Venezuela: Economy in freefall as December elections approach
October 8, 2015
Against a backdrop of economic freefall, Venezuela prepares to head to the polls for legislative elections on 6 December. 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. On 30 September, a filing by the Venezuelan government to the U.S. Securities and Exchange Commission stated that the Venezuelan economy contracted 4.0% in 2014, which, if confirmed, will mark the worst performance in Latin America. However, uncertainty has arisen regarding the validity of the data as it came with a footnote stating that figures were for 2014 “where available”, leading to confusion among market analysts.
Regarding consumer prices, the FocusEconomics panel of analysts estimates that inflation has worsened drastically from December 2014’s 68.5%. Our panel estimates that inflation soared from August’s 152.9% to 169.4% in September, which would mark a multi-year high if confirmed. Low oil prices, which account for the vast majority of Venezuela’s dollar income, have aggravated the shortages of U.S. dollars and basic goods that are fueling inflationary pressures. Moreover, the government maintains a complex system of exchange rates—the official exchange rate pegged at 6.3 VEF per USD—and large fuel and electricity subsidies that add pressure on the government’s finances and intensify dollar shortages. LatinFocus Consensus Forecast panelists see inflation remaining elevated in the coming months and expect inflation to end the year at 160.6%, which is up 8.8 percentage points from last month’s forecast. For 2016, the panel foresees inflation inching up to 161.6%.
Set against the context of a spiraling economy, potentially-landmark elections are approaching. Early polls point to a victory for the opposition coalition, Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD), which could upset over 15 years of the government’s rule. However, despite a large lead in the polls, victory is uncertain. Critics have questioned how fairly the upcoming elections will be held, especially in the wake of Leopoldo López trial. López, an opposition leader, was sentenced to nearly 14 years in jail in September in a trial heavily criticized as illegitimate. In addition, sufficient time remains for the government to revert its poor approval rating, which it was able to do successfully in past elections, and the potential for bold moves and large swings in public opinion cannot be ruled out.
The implications of an opposition victory hinge on whether a two-thirds supermajority is secured. 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. In addition, a potential defeat or close race could push the government to change its economic policies, since its fall in popularity has been closely tied to the economy’s demise.
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 6.9% in 2015, which is down 0.3 percentage points from last month’s forecast. For 2016, the panel of analysts expects the economy to contract 3.6%.