Venezuela Inflation July 2016


Venezuela: Economy in freefall as government declares opposition-controlled National Assembly null and void

August 8, 2016

The institutional tug-of-war between the political opposition and the ruling party has taken a turn for the worse. The government-controlled Supreme Court declared in early August that the National Assembly, dominated by the political opposition, was in contempt of Court. The ruling has been interpreted as a retaliation by the government after the opposition completed the first phase to trigger a recall referendum. While the institutional standoff escalates, the latest economic data paint a dire picture in the crisis-ridden country.

The political opposition scored an important victory after the National Electoral Council (Consejo Nacional Electoral, CNE) confirmed that the first phase to trigger a recall referendum had been successfully completed. The CNE, however, did not choose the dates for the three-day period in which the opposition has to collect roughly four million signatures, 20% of the electorate, to trigger the recall referendum. The opposition is hoping to hold the second phase of the recall referendum in late August and the referendum before 10 January 2017. Timing is key because if the vote is held after this date 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.

The victory accrued by the opposition, however, was short-lived. The Supreme Court ruled all Legislative acts since 28 July null and avoid. The Supreme Court considered the National Assembly to be in contempt after the Assembly swore in three lawmakers who were barred by the Court to take their seats. Despite the ruling and threats from president Maduro to cut funding to the Assembly, the opposition has vowed to keep working. The growing standoff threatens to exacerbate the existing tension and 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 basket of goods and services was 26.0% more expensive in June compared to May and 624.0% higher than in the same month in 2015. 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 98.1% in June, virtually unchanged from May’s 97.8% 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 PDVSA is very unlikely due to the retaliatory measures that creditors could undertake, though continuous production shocks and still-low oil prices make a default likely. The government is determined to honor its debt commitment in order to avoid asset seizures and loss of access to the international capital markets. The government stated in July that oil prices at around USD 50 would be enough to avoid a default. However, analysts consider a default inevitable unless Venezuela monetizes non-reserve assets, plans additional gold sales or extends the support it receives from China.

FocusEconomics panelists are increasingly pessimistic about the country’s outlook and foresee GDP falling 9.2% in 2016, which is down 0.2 percentage points from last month’s forecast. For 2017, the panel expects the economy to contract 2.5%. Simultaneously, inflation is seen ending 2016 at 457.7%. For 2017, the panel expects inflation to reach 465.0%.

Author: Jean-Philippe Pourcelot, Economist

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