Economic Analysis
Venezuela

Venezuela

Population 28.9 million
GDP per capita 3,411 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) -14.0 -18.0 -35.0 -20.0
Inflation (yearly average, %) 1087.5 1000000.0 35000.0 40 000.0
Budget balance (% GDP) -31 .8 -30.2 -27.0 -20.0
Current account balance (% GDP) 2.0 4.0 2.0 1.4
Public debt * (% GDP) 38.9 159.0 162.0 180.0

(e): Estimate. (f): Forecast. ** Including non-financial public sector (PDVSA).

STRENGTHS

  • Major oil reserves along the Orinoco River and offshore gas potential
  • Assets (including in the United States) of the state oil company PDVSA

WEAKNESSES

  • In default on its sovereign and quasi-sovereign (PDVSA) debt; payment delays in everyday business
  • Economy heavily dependent on hydrocarbons and loans from China and Russia
  • Non-transparent and discretionary management of oil revenues
  • Hyperinflation
  • Shortage of foreign exchange and goods (basic foodstuffs, medicines)
  • Serious political insecurity
  • Crime (homicides), corruption, trafficking of all kinds, black market

RISK ASSESSMENT

An umpteenth collapse in activity in the face of political turmoil

Venezuela will enter its seventh year of contraction in 2020, bringing GDP down to 66% of its level in 2013, the year the crisis broke out. The hyperinflationary climate, created by several years of monetising the public deficit and a free-falling currency that makes imports more expensive, has left domestic demand completely sluggish. By September 2019, real household wages had fallen by 75% compared with the previous year, with multiple minimum wage hikes decided by the government fuelling the price increase. The central bank’s policy of reducing the money supply (increase in the reserve rate) is not expected to help reduce hyperinflation sustainably, as it does not address the economy’s key imbalances. Household consumption will be increasingly dependent on remittances from expatriates (estimated at 8 million by the UN in 2020). These foreign exchange flows were estimated at USD 3.7 billion in 2019, exceeding revenues from non-oil exports. However, tougher residency restrictions for Venezuelan migrants in the region could affect these flows. Investment is expected to continue to contract, as companies have very limited access to international financing and the central bank’s restrictive monetary measures are curtailing access to credit. From an international perspective, US sanctions deter foreign investors from investing in the country. The opposition-dominated National Assembly has drafted a bill to make the country more attractive to such investments by allowing foreign companies to hold a majority share in joint-ventures with the state-owned oil company PDVSA. However, this bill has very little chance of being implemented, with Nicolas Maduro’s government looking set to hold onto power thanks to a powerful patronage system. Public investment, meanwhile, is stymied by the inability to renegotiate public debt without a political transition, owing to US sanctions. In the absence of investment, PDVSA’s production capacity is expected to continue to decline, reaching 687 thousand barrels per day in October 2019 down from 2.4 million barrels in 2013. Non-oil production will continue to be severely affected by inadequate energy supply and import restrictions imposed by the government.

 

External and current accounts on the brink of collapse

The collapse of oil production, coupled with US sanctions that prevent delivery of a portion of the output, has significantly reduced the oil rents used to fuel public spending. In arrears of principal payments on its sovereign and quasi-sovereign (PDVSA) bonds since November 2, 2017 to private creditors, and since December 14, 2017 to the Inter-American Development Bank (IDB), the Maduro government announced in September 2019 that it wished to reopen negotiations with creditors to restructure the debt. However, American sanctions make Juan Guaidó the only possible talking partner. The latter has obtained measures from the US Treasury to provide creditor protection for the assets of Citgo, PDVSA’s US subsidiary, which serve as collateral for PDVSA 2020 bonds. One of the only financing mechanisms for the Maduro government therefore seems to be “loans for oil” deals with China and Russia.

 

The current account surplus should decrease with the fall in oil sales, which have been made very difficult since US sanctions were stepped up in early 2019. Non-oil exports are expected to continue to decline. However, the contraction of imports in the face of falling demand means that the trade balance remains in surplus. This surplus, coupled with expatriate remittances, compensates for the services deficit due to the weak tourism sector and the cost of oil engineering services. The small current account surplus and low capital flows will not be enough to make debt repayments, while reserves are already severely depleted. Despite the sharp depreciation of the bolivar, there is still a significant gap between the official exchange rate and the parallel rate.

 

With two presidents, Venezuela faces ever greater uncertainty

With Nicolas Maduro and the Partido Socialista Unido de Venezuela controlling the army and most institutions, the National Assembly, which is dominated by opposition forces, declared Juan Guaidó interim President of the country in January 2019. Mr Guaidó, who is recognised by some 50 countries internationally, organised an unsuccessful coup attempt on April 30, 2019 that was unable to break the army’s loyalty to Maduro. This failure left the country with two presidents and greatly reduced Guaidó’s popularity rating, a decline exacerbated by divisions between the members of different opposition parties. Negotiations between the government and a minority group of opposition parties have resulted in the return of 38 PSUV deputies to the National Assembly, but a real way out of the crisis remains highly unlikely. The same divisions are at work internationally. Maduro is seeking the backing of Russia and China, while support from neighbours is waning with new elections in the region. Guaidó, meanwhile, enjoys the full support of the United States and its allies.

 

 

Last update: February 2020

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