Venezuela's economy: Rising from the ashes?

Venezuela’s economic prospects have improved notably in recent months, in contrast to those of the rest of Latin America. In our latest insight piece, we examine why.

Economic prospects in the Latin American region have cooled somewhat since late 2021, as economies have contended with surging inflation and central banks have been forced into aggressive monetary tightening as a result. That said, one country has bucked the trend: Venezuela. Our analysts have continuously upgraded their Venezuelan 2022 GDP growth projections since the start of Q4 last year. At 9.8%, Venezuelan growth is expected to be by far the fastest in the region—and close to double that of Colombia, the next best-performing economy.

 

Positive dynamics in the energy sector have been the key driver. Oil production has risen notably in recent months, and was up around 40% year-on-year in May. Moreover, multi-year high oil prices are buoying government coffers and reducing the need for monetary financing of the fiscal deficit. This, coupled with widespread dollarization, is driving down inflation, which is expected to fall back into double digits later this year for the first time since 2014. Timid market reform and the return of some of the millions of migrants who left the country during the worst years of the economic crisis are also helping.

That said, the economy remains dysfunctional. The dual use of both the U.S. dollar and the bolivar creates extra headaches for firms and consumers, while American sanctions continue to restrain activity and trust in government policymaking is poor. As such, economic growth will slow notably from 2023 onwards, and the economy will likely remain far smaller than its pre-crisis size at the end of our forecast horizon in 2026.

The lifting of U.S. sanctions will be key to a durable economic recovery. On this front, in mid-May Washington took some small steps towards sanctions relief by allowing Chevron to negotiate its license with state-owned oil company PDVSA, although a more comprehensive lifting of U.S. sanctions is unlikely until progress on talks with the Venezuelan opposition and moves towards free and fair elections.

Insight from our analyst network:

On Venezuela’s longer-term prospects, the EIU said:

“In the medium term, we expect growth to weaken considerably. Serious operational problems, inadequate investment and a limited pool of buyers of Venezuelan crude will cause growth in the oil industry to taper off later in our 2022-26 forecast period. The non-oil economy will strengthen modestly, assuming that recent shifts towards more orthodox policy help to foster macroeconomic stability. However, weak fundamentals and a poor policy environment will keep market opportunities subdued.”

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Oliver Reynolds, Economist

Date: June 17, 2022

Twitter @FocusEconomics

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