Multinationals continue to face an increasingly worrying environment in Venezuela, where conditions are set to deteriorate further. Venezuela’s economic crisis is deepening, and government measures to stave off a sovereign debt default through cuts to imports are exacerbating the social and economic costs of President Maduro’s inadequate response to low oil prices and unsustainable economic policies. Venezuela confronts increasing product shortages (as imports are further curtailed), chronic power outages, and an economy that is likely to contract by over 6% this year.
The government responded to a landslide opposition victory in national assembly elections last December by leveraging its control over all other government institutions (including the country’s supreme court) to neutralize any and all attempts by the opposition to change economic policy and to end President Maduro’s term in office. President Maduro’s unpopularity has only deepened since last December, and the prospects for politically explosive and violent protests are increasing every day. Multinationals should be very mindful that the prospects for a smooth transition to a more market-friendly government are very low, and that the government is unlikely to make necessary economic changes to move the economy back on a sustainable growth path.
The government’s inadequate adjustment
President Maduro has extended the state of emergency through the end of 2016, limiting the opposition-controlled national assembly’s ability to influence economic policy. The government has pursued the following measures to contain the crisis in the last few months:
- Covert devaluation of non-preferential, official exchange rate: The government has allowed the official DICOM exchange rate to depreciate to over 400 BsF/USD. This could potentially help improve access to foreign exchange, but the government continues to undersupply the DICOM exchange rate system, and has retained the 10 BsF/USD DIPRO system, exacerbating economic distortions
- Reducing demand for electricity: The government moved clocks a half hour, closed schools on Fridays, reduced public workers’ workdays to two days, and established scheduled power cuts across the country. Even if they succeed, these will have severe deleterious effects on the Venezuelan economy
- Severe import cuts: The government is seeking to cut imports by US$17 billion in 2016, which will severely curtail food and medicine imports. The purpose is to stave off a sovereign debt default, which appeared likely by Q4 2016 (but remains likely to occur by 2017 at the latest)
- Seizure of closed factories: As more companies choose to close down local manufacturing due to FX shortages and deteriorating economic conditions, President Maduro has signaled his intent to expropriate closed factories, particularly in the food production sector
Venezuela’s further economic collapse remains the baseline expectation
FSG’s baseline scenario for Venezuela remains the same, leaving multinationals with few hopes for a rapid improvement:
- Prolonged economic collapse: Severe economic deterioration is certain, and while the risks of a sovereign debt default are somewhat lower today than previously (due to savage cuts to imports by the government), the economic pain for Venezuelan households and companies operating in the market are only likely to worsen. Consumer purchasing power will be progressively precarious and investor sentiment will fall further
- Severe political polarization and gridlock: The government has chosen to revoke most of the legislative powers of the national assembly, and is moving to stave off a recall referendum. Discord between the legislative and executive branch will likely lead to a severe institutional crisis, with the end result being either the removal of President Maduro from power or more severe repression
- Worsening social conditions and growing potential for a social explosion: There is increasing risk of violent protests, particularly if the opposition is stymied from leveraging its legislative majority and constitutional prerogatives to recall President Maduro
Multinationals should continue to evaluate their long-term prospects in Venezuela
The Venezuelan government is not seriously tackling the need to confront the internal economic imbalances that President Maduro has worsened over the last three years. Given the current reality, multinationals should evaluate whether they have the right operational footprint in Venezuela given the likely persistence of an adverse political, economic and business environment. Executives should leverage FSG’s Venezuela Decision Framework to determine the right path forward for their companies in Venezuela. For multinationals seeking to maintain a presence in Venezuela, they should consult Managing Risk in Venezuela.