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Venezuela Special April 2020

Venezuela: Economic depression set to deepen despite government measures to fight Covid-19

On 17 March, a nationwide quarantine was declared by the government to fight the Covid-19 health crisis. Under the restrictions, the country’s borders have been closed, only essential businesses are allowed to continue operating and citizens can only leave their homes to purchase essential goods. Meanwhile, all rents, capital and loan interest payments have been suspended, while the government has vowed to cover the payroll of small- and medium-sized enterprises.

The announced measures come against the backdrop of the collapse in oil prices and departure of Rosneft, the Russian company that handled about half of Venezuela’s crude exports, which has led to a fall in output in PDVSA, the state-oil producer, effectively cutting the government’s main source of revenue. In turn, authorities have likely resorted to monetary financing to pay for the emergency measures, after the IMF rejected the country’s request for a USD 5.0 billion loan to deal with the pandemic in mid-March. The combination of plummeting oil output, additional money printing, and shortages of food and medical equipment is setting the stage for a resurgence of hyperinflation this year.

Venezuela’s economic depression will likely deepen this year owing to the global health crisis, with output contracting for the seventh year running. Moreover, the risk of widespread social disorder is elevated, as a prolonged quarantine would exacerbate the dire economic scenario at a time when the U.S. is escalating its pressure on the country. Against this backdrop, Alberto J. Rojas, head economist for Venezuela and Peru at Credit Suisse, noted:

“We have long been of the view that regime change in the near -term is unlikely, but we think recent events increase the probability that a restart of political negotiations takes place. Foreign pressure, the health emergency, and the lack of oil export inflows, impose a liquidity crunch of a magnitude we have not seen before in the country. Moreover, domestic pressure could heighten; protests might erupt again, if as we fear, the already poor living conditions worsen. We are reluctant to think Chavismo would approach the negotiating table with an open mind. However, desperate times might call for desperate measures.”

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