Venezuela Inflation April 2016


Maduro shortens work week as blackouts add to list of economic woes

President Nicolás Maduro continued to rule by decree on economic matters after the Supreme Court overruled the National Assembly’s objection to granting Maduro special powers to address the country’s deepening crisis. The special powers were extended until May and, due to recurrent blackouts, Maduro implemented a set of measures in an attempt to curb energy consumption. The opposition considers his policies to be insufficient and short-sighted. Maduro continues to stifle any attempt by the opposition to erode his grip on power as the polarization between the government and the opposition escalates, offering little hope of implementing far-reaching solutions amid clear signs of a deepening crisis.

Energy blackouts have become a recurrent problem in Venezuela as a prolonged drought exacerbated by El Niño has severely hampered hydroelectric production. After failing to curb energy consumption by extending the Easter holiday from three to five days, the government declared a shorter working week of four days in all public offices and required retailers to cut their opening hours. The measure, which is to last until May, has been fiercely criticized. The political opposition represented by the Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD), argues that the measure will exacerbate chronic shortages of goods and services and will constrain economic activity in the already-depressed economy. Additional measures, such as changing the time zone, have also been implemented.

MUD strives to jumpstart the economy by ousting Maduro. The opposition-controlled National Assembly is currently drafting an impeachment referendum bill to hold snap elections by the year's end. The approval of the bill, however, has been delayed as the opposition strives to overcome the numerous legal hurdles imposed by the government and to avoid the bill being rendered void by the Supreme Court. The government-controlled Supreme Court has struck down various bills, even measures like subsidies for the elderly, effectively rendering the opposition-controlled National Assembly powerless. Consequently, the political standoff between the opposition and the government continues and has further polarized the already-tense social and political situation. Maduro is considering amending the Constitution to dissolve the Assembly within months. A stark example of the polarization took place on 31 March when massive strikes left two police officers dead and scores of protesters wounded.

The economic crisis has exacerbated the country’s bitter political division, which has the potential to put the country on a crash course. Panelists surveyed by the LatinFocus Consensus Forecasts saw inflationary pressures mounting in the first quarter of the year and estimate that inflation soared past 200%. Against a backdrop of economic freefall and runaway inflation, analysts remain concerned about growing prospects of a sovereign debt default. Latest available data show that Venezuelan international reserves stood at a multi-year low of USD 13.2 billion in March and the government has to make USD 8.3 billion in bond payments this year alone. The government has reiterated its commitment to respect its debt obligations and made a payment instalment due in February. However, with diminished cash flow, the government will struggle to avoid a default unless it organizes additional gold sales, monetizes some other non-reserve assets or agrees on external financial support from key allies, namely China.

In spite of the measures, FocusEconomics panelists are increasingly pessimistic about the country’s outlook and foresee GDP falling 7.2% in 2016, which is unchanged from last month’s forecast. For 2017, the panel expects the economy to contract 1.1%. Simultaneously, inflation is seen ending 2016 at 295.4%. For 2017, the panel expects inflation to remain elevated at 218.1%.

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