Populism Reigns amid Rising Tensions

Domestic tensions have been smoldering since Nicolás Maduro’s heavily disputed victory in a special presidential election held in April 2013, which was necessitated by the death of the country’s long-time leader, Hugo Chávez.  In the year since, economic instability, crime, and corruption have fueled widespread frustration with Maduro’s regime, and the escalating intensity of street-level protests has been accompanied by open discussion of la salida (the exit), as opposition leaders plot a strategy to force Maduro from power.  In addition to his questionable mandate and a sinking approval rating, Maduro lacks both the unquestioned authority among his political allies and the fierce loyalty of Venezuela’s urban poor that enabled Chávez to beat back challenges to his claim to power.  Even so, the risk that Maduro might be forced to step down before the end of his term is fairly low.  For now, at least, his political advantages greatly outweigh his liabilities.  The opposition coalition fractured in the wake of its second presidential election defeat in the space of just six months, and disagreements on several issues, including the reliance on tactics that create a high risk of reprisals by the government, pose an obstacle to concerted action by the militant and moderate wings of the opposition MUD.  Even more important, military leaders have given no indication that they believe it is time for Maduro to go.  Likewise, the governing PSUV, which controls a comfortable majority in the national legislature, has for the most part rallied behind the president.  As long as he continues to enjoy the backing of both the generals and the legislature, the president will also control the income generated by PDVSA, the state-owned oil company, which he will undoubtedly use to ensure that poor Venezuelans, who have from the beginning formed the hard core of support for the leftist program initiated by Chávez and inherited by Maduro, do not defect to the opposition.  That said, Maduro has been damaged politically, and with a battered economy likely to fuel widespread public anger for the foreseeable future, it is probable the unrest will persist.  Under the circumstances, there is little chance that the president might make the inevitably unpopular policy moves required to shore up the economic foundation.

A Hostile Climate for Private Businesses

The deteriorating state of the economy highlights the urgent need for increased investment, especially in the all-important oil sector.  In the later stages of his presidency, Chávez courted foreign firms to assist state-owned PDVSA in developing the massive Orinoco reserves, but foreign investors adopted a wait-and-see attitude following Chavez’s death, and the Maduro administration has done little to convince them to proceed.  The easing of restrictions on foreign participation in Mexico’s energy sector and planned changes to foreign investment rules in Cuba will create competition for FDI, and Venezuela has little chance of coming out on top unless the Maduro administration takes steps to undo many of the changes made under Chávez, particularly with regard to the tax and ownership structures of the sector, and convince investors that it is prepared to honor its contractual obligations and abide by the norms of international dispute resolution.  To date, the government has given no evidence that it is prepared to do so.  In fact, Maduro has responded to spreading discontent by adopting some of his mentor’s most questionable tactics, including the use of the military to intimidate retailers into cutting their prices and the approval of large wage increases that have driven up labor costs and impeded efforts to contain inflation, which is forecast to remain close to 50% on average in 2014.  With out-of-control inflation eroding household spending power, and political instability reinforcing the dampening effect of an inhospitable business climate on private investment, there is a high probability that the economy will contract in 2014.  Inadequate levels of investment will limit the potential for sustaining even moderate rates of growth over the medium term.  Barring a collapse of oil prices, positive real GDP growth is forecast over the extended forecast period, but the structural weaknesses of the economy will hold real GDP growth to just 2% per year on average through 2019.

 Forecast Summary

SUMMARY OF 18-MONTH FORECAST

 REGIMES & PROBABILITIES Maduro
55%
Divided Government 35% Military-Civilian 10%
RISK FACTORS CURRENT
Turmoil High Same Same MUCH MORE
Investment
  Equity High SLIGHTLY MORE Same Same
  Operations Very High SLIGHTLY MORE Same MORE
  Taxation High SLIGHTLY MORE SLIGHTLY LESS Same
  Repatriation High Same Same MORE
  Exchange High SLIGHTLY MORE Same SLIGHTLY MORE
Trade
  Tariffs Moderate MORE SLIGHTLY MORE SLIGHTLY MORE
  Other Barriers High Same SLIGHTLY LESS SLIGHTLY MORE
  Payment Delays Very High Same SLIGHTLY LESS SLIGHTLY MORE
Economic Policy
  Expansion High SLIGHTLY MORE Same Same
  Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Foreign Debt High Same SLIGHTLY MORE MORE

SUMMARY OF FIVE-YEAR FORECAST

 REGIMES & PROBABILITIES Maduro
45%
Divided Government 35% Military-Civilian 20%
RISK FACTORS BASE
Turmoil Moderate SLIGHTLY MORE SLIGHTLY MORE MORE
Restrictions
   Investment High SLIGHTLY MORE Same SLIGHTLY MORE
   Trade High Same Same SLIGHTLY MORE
Economic Problems
   Domestic High Same SLIGHTLY MORE MORE
   International High SLIGHTLY MORE SLIGHTLY MORE MORE
   * When present, indicates forecast of a new regime

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