Venezuela: Maduro Facing Mounting Economic And Political Challenges
Since his election earlier this year, Venezuelan President Nicolás Maduro has largely maintained the socialist policies of his predecessor, the late Hugo Chávez, in line with our expectations. However, there are some notable differences under the new administration, including a tacit admission of the need for economic reforms, and – less positively – rising potential for discord between the president and leading members of the ruling PSUV party and the army. We maintain our view of heightened political risk as a result of ongoing economic turmoil, combined with Maduro's inexperience in the top office.
Meanwhile, the economy has yet to respond positively to the changes, which we believe do not go nearly far enough.
- The most recent inflation figure was 45.4% y-o-y, which is higher than it was at any time during Chávez's presidency, which began in February 1999.
- We estimate that the official exchange rate for the bolivar currency is overvalued by a ratio of 7 to 1, following its swift depreciation on the black market.
- Foreign exchange reserves have fallen below US$22bn for the first time since 2004.
- Shortages are worsening for many basic goods, including beef, cooking oil, and toilet paper.
Consequently, the Maduro administration has begun to re-assess its strategy. We believe the appointments of Nelson Merentes as finance minister earlier this year and of Eudomar Tovar as president of the central bank are pragmatic choices meant to help restore credibility in Venezuela's macroeconomic governance and to turn the country around.
While these are steps in the right direction, they do not go nearly far enough to turn the tide, and we expect the economy to continue suffering. The principal themes of 'Chavismo', including high levels of social spending and extensive state intervention, remain in play. Maduro has the unenviable task of pursuing economic reforms, while simultaneously protecting himself politically from the hardliners within his PSUV party. The principal rift lies between Maduro and his supporters on the one hand, and President of the National Assembly Diosdado Cabello (a former member of the armed forces) and the more militant wing of the PSUV on the other. As the outlook for the economy continues to worsen (which we believe it will), and PSUV dominance is threatened, Maduro is increasingly likely to be portrayed as a weak leader, unfit to carry on the legacy of Chávez.
That said, although many of the ingredients for a political shake-up in the Venezuelan leadership are already present, our core scenario is for the status quo to be preserved for as long as possible. Cabello is a PSUV loyalist who we believe would be loathe to see the party's reputation seriously damaged, which would almost certainly occur if a major rift in its leadership were to emerge. At a time when the opposition coalition Mesa de la Unidad Democrática is making inroads with the electorate, Cabello and like-minded hardliners have probably calculated that the best course of action is to avoid rocking the boat. However, as it becomes increasingly apparent that the current trajectory is unsustainable, both for the economy and for the party, we expect political risk to rise.