Venezuela Politics August 2017

Venezuela

Venezuela: Latest vote pushes economy further into uncharted territory

August 7, 2017

The outcome of the highly-controversial 30 July Constitutional vote has resulted in a further escalation of violence and polarization in the country. The vote, allegedly held to put to an end over four months of massive protests, has been condemned by an ever-growing list of countries due to mounting evidence of large-scale voter fraud. In a relevant move, the Mercosur trading bloc suspended Venezuela indefinitely from the regional body and some countries are considering severing diplomatic ties with Venezuela. It remains unclear what impact international isolation will have; these actions are intended to raise the heat and pressure the government to halt its authoritarian decline.

Despite international condemnation and widespread protests at home, the new National Constitutional Assembly was convened on 4 August, with the aim of rewriting the Constitution. Although there is little clarity about the ultimate goals of President Nicolas Maduro, it is very likely that the government and the National Constitutional Assembly will attempt to cement Maduro’s grip on power. In this regard, the first decision of the new assembly was to sack Venezuela's dissident attorney general Luisa Ortega. The once-loyalist Ortega was removed from her post over accusations of "grave breaches of the law". The opposition, however, sees this move as politically motivated as she was investigating corruption and human rights abuses.

The short-term outcome of the vote yielded greater uncertainty and unrest. Internationally, the vote has produced a tectonic shift in how countries deal with the increasingly-rogue regime and will likely accelerate the country’s economic decline. The United States, the largest buyer of Venezuelan oil, has threatened to impose financial and economic sanctions. A possible scenario could see the U.S. government forbidding Venezuela from carrying out daily transactions in U.S. dollars, such as paying suppliers or receiving export earnings. This would also impede the government from servicing its international debt obligations and increase the probability of the sovereign and PDVSA defaulting in the foreseeable future.

Lack of international recognition of the legislative body and growing political turmoil at home will greatly undermine government efforts to steer the economy. There is a strong consensus among analysts that the government will try to issue new debt to raise cash since bond issuance had required parliamentary approval. However, it is very uncertain this could materialize even without the opposition interceding in the former Legislature. Default risks have spiked recently and this has generated greater aversion to purchase highly-lucrative Venezuelan bonds. Similarly, investment banks might be reluctant to provide a lifeline to the government to avoid public outcry as occurred with Goldman Sachs and Nomura in May.

Other measures that could be implemented include amending the Constitution and employing laws to reform legislation on oil ventures, and royalty regimes. The government could amend the Constitution to allow foreign companies to take larger stakes in joint ventures to improve the country's battered finances. However, it remains to be seen if any firm will decide to partake in any joint venture due to the public outcry it could cause. Lastly, government proposals might run aground since few governments worldwide are expected to recognize the laws enacted by the new Legislative body.

Panelists participating in the Venezuela Latin Focus Consensus Forecast have slashed down 0.1 percentage points off the country’s GDP outlook for 2017 and now foresee a sharper 6.6% contraction. For 2018, the panel foresees a drop in output of 1.7%.


Author: Jean-Philippe Pourcelot, Economist

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