Image caption: Oil has long been a mainstay of Venezuela’s economy. Article information Author: Robert Plummer Role: BBC News
58 minutes ago
Venezuela’s battered economy is one of the key battlegrounds in Sunday’s presidential election, with President Nicolas Maduro hoping to convince voters that the country has turned around after years of conflict.
Recent efforts to lower the cost of living have brightened the outlook somewhat: In February, Venezuela finally said goodbye to runaway hyperinflation that saw annual price growth reach more than 400,000% in 2019.
Currently, annual inflation rates are more manageable but still remain high at around 50%.
President Maduro is keen to take credit for the downfall, saying it is proof of his “right policies”.
Unfortunately, these policies have done little or nothing to address the underlying structural problems in the economy, primarily a historic dependency on oil that has harmed other sectors.
“Since oil was discovered in Venezuela in the 1920s, it has taken the country through exciting but dangerous booms and busts,” said the US think tank Council on Foreign Relations.
Now, Maduro’s opponents are pinning their hopes of economic recovery on a change of leadership and a fresh start under election rival Edmundo Gonzalez.
“An opposition victory would reopen Venezuela’s trade and financial ties with the rest of the world,” said Jason Tuby, deputy chief emerging markets economist at Capital Economics.
It would also mark an end to U.S. economic sanctions imposed after Maduro’s victory in a 2018 presidential election that was widely dismissed as neither free nor fair.
These circumstances have made it difficult for state oil company PDVSA to sell its crude internationally, forcing it to resort to black market trading at steep discounts.
But Tuby warned that increasing oil production would require huge investments, and with oil demand approaching a peak, reversing the economic collapse of the past decade will be a huge challenge.
“Venezuela’s economy will never go back to the way it was 15 or 20 years ago,” he told the BBC. “It will generally be starting from square one again.”
Image caption: Prices still rising in Venezuela, but hyperinflation has ended
Venezuela’s 25-year-old Bolivarian Revolution (the name given to his political movement by the late President Hugo Chavez) has promised much but has failed to deliver what the country may have needed most: a broad-based economy.
Rather than diversifying away from the oil industry, the Chavez and Maduro governments doubled down on investments in Venezuela’s mineral wealth.
With little regard for the future, they treated PDVSA like a cash cow, squeezing funds intended for social spending on housing, health care and transportation.
But at the same time, they have neglected to invest in maintaining the levels of oil production, which have plummeted in recent years, partly but not only because of U.S. sanctions.
“Under Chavez, Venezuela was able to enjoy an oil boom until the global financial crisis hit,” Tubay said.
“Fifteen or twenty years ago, Venezuela was a major oil producer, pumping 3.5 million barrels of oil a day, about the same as a small Gulf state.
“The oil sector has now been completely hollowed out, with production at less than one million barrels per day.”
GDP has fallen sharply, dropping 70% since 2013, but President Maduro has resorted to compensating for falling oil prices by printing money to cover spending, and as a result the country has only recently managed to bring inflation under control.
The economic crisis has hit Venezuela hard, forcing more than 7.7 million people – about a quarter of the population – to flee the country in search of a better life.
But for those left behind, there are signs of improvement: While the bolivar remains the official currency, unofficial dollarization is on the rise, with the U.S. dollar increasingly becoming the preferred means of payment in retail transactions — at least for those who can access it.
This stabilized the economy but came with social costs.
Image credit: Getty Images
Image caption: Karol G’s two concerts in Venezuela drew well-heeled crowds
Residents of the capital, Caracas, now find themselves trapped in a dual economy: US dollars fuel a spending boom in upscale shops and restaurants, while those who are paid in bolivars feel increasingly alienated.
One emblematic moment that highlighted these changes was Colombian reggaeton superstar Karol G’s recent appearance in Caracas as part of his world tour.
Few big-name artists perform in Venezuela these days, but she easily sold out two nights at the 50,000-seat Estadio Monumental in March, with tickets ranging from $30 to $500 (£23 to £390).
Meanwhile, about 65% of Venezuelans earn less than $100 a month, and only 8 to 9 million of the country’s 28 million people can be considered actual consumers with purchasing power, according to Ecoanalytica, a Caracas-based consultancy.
“Those who have very close ties to the regime and PDVSA have been largely unaffected by all of this,” Tuvey said.
Image caption: A handful of bolivars won’t get you as far as a handful of dollars
In addition to the need to improve living standards and reduce inequality, another major economic challenge for Venezuela is what to do about its huge foreign debt.
The country owes an estimated $150 billion to bondholders and other foreign creditors and has been in partial default since 2017, with no talks yet taking place despite repeated promises by President Maduro to restructure the debt.
The issue is complicated by the fact that some of the bonds were issued using PDVSA’s U.S. refinery, Citgo, as collateral, meaning bondholders could pursue the matter through New York courts.
Bruno Gennari, emerging markets strategist at investment bank KNG Securities, told the BBC that Venezuela was suffering a “crisis of legitimacy” because the US still does not recognise Maduro as president after the 2018 elections.
This means that whoever wins Sunday’s election must be someone acceptable to Washington for a U.S.-approved debt restructuring to take place.
Gennari doesn’t rule out the possibility that the US “could turn a blind eye” if Maduro wins the election under questionable circumstances, but he thinks that’s rather unlikely.
“These elections will have a huge impact on Venezuela’s future, and as restructuring proceeds it will mark the beginning of a very complex recovery process,” Gennari said.
Once South America’s richest country, Venezuela is now on a path to stability, but whatever happens, its days of economic glory are firmly behind it.
