Venezuela: President Nicolás Maduro set for reelection against a grim economic outlook
May 15, 2018
On 20 May, President Nicolás Maduro is poised to secure a second six-year term in a presidential election that has been widely criticized for lacking credibility and fairness. Maduro’s two strongest opposition rivals, Henrique Capriles and Leopoldo López, were barred from running, while the main opposition coalition, Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD), is also not contending. The MUD leadership has called on member parties and the broader electorate to abstain from participating in what it deems a sham election. Nonetheless, Henri Falcón, an ex-Chavista and former governor, and Javier Bertucci, an evangelical pastor, opted to enter the race and now stand as Maduro’s two main challengers. However, their chances of victory are slim. Amid a fractured opposition, low voter turnout and an electoral process marred by irregularities, it is likely Maduro will be reelected, thus suggesting that the deep economic crisis will continue, given the government’s reluctance to implement meaningful, and much-needed, reforms.
Assuming a Maduro victory, the status quo in economic policymaking is expected to continue. On 30 April, Maduro announced a 95% minimum wage hike to protect workers against soaring inflation, the third raise so far this year. However, despite wage increases becoming routine, they severely lag behind inflation. Real wages therefore continue to erode, denting economic activity. Furthermore, on 4 June the bolivar will be redenominated, by eliminating three zeros. The government claims the measure will help control runaway inflation and relieve rampant cash shortages. Critics argue, however, that the move is mainly cosmetic and will not combat hyperinflation. Both the wage hikes and currency overhaul are half-way measures that do not tackle the structural causes of the crisis, mainly the dysfunctional exchange rate regime. Moreover, international financial sanctions are adding to the country’s economic woes, complicating a restructuring of the country’s debt. Some analysts speculate that sanctions could be ramped up under the current regime, namely by targeting the all-important oil sector.
On the electoral scene, Falcón is seen as the strongest contender, with recent polls showing him beating Maduro in a two-way contest. However, he faces significant obstacles. First, he lacks the backing of the country’s main opposition force, as he was expelled from the MUD after he announced his candidacy; this, along with the coalition’s decision to boycott the election, will hinder his support from the MUD’s voter base. Furthermore, with Bertucci entering the political scene and gradually rising in the polls, Falcón’s lead has been eroded, which will likely dilute the opposition vote. Lastly, despite polls indicating that Maduro counts with only a minority of voters, the vast majority of them are likely to vote whereas the intention to do so among opposition supporters and the politically unaffiliated is much lower. Hence, weak willingness to participate and consequently low turnout will undermine Falcón’s chances of earning victory. Even if Falcón comes out on top, there is the possibility that the National Electoral Council will distort the vote count in favor of Maduro given the government’s clout on the agency.
A radical departure from the current economic policy framework could be expected in the unlikely scenario of a Falcón victory. At the center of his economic platform lies the dollarization of the economy to stabilize spiraling inflation and never-ending currency depreciation. Among other policy proposals, he has proposed returning expropriated companies to the private sector, seeking financing from multilateral organizations, and providing monthly cash transfers to poor Venezuelans. It should be noted that such policy changes would not start only until January 2019, when the new president takes office. Despite Falcón’s claims that dollarization will resolve Venezuela’s economic problems, it would carry considerable risks in the short and long term. Dollarization would entail a loss of monetary sovereignty and subject the economy to fluctuations of a currency it cannot control. It could also deepen the economy’s already-high dependence on imports and hinder export diversification due to an overvalued currency. As such, even if dollarization stabilizes the economy in the short term, more would need to be done to correct Venezuela’s structural economic woes, including an overreliance on oil exports and the associated lack of productive diversification.
All told, the outlook remains bleak. President Nicolás Maduro is well-positioned to be reelected amid an economy ailing from severe macro-imbalances that include mounting debt pressures, exchange rate misalignments and hyperinflation. The economy is set to remain in a deep recession given the absence of a clear government strategy to address the crisis. Panelists participating in the LatinFocus Consensus Forecast project that GDP will contract 9.3% in 2018, which is down 0.4 percentage points from last month’s forecast. For 2019, panelists expect GDP to drop 1.5%.
Author: Javier Colato, Economist