Venezuela Inflation February 2016


Venezuela: Maduro reshuffles cabinet and raises gasoline prices

March 10, 2016

With the special powers granted by the Venezuelan Supreme Court to tackle the economic crisis, President Nicolás Maduro announced new measures to mend the economy and to comply with the debt repayments due this year. Maduro replaced recently-nominated Vice President for the Economy Luis Salas with the more moderate and pragmatic Miguel Pérez Abad. The President also released a new batch of economic data and described the country’s economic situation as critical: the economy contracted 5.7% in 2015 and inflation reached 180.9% in December. Mr. Maduro also announced notable cuts in gasoline subsidies, salary hikes and the implementation of a new exchange rate system.

Maduro raised gasoline prices for the first time since 1997, hiking them up to 6,000%. The cut will help the government reduce the amount they spend on oil subsidies which amount to more than USD 12 billion annually. However, analysts consider the cut as insufficient to rebalance the government’s budget. Nevertheless, consumers will be hard-hit by higher gasoline prices. The government had been reluctant to slash subsidies earlier since food and gasoline price hikes in 1989 led to riots that ultimately ousted the administration.

The subsidy cuts aim at enabling the country to make the government’s and state-owned oil enterprise PDVSA’s international debt payments. The government paid USD 1.5 billion of maturing debt in February after using USD 1.3 billion worth of gold from its already-depleted international reserves. Venezuela’s international reserves recorded a multi-year low in February. Taking into account interest payments, the government and PDVSA have still to make USD 8.3 billion in bond payments this year, which raises questions regarding whether the government will be able to make the payments.

Analysts and the opposition agree that the measures are insufficient and have come too late to lift the economy from recession. The political opposition represented by the Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD), announced that it will use all the legal mechanisms at its disposal to end Maduro’s term. The MUD plans to make a constitutional amendment to shorten presidential term limits and aims to hold snap elections by the year’s end. The opposition is also considering to organize a Constituent Assembly or an impeachment referendum. MUD sees the ousting of Maduro as the only solution to jumpstart the economy. Ousting Maduro, however, will invariably polarize the already-tense social and political situation in the country.

In spite of the measures, FocusEconomics panelists are increasingly pessimistic about the country’s outlook and foresee GDP falling 7.2% in 2016, which is down 1.4 percentage points from last month’s forecast. For 2017, the panel expects the economy to contract 0.9%. Simultaneously, inflation is seen ending 2016 at 267.2%. For 2017, the panel expects inflation to remain elevated at 177.0%.

Author: Jean-Philippe Pourcelot, Economist

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