could increase the risk of loan default among private sector borrowers. It is also a way of favoring export-oriented industry that can pay back indexed loans. This will generate sorely-needed foreign currency but not necessarily meet the needs of hungry Venezuelans.

While there are reports that scarcities have diminished in Venezuela, it is important to realize that what is on the shelves is largely unobtainable for average people. With the recently declared increase in the minimum wage to $15 per month, it would still take 20 minimum wages to buy the “basic basket” of goods which is now calculated at $300 per month.

And while there are many reports of dollarization of the Venezuelan economy, only about one third of the population regularly makes  transactions in dollars and in fact fewer people are eating three times a day than a year ago.

Legislative Elections

Southern Cone

  • Analysts suggest that Alberto Fernández’s victory in Argentina’s presidential election will likely change the outspoken position the country has had with respect to Venezuela. That, in turn, could reduce the impact of the Lima Group.
  • Maduro celebrated the Argentinian election saying the people had defeated neoliberalism. ANC President Diosdado Cabello said what is happening in the region is part of a Bolivarian hurricane that will even reach Europe and the U.S.

Migration

  • The co-chairs of the International Solidarity Conference (October 28-29) on the Venezuelan refugee and migrant crisis published a statement arguing that the situation demands a coordinated international response, including international financial institutions, development actors, and the private sector.
  • In her remarks after the conference, High Representative and Vice-President of the European Commission Federica Mogherini said 120 million euros of new contributions had been pledged, and that the EU would continue supporting regional coordination mechanisms. See the EU’s final statement here.
  • Maduro’s government criticized the conference and said the organizers themselves are the causes of the crisis.

Police Violence

  • The Zulia state government boasted it is averaging 100 deaths per week of supposed criminals in confrontations with police. Human rights organizations are demanding an investigation.
  • Transparency Venezuela (TV) and the National Assembly announced a new initiative regarding gender violence. TV will include an option in its smartphone app DiloAqui to denounce gender violence.