Venezuela: Economic crisis deeps prior to key legislative election
November 4, 2015
Venezuela is preparing to head to the polls for legislative elections on 6 December amid one of the biggest economic crises the country has faced in its recent history. Although no official GDP data has been released for 2014 or 2015 and there is no official inflation data for this year, the available evidence continues to point to a deepening economic crisis. A sharp drop in oil prices, which accounts for about 95% of Venezuela’s exports and half of public revenues, has significantly limited access to foreign currency and is aggravating inflation and creating huge goods shortages. Meanwhile, President Nicolas Maduro has downplayed the crisis, arguing that the opposition is sabotaging the economy ahead of the elections. He also stated recently that his government expects inflation to stand at around 80% in 2015 even though neither the Central Bank of Venezuela (BCV) nor the National Statistics Institute (INE) has produced an official press release.
Despite Maduro’s statement, the FocusEconomics panel of analysts has a more pessimistic view of price developments in the country. Our panel estimates that inflation has worsened drastically from December 2014’s 68.5% and that it soared from September’s 169.4% to 175.0% in October, which would mark a multi-year high if confirmed. Inflation has continually spiraled upward in Venezuela as the drop low oil price is hindering the ability of the government to supply dollars to its complex exchange rate system. President Maduro announced a 30% minimum wage increase for public employees in October effective as of 1 November. Minimum wage had already risen by 97% during 2015 and this new rise puts the figure at a 137% increase if additional subsidies that grew as a measure to address ballooning prices are also included. On that topic, Munir Jalil and Esteban Tamayo from Citibank state that, “the new wage increase implies a validation of inflationary pressures and is a clear sign of a wage-price spiral materializing, which should end up generating more inflation in the end.”
Price controls were extended in October to include all goods and services in a bid to control rampant inflation and all business were ordered to change their prices before December. Profit margin limits of 30% have also been implemented. LatinFocus Consensus Forecast panelists see inflation remaining elevated in the coming months and expect inflation to end the year at 180.7%, which is up 7.7 percentage points from last month’s forecast. For 2016, the panel foresees inflation inching up to 148.1%, which is down 28.9 percentage points from last month’s forecast.
Set against the background of a spiraling economy, potentially-landmark elections are approaching. Early polls point to an unprecedented victory for the opposition coalition, Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD), which could upset over 15 years of uninterrupted government rule. Latest polls indicate a widening lead of more than 30% between the opposition and the government as the dire economic circumstances are taking a toll on the government’s support. Despite the comfortable lead held by the opposition in numerous polls, victory remains uncertain. Critics have questioned how fair the upcoming elections will be, especially since the government recently declined the offer made by the Organization of American States (OAS) to monitor the elections. The opposition says that barring independent institutions such as the OAS from monitoring the elections paves the way for irregularities and fraud to be committed.
The implications of an opposition victory depend mainly on whether the party can secure a two-thirds supermajority. A two-thirds majority could hinder the government’s ability to appoint Supreme Court justices and push through laws and may even pave the way for constitutional reform. However, little is known about the opposition’s economic platform and whether a change of power would improve the country’s economic crisis. Lastly, the election could push the government to change its economic policies, since its fall in popularity is inextricably tied to Venezuela’s economic decline.
Despite the possibility of change in Venezuela’s Parliament, FocusEconomics panelists are pessimistic about the country’s outlook. Recession, skyrocketing inflation and low oil prices are expected to push the economy into the worst contraction in over a decade this year. The economic analysts we surveyed this month foresee GDP falling 7.4% in 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, the panel of analysts expects the economy to contract 4.0%, which is unchanged from last month’s forecast.