Home Politics Hugo Chavez Gone But Inflation Not Leaving Venezuela Soon

Hugo Chavez Gone But Inflation Not Leaving Venezuela Soon

Hugo Chavez Gone But Inflation Not Leaving Venezuela Soon

Hugo Chavez died on March 5th following a long battle with cancer. The death of Hugo Chavez was expected but what happens next in the country’s political transition is less clear. Based on a ruling from Venezuela’s Supreme Court, our expectation is that Vice-president Nicolas Maduro, a self-declared socialist and Hugo Chavez’s anointed successor, looks to take the role of acting president until new elections, which could be called as early as April.

Many experts expect Hugo Chavez’s ruling PSUV to win re-election in new polls, given their strong performance in last year’s elections plus an expected sympathy factor against a weak and divided opposition. As a major energy producer with ties to both Iran and Cuba as well as a history of tensions with Washington, political stability in Venezuela has geopolitical implications beyond the country’s borders.

Economic Reform

After managing the initial political transition, likely helped by a sympathetic judiciary, the ability of the PSUV party apparatus to maintain continuity and to manage the country’s complex economy becomes more questionable. Hugo Chavez’s highly personalized leadership style resulted in a small inner circle, with most decisions taken by Hugo Chavez personally.

Besides lacking Hugo Chavez’s strong public support, internal tensions created the need for more revenue for PSUV programs even in the face of lower oil prices. More radical action by the leadership to consolidate control, intervention by the country’s military or other outcomes with negative implications for political stability cannot be excluded in the months and years ahead.

Economic Challenges

Economic pressures on Hugo Chavez’s expensive “Bolivarian socialist” model are mounting. Initially Hugo Chavez’s successors will likely aim to reassure continuity, especially funding for generous social programs. In the near-term, they could move to implement potential near-term populist sweeteners such as a rise in the minimum wage. But such measures should do little to address the country’s economic challenges.

Intra-Party Tension

Amid rising inflation, shortages of basic goods, a mounting debt burden and minus the oil price spike that funded Hugo Chavez’s programs, the ability to maintain this funding is questionable. This could prompt more radical actions from the leadership in an effort to burnish its “revolutionary” credentials and maintain support.

It is questionable that Hugo Chavez’s inner circle, who were blocked from most key decision-taking, should be able to manage the country’s highly complex economy smoothly for an extended period. The risk of internal divisions within the PSUV is also significant.

Declining Appeal Before Death

The death of Hugo Chavez follows a period of the declining appeal of his Bolivarian Socialist model, during which time the Brazilian model of a moderate pro-business left-wing government under Lula da Silva gained more traction on the continent. In years to come, the declining feasibility of this model could open up space for political alternatives. The risk is that the country deteriorates, and political change does not happen in an orderly fashion, but rather sparks a violent confrontation, as happened in 2002 during a failed right-wing coup attempt.

Oil Policy

Venezuela’s Energy Minister Rafael Ramirez has come out and said that oil policy would not change post- Hugo Chavez: “One of the President’s successes was formulation of the oil sovereignty plan. The oil industry has shown its loyalty to President Hugo Chavez, and this won’t change.”

But given the continued downward trend in oil production, the country’s heavy reliance on PDVSA’s oil revenues to finance ballooning social spending, leaving continued underinvestment to bolster these oil revenues going forward, there is a spiral of bloating public debt that means oil policy, government programs and aid to Cuba need to be reassessed. Without the charisma and popularity of Hugo Chavez, Venezuela’s future leaders may not be let off so lightly on corruption and economic mismanagement of the country by the populous.

Oil Reserves

Venezuela has, at least on paper, the largest proven oil reserves in the world, but has struggled to realize its potential. Nevertheless, it is the fourth-largest exporter in OPEC at around 1.5-m b/d, down some 50% from around 3-m b/d when Hugo Chavez took power in 1998.

Citigroup’s Take

“Good Economic News Coming”

Nicolás Maduro said yesterday that there is going to be good economic news this year. Analysts at Citigroup think that the most likely announcement will be the increase in the minimum wage. They note that a hike in minimum wage would help boost Mr. Maduro’s popularity.

Inflation Could Increase

The national inflation index stood at 1.6% MoM in February. The total yearly increase was of 22.8%. On the other hand, the scarcity index stood at 19.7 during the second month of the year. citi expects inflation to display an important deterioration during the year, taking headline inflation up to 25% by year-end.