Economic Analysis
Venezuela

Venezuela

Population 28.0 million
GDP per capita 1,691 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) -35.0 -30.0 -1.0 4.0
Inflation (yearly average, %) 19,906.0 2,355.0 2,700.0 2,000.0
Budget balance (% GDP) -10.0 -5.0 -4.0 -3.5
Current account balance (% GDP) 7.8 -4.3 0.3 1.0
Public debt (% GDP)* 232.9 304.0 315.0 310.0

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

STRENGTHS

  • Major oil reserves along the Orinoco River and offshore gas potential

WEAKNESSES

  • In default on its sovereign and quasi-sovereign (PDVSA) debt, payment delays in everyday business
  • Economy heavily dependent on hydrocarbons, loans from China and Russia, and Iranian aid
  • Non-transparent and discretionary management of oil revenues
  • Hyperinflation
  • Shortage of foreign currency and goods (basic foodstuffs, medicines)
  • Serious political insecurity
  • Crime (homicides), corruption, trafficking of all kinds, black market
  • Under U.S. sanctions: oil trade blockade, financial sanctions

RISK ASSESSMENT

The end of a multi-year crisis, but the situation remains critical

In 2022, the Venezuelan economy should finally stop shrinking, after eight years of decline. At the end of 2021, GDP will be only 24% of its pre-crisis level in 2013. This return to growth will be mainly due to the recovery of oil GDP, driven by higher oil prices and the agreement signed in October 2021 with Iran, which should enable the country's oil production to increase. This agreement between the Venezuelan company PDVSA and its Iranian counterpart NIOC provides for the exchange of Venezuelan heavy crude oil for Iranian light condensate. These deliveries of light condensate for a renewable period of six months should allow PDVSA to dilute its heavy oil from the main Orinoco extraction area and reduce the country's diesel shortage. Exports should also benefit following initial results in late 2021. Non-oil GDP recovery is expected to be slower, as years of underinvestment and shortages have destroyed the productive apparatus and encouraged a brain drain. Growth in the host countries of Venezuelan expatriates (Colombia, Spain, the United States) should increase remittance flows and support some recovery in household consumption, while restrictions on internal mobility have ended, provided there is no rebound in the epidemic (53% of the population vaccinated according to official figures in October 2021). These transfers are the main source of income for a large number of households, with 95% of the population below the poverty line in 2021 according to the recent Encovi study carried out by the country's leading universities. The constraints on households are, however, expected to remain severe, as successive increases in the full minimum wage (salary & vouchers) have failed to keep pace with three-digit price growth. The increasing dollarization of the economy, through the payment of some wages by companies in foreign currencies to limit the brain drain abroad, coupled with remittances, should partly limit the impact of this inflation on households, but will not be sufficient. A currency redenomination was introduced in October 2021, the third since the beginning of the crisis, with sovereign bolivars being converted to digital bolivars at a rate of one million to one. The move is not expected to make up for the lack of structural reform and monetisation of the public deficit to reduce inflation. Public consumption will remain largely constrained by the lack of financing, while investment will remain sluggish in the face of continuing U.S. sanctions and a poor business environment. From the point of view of external demand, the recovery of the country's partners (mainly Russia and China) should support crude oil exports.

 

Massive public debt and a slightly positive current account

Tax revenues are heavily dependent on oil and are expected to increase, while expenditure linked to the fight against the pandemic should decrease. The public deficit should therefore be slightly lower in 2022. The budget, described as "realistic" by the government, includes spending on health, education, transport and reducing red tape. This deficit will be largely financed by printing money, as the country lost all access to international financing following the 2017 suspension of interest and principal payments on 2019 and 2024 bonds. There is still uncertainty about the negotiations on the debt held by China, after a first moratorium was obtained in 2020.

 
The current account is expected to get back in the green thanks to strong expatriate remittance flows. The goods deficit should remain stable, as higher oil prices support exports but also push up the import bill, since the country has become a net importer of petrol and diesel. The slow recovery of household consumption should also support imports, which will however remain constrained by the lack of foreign currency. In the absence of foreign direct investment, foreign exchange reserves are expected to remain under pressure. These reserves reached their lowest level ever in July 2021, down 72% from where they were in December 2014, exhausted by central bank interventions to limit the depreciation of various versions of the currency.

 

Periodic negotiations are expected to bring little change 

While the international community has recognised Juan Guaido, former president of the National Assembly, as the legitimate head of government since 2019, Nicolas Maduroseems disinclined to relinquish power. The opposition agreed to participate in local elections in November 2021 after boycotting the legislative elections in late 2020. The strong local presence of Maduro's PSUV, the massive repression of recent years and widespread disillusionment allowed the ruling party to secure victory, despite the defeat in the stronghold of the Chavez family.. Negotiations between the two parties led to the signing of two low-stakes agreements in September 2021 on the territorial dispute with Guyana and the establishment of a working group to provide humanitarian services. The deportation to the U.S. by Cabo Verde of Alex Saab, a Colombian businessman and Maduro ally, to face corruption charges, caused these negotiations to be put on hold. Five U.S. citizens, executives of PDVSA's U.S. subsidiary Citgo Petroleum, were arrested to serve as bargaining chips. However, it is unlikely that this strategy will work on the Biden administration, which is awaiting democratic progress in the country. 

 

Last updated: February 2022

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