Inflation in Venezuela

Venezuela - Inflation (end of period)

Economy in collapse amid massive protests for recall referendum

Venezuela’s political situation has continued to deteriorate as the long-lasting standoff between the ruling party and the political opposition recently intensified. In early September, supporters of the opposition held massive protests in Caracas to increase pressure on the government to approve a recall vote against President Nicolas Maduro before 10 January 2017. The protests represent the largest manifestation of discontent with Maduro’s government since 2014, as Venezuela’s economy crumbles in a context of triple-digit inflation and with a severe scarcity of basic goods such as food products.

The recall referendum aims to trigger new elections and a transition of power to the opposition. Timing is key because if the referendum is held after 10 January 2017 and the opposition wins, the current vice president will be sworn in as president and the ruling party will stay in office. If the vote is held before this date and the opposition wins the referendum, the opposition will take power. While the National Electoral Council (Consejo Nacional Electoral, CNE) confirmed that the first phase to trigger a recall referendum had been successfully completed, it has been dragging out the second phase of the process. Particularly, the CNE has not yet chosen the dates for the three-day period in which the opposition has to collect roughly four million signatures, 20% of the electorate, to activate the recall referendum. On 7 September, the opposition party again asked electoral authorities to complete the second stage, this time demanding a 19 September deadline to ensure that a recall referendum can be held before the critical date. Nevertheless, President Maduro has so far denied any chance of a referendum being held before 10 January and analysts point out that it is difficult to see how the opposition could force it.

The opposition’s demonstrations came amid an ongoing institutional tug-of-war between the government and the political opposition. The government-controlled Supreme Court declared in early August that the National Assembly, dominated by the opposition, was in contempt of court after the Assembly swore in three lawmakers who had been barred by the Court from taking their seats. The ruling has been interpreted as a retaliation by the government after the opposition completed the first phase to trigger the recall referendum. Thereafter, the Supreme Court ruled all legislative acts since 28 July null and void. Despite the ruling and threats from Maduro to cut funding to the Assembly, the opposition has vowed to keep working. The growing standoff threatens to lead to an escalation of social unrest amid a worsening economic and social crisis.

Given the dearth of official data for inflation, different indicators from official and non-official sources are used as proxies to measure the evolution of price levels in the South American country. According to figures from the Venezuelan Center of Documentation and Analysis for Workers (Centro de Documentación y Análisis para los Trabajadores, CENDA), the basic basket of food, goods and services was 21.6% more expensive in July compared to June and 605% higher than in the same month in 2015. The basic basket of food, goods and services takes into consideration prices of a different set of products than the consumer price index; particularly, the basic basket tracks prices of selected products to cover basic food needs, personal hygiene, living expenses, healthcare, education, clothing and footwear. Analysts participating in the FocusEconomics Consensus Forecasts estimate that inflation jumped from 261.2% at the end of Q1 to 343.7% at the end of Q2. The latest available data show that the money supply increased by 99.4% in July, marginally up from June’s 98.1% increase. The money supply is expected to keep increasing at an alarmingly-fast rate following new reports that show that oil output is declining. Dwindling oil revenues will impact the government’s finances, which suggests that it will resort to financing the fiscal deficit by printing more money. In addition, a crunch in foreign currency spells trouble ahead of international debt payments.

Analysts consider that a unilateral default by cash-strapped state-run oil company Petroleum of Venezuela (PDVSA), which is struggling with continuous production halts and depressed oil prices, is rather unlikely due to the retaliatory measures that creditors could undertake. The government is determined to honor its debt commitments in order to avoid asset seizures and loss of access to the international capital markets. However, analysts expect that Venezuela will have to take drastic measures—such as monetizing non-reserve assets, selling additional gold reserves or extending the support it receives from China—to avoid a default.

FocusEconomics panelists are increasingly pessimistic about the country’s outlook and foresee GDP falling 9.0% in 2016, which is up 0.2 percentage points from last month’s forecast. For 2017, the panel expects the economy to contract 2.6%. Simultaneously, inflation is seen ending 2016 at 469.4%. For 2017, the panel expects inflation to reach 455.9%.