Fri | Dec 9, 2016

OPEC fallout - Venezuelan woes deepen as oil price slides

Published:Wednesday | December 3, 2014 | 12:00 AM
President of Venezuela, Nicolás Maduro. - File

By Andres Schipani in Caracas

The slide in oil prices has hit Elena Gonzalez personally. The pensioner says she has lost 10kg due to shortages and "queueing, queueing, queueing" at Venezuela's state-run supermarkets.

"It is not only food, but also medicines," she says as she waits in line outside a store in Caracas, the capital. "Now with low oil prices, I am braced for what else lies ahead."

Lines of frustrated shoppers have replaced socialist rallies and posters of Hugo Chávez as among the most ubiquitous images of the South American nation. Analysts believe the situation will worsen after OPEC last week resisted Venezuela's campaign for a cut in output to boost the price of oil, which accounts for 96 per cent of Venezuelan export revenues.

The OPEC member loses about US$700m for every dollar drop in the oil price - the 30 per cent drop in crude prices since the summer means total imports will plunge this year to about US$43bn compared with US$77bn two years ago, estimates Ecoanalitica, a local consultancy. That will exacerbate shortages in an economy already ravaged by inflation, and which is forecast to shrink 3 per cent this year.

"The fall in the oil price came at the worst moment in the history of Chavismo," says Luis Vicente Leon, a respected analyst in Caracas, referring to the governing ideology put in place by Chávez, the former leader who died last year.

Nicolás Maduro, who replaced Chávez as president, has put a brave face on the oil price slide. "I do not take this blow from the drop in oil prices badly," he said during a televised address on Friday. "I take it as an opportunity to end superfluous luxuries and unnecessary spending," he added as he ordered a reduction in government spending and in his own pay, although not, he stressed, in social programmes.

Cutting those would further erode Mr Maduro's support base ahead of congressional elections next year, analysts say. The president's approval rating is at 25 per cent, down from 55 per cent more than a year ago. Mr Maduro has gone as far as to introduce fingerprint scanners at supermarkets to stop Venezuelans from stocking up on too many cheap items, and dispatched 27,000 government inspectors to check shop prices are fair and stop hoarding.

He has also ordered Christmas giveaways of cut-price consumer goods, such as Barbie dolls, following the success of a similar strategy last year. A wave of forced price reductions of electrical goods boosted the governing Socialist party's standing in 2013 municipal elections, although whether the strategy will work again is unclear.

"People have lost patience; violence could flare with a single spark," says a senior manager at one of Caracas's state-run food stores, who asked to remain anonymous.

Protests this year - when oil prices were above US$100 a barrel compared with below US$70 a barrel yesterday - left dozens dead. "Under a scenario of flat or further declining oil prices, Venezuela will face increased risks of government instability, protests and riots," says Diego Moya-Ocampos, a Latin America analyst with IHS, a risk consultancy.

The financial markets are also concerned. The yield on Venezuela's benchmark 2027 dollar bond rose to 19.5 per cent.

Caracas has insisted it will not default. It has also sought to bring greater transparency to state finances ahead of an investor roadshow reportedly planned for this month. This week, as part of attempts to find extra funds, it also dispatched Rodolfo Marco Torres, finance minister, to China, a country that has lent Venezuela US$50bn since 2006.

"[The] authorities are buying time . . . but not addressing any of the distortions . . . [in] economic policy," Barclays, the UK bank, said in a note to investors.

While analysts noted Mr Maduro's weak political standing might constrain his ability to change economic policies, such as a multiple exchange rate regime, Caracas-based polling firm Datanalisis put forward a five-point reform plan to correct the country's finances.

This involves cutting state spending; curtailing shipments of subsidised oil to allies such as Cuba; devaluing the currency to boost the value of dollar-denominated oil receipts; increasing heavily subsidised domestic gas prices; and selling foreign assets such as Citgo, Venezuela's US refining operation.

Although such measures could prove politically unpopular, analysts say the current system is untenable. Printing money to finance a budget deficit estimated at 20 per cent of gross domestic product has fuelled 63 per cent inflation. With Ecoanalitica forecasting inflation to hit 110 per cent next year, resentment is likely to increase.

"We are beggars of food, beggars of basic products, beggars of medicines, beggars of diapers for our children - right now we are beggars of everything," says civil servant Angela Torres, lining up to buy a subsidised Chinese fridge. "Inflation eats us up; we have hit rock bottom. We cannot get any worse."

Additional reporting by John Paul Rathbone in London

(c) The Financial Times Limited 2014