As we look to 2017, Venezuela will begin its fourth year of economic recession without prospect of a recovery in the short-term. The country will continue to contract until it is able to successfully undergo a political transition and its government begins to implement sensible macroeconomic policymaking, which is not expected until after 2019. However, until then, Venezuela will face mounting supply shortages, political unrest, social upheaval, and a potential economic collapse as inflation is expected to average 1300% and the bolivar continues to rapidly devalue.
President Maduro’s government will continue to prioritize political survival and sovereign debt repayment over much-needed rebalancing of the economy, and the inability of the government and opposition to reach an agreement will further delay prospects of economic course correction until the 2019 presidential election.
While oil revenues account for 96% of Venezuela’s exports, an expected stabilization of global oil prices in 2017-2018 is unlikely to provide much relief to the cash-strapped economy as long as President Maduro’s government fails to allocate any potential oil revenues toward efforts other than avoiding debt default. Although global oil prices are expected to see a small increase in the upcoming years, these prices (FSG anticipates WTI going from US$42.7 to US$53.5 in 2018, and Brent going from US$43 to $54.9) will not compare to those seen during the commodity boom and will only grant minimal reprieve. Moreover, in addition to the country’s production issues as state-owned PDVSA, like the government, struggles to avoid default, the recent OPEC-Russia agreement to cut production by an average 4.6% per member will be of little help granting Venezuela much-needed access to foreign exchange.
Despite worsening economic conditions and a hyperinflationary environment, the Venezuelan government continues to implement counterproductive policies. Simultaneously, the central bank recently pulled the 100-bolivar note and is in the process of issuing currency in larger denominations as Venezuelans become increasingly dependent on paper currency due to a faltering electronic payment system. Not only has the bank doubled the country’s monetary base in the past few months, but its rapid injection of money supply (meant, in part, to help finance debt payments) will only serve to worsen the country’s cash crunch while the new, large notes further augment liquidity issues and inflationary pressures. These pressures will grow to the point that real wages in Venezuela, unable to keep up with rising prices, will fall the most compared to the rest of the world, severely eating at customers’ purchasing power despite any number of wage hikes that the government passes.
Lastly, as the government continues its distractive and counterproductive policies, it will grow its arbitrary interventions on private companies in the form of widespread price controls and expropriations, which will continue to hamper commercial performance in the market. With the Chavistas still in power in 2017, key political seats will become available at regional and municipal elections, which could encourage further poor short-term policymaking by the government in an effort to garner popular support, and could worsen the country’s economic mismanagement. As a result, many companies have already been forced to reconsider their long-term operations in the country and are taking action to limit operational risk to their corporate performance.
Actions to take
Multinationals should be prepared to continue experiencing downside risk in Venezuela as the crisis continues to worsen -with limited upside in the medium-term-, and consistently monitor their downside exposure to the market. Those that continue to operate in the country should ensure they have developed contingency plans as local conditions continue to deteriorate and the likelihood of significant political and social unrest grows. As companies evaluate their local production capabilities and industry segments, they should consider how best to protect their relationships with key partners, distributors, and customers given that a worsening of operating conditions is extremely likely. They should also consider working with partners in the country to share the rising costs of FX volatility and inflation.
It will be crucial for MNCs to temper short- and long-term corporate expectations around Venezuela for their regional portfolio, and be prepared to pressure-test expectations around local demand in the short- to medium-term in light of growing pressures on the provision of FX and mounting hyperinflation. Corporate should be aware that the unfavorable economic and social situation in Venezuela will not subside until there is a change in government coupled with much-needed responsible macroeconomic policy implementation. Until then, the stabilization in global oil prices will only marginally favor the country’s economy, while most actions taken by the government will aim to either distract from the harsh reality or fuel further chaos in the country.
In light of the low potential for a stabilization of economic conditions and any improvement in the local business environment, some MNCs should reevaluate the long-term sustainability of a local presence in the market and consider deconsolidating assets in order to avoid the market becoming a constant danger to overall performance.