Stratfor Vice President of Global Analysis Reva Bhalla and Latin America Analyst Reggie Thompson discuss the severe challenges facing Venezuela’s government as it tries to manage the steep drop in oil revenue.
Video Transcript
Reva Bhalla: Hello my name is Reva Bhalla and today I’m joined by Reggie Thompson, Stratfor’s Latin America analyst, to discuss what is likely to be a very volatile year in Venezuela. So Reggie, obviously everyone knows right oil prices have been slashed by more than half. Venezuela was already having a difficult time funding its imports. Shortages have only grown worse. Give us a sense of just how bad things have gotten over the course of the last six months or so and the trajectory we’re seeing in the year ahead for the economic situation?
Reggie Thompson: So right now what we’re seeing are the affects of the long-term economic policies followed by Chavez and Maduro during the past 15 or so years. So Venezuela has traditionally underpinned its public support, the support it gets from its voters, by high levels of public spending from the oil revenue it receives. And right now we had been seeing for several years declining oil production, right now production is hovering around 2 billion to 2.2 billion barrels per day, and so the reduced income from this over the last decade has caused a cash flow crisis in Venezuela’s public finances. In other words, the inflow of dollars has reduced, the expenses keep going up, and so what we’ve been seeing lately with the past four months with the decline in oil prices, Venezuela is in a serious crisis where it can no longer optimally fund domestic obligations, domestic spending obligations that are funded by this kind of oil income. And so what Venezuela has relied on for quite a while to balance its budget is basically printing more bolivars and so in the long term what we’ve seen this cause is lots of inflation. We’ve also had long-term crises of food scarcities and rising food prices and these have only been exacerbated with the decline in oil prices. So the immediate consequences right now of this are that there is not necessarily enough food. It’s not a matter of there not being enough food in the country, a lot has been smuggled out toward Colombia for example, some has been hoarded to sell for higher prices on the black market, but Venezuela cannot optimally fund imports. So in other words all of these inefficiencies building up over the years have finally caused this crisis that we’ve been seeing being exacerbated in the past few months.
Reva: And when it comes to inflation, just looking at food prices, is it right that Venezuelans are now looking at over the past few weeks, you know, 100 percent increase in just the average price of food?
Reggie: Yes. The issue in Venezuela right now is that the government has not released inflation figures promptly. We’ve seen indications that such figures may not necessarily be in line with the real figures with the actual pace of inflation in the country. According to unofficial figures, food prices overall — the average price of the food basket as compiled by unofficial organizations and think tanks — may have as much as doubled in the past year. So this is a strain on Venezuelan consumers and obviously translates into a loss of political support for President Nicolas Maduro. What remains to be seen now is what the effect of this will be on his ability to manage the country.
Reva: So Maduro has, he’s watching this situation at home, and he knows that social unrest, the likelihood of that is extremely high this year. So he’s been on this global tour. So Russia twice he went to, China, of course Saudi Arabia, Iran, Qatar, Algeria, maybe Mexico in the coming days before he makes his state of the union address. So in this giant tour, is there any sense that Maduro is getting the financial assistance that he is so desperately seeking?
Reggie: That’s the thing. Right now, what Maduro is really looking for is a fast infusion of cash to offset these low oil prices. Without it, he’s got no other option other than to just hope to ride out this crisis and make spending cuts wherever possible and take potentially unpopular economic decisions like devaluation, raising gasoline prices and some other foreign policy decisions such as cutting off oil shipments through the existing energy agreements like Petrocaribe or to Cuba. And so right now he’s under pressure to maximize all the dollar inflow he can get from oil, but in lieu of that, he needs loans. Maduro is in the preliminary stages of negotiating some sort of financing agreement from Qatar, but Qatar has not ultimately decided on what it will provide or how much it will provide.
Reva: OK. So as we’re looking at the situation then on the streets in Venezuela, obviously Venezuelans have built up a very high tolerance for economic pain and those lines are getting longer and longer just to get basic goods from the stores. Now when we look at the opposition in Venezuela, long has been fragmented, which has worked to the regime’s favor. But you know when we look at players like [Henrique] Capriles [Radonski], for example, trying to band these different opposition elements together. What do you think his biggest challenge is? What does his timing look like and what is he trying to now strategize and capitalizing on this discontent on the street?
Reggie: The biggest challenge right now for Capriles is galvanizing enough opposition voters behind him in order to make a difference in the coming year in the legislative elections. So the opposition is definitely pushing toward an electoral victory. There is dissatisfaction with how Maduro has handled the crisis among the population. Obviously the ongoing inflation, the price increases, the scarcity of food, this has definitely impacted Maduro’s popularity.
Reva: So we‘ll have to watch whether Capriles can actually band the opposition together and pose a formidable resistance. But even within the government, what’s interesting, the irony I guess is that this is not a classic power struggle in the sense that nobody wants Maduro’s job. If you’re in the military, if you’re anyone within the regime that came up through the ranks with Chavez as a loyalist. You know Chavez is no longer there. Loyalty is now more of a question obviously, but there are a lot of vested economic interests within the regime that many of those members want to protect. And so even if we have a crisis that replaces Maduro, a personnel change doesn’t necessarily alter the situation cart blanche. I mean, you still see a huge economic crisis underway for any player, whether it’s an opposition member or someone within the regime that takes over. But Reggie, thank you for your input today. We’re certainly going to be watching Venezuela closely in the coming weeks and months. Thank you all for joining us, we’ll see you again next time.
“Conversation: Venezuela’s Volatile Year Ahead“ is republished with permission of Stratfor.
Venezuela’s Volatile Year Ahead
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Video Transcript
Reva Bhalla: Hello my name is Reva Bhalla and today I’m joined by Reggie Thompson, Stratfor’s Latin America analyst, to discuss what is likely to be a very volatile year in Venezuela. So Reggie, obviously everyone knows right oil prices have been slashed by more than half. Venezuela was already having a difficult time funding its imports. Shortages have only grown worse. Give us a sense of just how bad things have gotten over the course of the last six months or so and the trajectory we’re seeing in the year ahead for the economic situation?
Reggie Thompson: So right now what we’re seeing are the affects of the long-term economic policies followed by Chavez and Maduro during the past 15 or so years. So Venezuela has traditionally underpinned its public support, the support it gets from its voters, by high levels of public spending from the oil revenue it receives. And right now we had been seeing for several years declining oil production, right now production is hovering around 2 billion to 2.2 billion barrels per day, and so the reduced income from this over the last decade has caused a cash flow crisis in Venezuela’s public finances. In other words, the inflow of dollars has reduced, the expenses keep going up, and so what we’ve been seeing lately with the past four months with the decline in oil prices, Venezuela is in a serious crisis where it can no longer optimally fund domestic obligations, domestic spending obligations that are funded by this kind of oil income. And so what Venezuela has relied on for quite a while to balance its budget is basically printing more bolivars and so in the long term what we’ve seen this cause is lots of inflation. We’ve also had long-term crises of food scarcities and rising food prices and these have only been exacerbated with the decline in oil prices. So the immediate consequences right now of this are that there is not necessarily enough food. It’s not a matter of there not being enough food in the country, a lot has been smuggled out toward Colombia for example, some has been hoarded to sell for higher prices on the black market, but Venezuela cannot optimally fund imports. So in other words all of these inefficiencies building up over the years have finally caused this crisis that we’ve been seeing being exacerbated in the past few months.
Reva: And when it comes to inflation, just looking at food prices, is it right that Venezuelans are now looking at over the past few weeks, you know, 100 percent increase in just the average price of food?
Reggie: Yes. The issue in Venezuela right now is that the government has not released inflation figures promptly. We’ve seen indications that such figures may not necessarily be in line with the real figures with the actual pace of inflation in the country. According to unofficial figures, food prices overall — the average price of the food basket as compiled by unofficial organizations and think tanks — may have as much as doubled in the past year. So this is a strain on Venezuelan consumers and obviously translates into a loss of political support for President Nicolas Maduro. What remains to be seen now is what the effect of this will be on his ability to manage the country.
Reva: So Maduro has, he’s watching this situation at home, and he knows that social unrest, the likelihood of that is extremely high this year. So he’s been on this global tour. So Russia twice he went to, China, of course Saudi Arabia, Iran, Qatar, Algeria, maybe Mexico in the coming days before he makes his state of the union address. So in this giant tour, is there any sense that Maduro is getting the financial assistance that he is so desperately seeking?
Reggie: That’s the thing. Right now, what Maduro is really looking for is a fast infusion of cash to offset these low oil prices. Without it, he’s got no other option other than to just hope to ride out this crisis and make spending cuts wherever possible and take potentially unpopular economic decisions like devaluation, raising gasoline prices and some other foreign policy decisions such as cutting off oil shipments through the existing energy agreements like Petrocaribe or to Cuba. And so right now he’s under pressure to maximize all the dollar inflow he can get from oil, but in lieu of that, he needs loans. Maduro is in the preliminary stages of negotiating some sort of financing agreement from Qatar, but Qatar has not ultimately decided on what it will provide or how much it will provide.
Reva: OK. So as we’re looking at the situation then on the streets in Venezuela, obviously Venezuelans have built up a very high tolerance for economic pain and those lines are getting longer and longer just to get basic goods from the stores. Now when we look at the opposition in Venezuela, long has been fragmented, which has worked to the regime’s favor. But you know when we look at players like [Henrique] Capriles [Radonski], for example, trying to band these different opposition elements together. What do you think his biggest challenge is? What does his timing look like and what is he trying to now strategize and capitalizing on this discontent on the street?
Reggie: The biggest challenge right now for Capriles is galvanizing enough opposition voters behind him in order to make a difference in the coming year in the legislative elections. So the opposition is definitely pushing toward an electoral victory. There is dissatisfaction with how Maduro has handled the crisis among the population. Obviously the ongoing inflation, the price increases, the scarcity of food, this has definitely impacted Maduro’s popularity.
Reva: So we‘ll have to watch whether Capriles can actually band the opposition together and pose a formidable resistance. But even within the government, what’s interesting, the irony I guess is that this is not a classic power struggle in the sense that nobody wants Maduro’s job. If you’re in the military, if you’re anyone within the regime that came up through the ranks with Chavez as a loyalist. You know Chavez is no longer there. Loyalty is now more of a question obviously, but there are a lot of vested economic interests within the regime that many of those members want to protect. And so even if we have a crisis that replaces Maduro, a personnel change doesn’t necessarily alter the situation cart blanche. I mean, you still see a huge economic crisis underway for any player, whether it’s an opposition member or someone within the regime that takes over. But Reggie, thank you for your input today. We’re certainly going to be watching Venezuela closely in the coming weeks and months. Thank you all for joining us, we’ll see you again next time.
“Conversation: Venezuela’s Volatile Year Ahead“ is republished with permission of Stratfor.
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