Venezuela Inflation May 2016


Deepening crisis takes on an international dimension

The political and economic crisis in Venezuela continues to deepen after President Nicolás Maduro stepped up his effort to block the recall referendum launched by the opposition. International organizations, along with former heads of state, hope to bring both parties to the negotiation table and hammer out an exit to the deepening economic and political crisis. The likelihood of a solution, however, is slim, and there is little hope that the government will implement far-reaching reforms to mend the ailing economy.

The crisis in Venezuela took on an international dimension after former heads of state and the Organization of American States (OAS) stepped in. Former presidents of the Dominican Republic, Panama and the Prime Minister of Spain are holding talks with the Venezuelan government and the political opposition to find an adequate solution. Although the talks have faced numerous setbacks, the mediators are hopeful that with greater involvement from other regional governments the talks can be fruitful. The United States’ government already expressed its support for the talks, but the Venezuelan political opposition remains highly skeptical that they will be at all successful. While negotiations are under way, the OAS Secretary-General decided to invoke the Inter-American Democratic Charter to suspend Venezuela from the OAS. The motion, which has to pass with more than two thirds of the vote, would represent a diplomatic blow to the country. Another meeting is expected to be held sometime between 10 June and 20 June, which will coincide with the meeting of the OAS General Assembly in the Dominican Republic on 13–15 June.

While international actors are hoping to diffuse the crisis, events on the streets are becoming increasingly chaotic. Clashes between the opposition and the government have intensified, while looting and rolling blackouts have become recurrent across the country. Chronic shortages of goods and services are expected to worsen as the government has repeatedly assured foreign investors that it will first honor its obligations, even if the administration cuts imports further. Indeed, Caracas recently paid short-term debt after having liquidated USD 1.7 billion of gold in the first quarter. Seeking to reassure investors, the Venezuelan government and its main financier, China, reached a deal to extend loans. This deal will allow the state-owned oil enterprise PDVSA to focus more on its multibillion dollar debt commitments by providing less foreign currency to the Central Bank for covering imports. This agreement risks generating even greater scarcity of consumer goods and polarizing the already-tense situation on the streets. Moreover, greater shortages will, consequently, put upward pressure on prices.

Latest available data show that the money supply increased by 98.2% in April, slightly below March’s 102.4% increase. The money supply is expected to keep increasing at an alarmingly-fast rate after a report concluded that oil output in Venezuela fell significantly in the first quarter of this year. Diminishing oil revenues will put additional pressure on the government’s finances, which suggests that the government will resort to financing the fiscal deficit by printing more money. According to figures from the Venezuelan Center of Documentation and Analysis for Workers (Centro de Documentación y Análisis para los Trabajadores, CENDA), the basket of goods and services was 29.8% more expensive in April 2016 compared to the previous month and 601.4% higher than in the same month last year.

Against a backdrop of economic freefall and ballooning inflation, there is growing concern of a sovereign debt default ahead of over USD 8.0 billion in bond payments this year alone. Latest available data show that Venezuelan international reserves stood at an over-ten-year low of USD 12.1 billion in May (April: 12.7 billion). Analysts consider that a unilateral default by PDVSA is very unlikely due to the retaliatory measures that could be taken by creditors, though production shocks and falling oil prices could increase the probability of a default. However, analysts consider that a default is inevitable unless Venezuela monetizes non-reserve assets, plans additional gold sales or extends the support it receives from China.

FocusEconomics panelists are increasingly pessimistic about the country’s outlook and foresee GDP falling 8.3% in 2016, which is down 0.5 percentage points from last month’s forecast. For 2017, the panel expects the economy to contract 2.2%. Inflation is seen ending 2016 at 351.0%. For 2017, the panel expects inflation to ease to 266.8%.

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