Venezuela Inflation June 2016


Venezuela: Government confident about honoring debt payments with oil prices hovering USD 50

July 7, 2016

International mediation has been unable to diffuse the growing political crisis in Venezuela amid clear signs that the economy is deteriorating drasticallyaimed at solving the growing institutional crisis in Venezuela have failed to come to any meaningful result. The OAS failed to agree on whether the regional body should invoke the Inter-American Democratic Charter to suspend Venezuela from the bloc. While the OAS was convening, talks between the government and the opposition, brokered by former heads of states from different Latin American countries and Spain, have not made any significant progress. The political opposition refuses to negotiate until the government stops delaying the recall referendum process and meets other demands. The opposition argues that the government will drag out talks to buy time and avoid holding the recall 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 opposition scored an important victory in June after the National Electoral Council (Consejo Nacional Electoral, CNE) validated over 400,000 signatures, double the amount necessary, to activate the second phase of the recall referendum. The opposition now faces the monumental task of collecting over four million signatures in three days, equivalent to 20% of the electorate, to trigger a recall referendum.

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 25.5% more expensive in May 2016 compared to the previous month and 560.2% higher than in the same month last year. Analysts participating in the FocusEconomics Consensus Forecasts estimate that inflationary pressures jumped from 240.6% at the end of Q1 to 288.8% at the end of Q2. Latest available data show that the money supply increased by 97.8% in May, marginally below April’s 98.2% increase. The money supply is expected to keep increasing at an alarmingly-fast rate following new reports that highlighted that oil output in 2016 has fallen sharply and that oil earnings in 2015 were significantly lower. Dwindling oil revenues will put additional pressure on the government’s finances, which suggests that the government will resort to financing the fiscal deficit by printing more money. In addition, a foreign currency crunch spells trouble ahead of international debt payments.

There is growing concern that a sovereign debt default of over USD 8.0 billion in bond payments this year alone may be on the horizon. Of this amount, USD 4.4 billion correspond to PDVSA alone. A USD 756 million installment is due in August and most of the rest of the payments are due in October and November. Latest available data show that Venezuelan international reserves stood at the over-ten-year low of USD 12.1 billion in May (April: 12.1 billion). Analysts consider that a unilateral default by PDVSA is very unlikely due to the retaliatory measures that creditors could be undertake, though production shocks and still-low oil prices make a default likely. The government is adamant about honoring its debt commitment in order to avoid asset seizures and losing access to 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 9.0% in 2016, which is down 0.7 percentage points from last month’s forecast. For 2017, the panel expects the economy to contract 2.3%. Inflation is seen ending 2016 at 420.8%. For 2017, the panel expects inflation to ease to 317.2%.

Author: Jean-Philippe Pourcelot, Economist

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