Venezuela Politics

Venezuela

Venezuela: Maduro increases minimum wage amid signs of worsening crisis

May 15, 2015

Venezuelan President Nicolás Maduro announced a 30% increase in the minimum wage on 1 May, partly in response to the country’s runaway inflation. In addition, Maduro also announced a rise in the salaries for public-sector workers and plans to nationalize food distribution in the near future. These announcements come against a backdrop of economic recession and sky-rocketing inflation in the country. While little official data has been released, the available evidence points to a deepening economic crisis. Inflation hit 68.5% in December 2014 (the last month for which data are available) and reserves fell to an almost-twelve-year low in April. Going forward, the hike in minimum wage and government control over food distribution is expected to do little to ease the underlying economic problems. LatinFocus Consensus Forecast panelists expect inflation to reach 108.0% by year-end, greatly outpacing the wage hike and crippling real incomes. Moreover, the government already controls approximately 50% of food distribution, yet persistent basic goods shortages exist. In addition, it is expected that the government’s finances are under pressure due to the sharp drop in the prices for oil, which account for the vast majority of Venezuela’s dollar income.

Against this backdrop of economic freefall, Venezuelans are scheduled to vote this year. While the exact date has not been set, the government has announced that parliamentary elections will be held in the fourth quarter of the year. The government’s popularity has fallen notably in tandem with Venezuela’s economic growth, and early polls show a high chance that the fragmented opposition will win. Francisco Rodriguez, Chief Andean Economist at BofA Merrill Lynch Global Research adds:

We see prospects of regime change as ultimately positive […]. On one hand, an opposition administration would almost automatically be associated with improved economic policies and would thus strengthen the county’s capacity to service debt obligations. There would be little need to default given the country’s capacity to rollover its debt in such a setting. On the other hand, electoral competition may actually serve to give the government an incentive to improve economic policies; it is hard to envision a scenario in which the government runs into a hyperinflation but still manages to be electorally competitive.

At this point, it remains unclear whether the Maduro administration will be able to turn around the economy and what the outcome of the election will be. LatinFocus Consensus Forecast panelists see the economy falling 5.5% this year, which is unchanged from the previous month’s forecast. For next year, the panel sees the economic contraction easing to 1.2%.


Author: Angela Bouzanis, Senior Economist

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Venezuela Inflation December 2014 2

Note: Annual and monthly variation of consumer price index in %.
Source: Venezuela Central Bank (BCV).


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