Wed | Oct 16, 2019

Venezuela: A spinning vortex

Published:Friday | September 12, 2014 | 12:00 AM
President of Venezuela, Nicolás Maduro.-File


Despite the laconic rainy season, when most people decamp for the coast or nearby islands, the situation in Caracas has witnessed a marked deterioration.

A sense of desperation is seeping in across the board as the economy slowly spins out of control. The excitement and optimism that buoyed the market during the first half of the year has been replaced by a realisation that Venezuela may be headed for disaster.

Former PDVSA chief and vice president for economic affairs, Rafael Ramirez's vow to unify the exchange rate regimes in order to stabilise the economy turned into empty promises, and now he is gone.

There are rumours that the military brass is making untold sums of money from the use of CENCOEX, the former CADIVI exchange rate, and they do not want to give it up. Many military officers are now billionaires, with private jets and mansions abroad.

As a result of these and other distortions, the country's international reserves are dwindling below the US$20-billion mark. This is perilously low for a country that still faces US$4.5 billion in foreign debt amortisations and another US$1.8 billion in interest payments before the end of the year.

The level of international reserves includes the gold stock, which was recently relocated to Caracas. No one knows for sure if any has been pilfered. Moreover, PDVSA was said to have had significant exposure to the failed Banco Espiritu Santo in Portugal.

Last of all, international oil prices continue to decline, partly due to the economic slowdown in China and rumoured dumping by the Russians.

selling of citgo

It is little surprise that the country is being driven to such desperate means as the selling of Citgo, the large refining and distribution complex. Citgo was a key element of PDVSA's energy strategy, ensuring a ready buyer for its crude oil. In the medium run, this could imply lower prices for Venezuelan oil as it competes against other heavy crude producers.

The fact that the sale is being led by an institution, more known for sovereign debt restructurings than for its energy-related transactions, raised more than one eyebrow. No wonder, the parallel exchange rate has soared above 80 and Venezuelans are itching to move abroad. In other words, the country has become a spinning vortex.

Not known for its creativity in manipulating macroeconomic indicators, as is prevalent in China and Argentina, the authorities are resorting to delay tactics.

There is a good chance that the economy will contract two to three per cent y/y in 2014. Inflation has passed the 60 per cent mark, and it shows no signs of levelling off. As a result, labour unions are protesting for higher wages. There are so many shortages that the government recently introduced digital fingerprint scanners to keep better tabs on rationed goods.

deep sense of discontent

The deep sense of discontent is spilling into the political front. Maduro's approval rating is now in the 32-33 per cent range, and dropping. However, the opposition has fragmented, and it is in no position to capitalise on the government's woes.

The opposition to the Chávez movement has always been strong. However, it has also been badly divided.

President Chávez always exploited this division as a way to ensure his tenure. In 2002, after being ousted in a military coup, he was able to return to power when infighting broke out among the ringleaders.

In order to present a unified front, the various groups coalesced into a single institution, the Table for a Unified Democracy (MUD), in 2008. Ramón Aveledo was selected secretary general.

The coalition consisted of 30 parties of varying sizes and ideologies, but there were two main factions. The first faction consisted of hardliners, led by Leopoldo López, who pursued an aggressive strategy of trying to force President Maduro out of office. The second faction was led by Henrique Capriles. He promoted a more gradual approach of democratic change.

Aveledo, the head of MUD, also favoured the more conciliatory approach. The two sides split earlier this year, when López led a series of violent protests that left more than 40 dead and hundreds wounded. He was arrested for inciting social unrest and is currently undergoing trail.

The fissure between the two camps hobbled the MUD coalition, and Aveledo finally resigned at the end of July.

The deterioration of the economy and the implosion of the opposition party undermined the market's hope for a happy outcome in Venezuela. Now, the country is caught up in a whirlpool that is pulling it closer to the point of no return.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities