Is Venezuela’s democracy on the verge of dissolution?

This past Wednesday evening, Venezuela’s Supreme Court (Tribunal Supremo de Justicia – TSJ) announced that it will be assuming all functions of congress (National Assembly – AN). This effort to consolidate power in the hands of President Maduro is the latest move that has foreign governments and multinationals concerned about an impending dictatorship in the country.

The TSJ’s decision to usurp congressional power stems from allegations of voter fraud in the election of three opposition lawmakers from the Amazonas state, which provided grounds on which to rule the opposition-controlled AN was in contempt and, thus, necessitated the high court to step in and undertake all congressional duties.

The court’s ruling changes little for Venezuela

  • The immediate impact is mainly political: the consolidation of power. This ruling effectively shuts down congress, which was the only remaining branch of government not controlled by Venezuela’s ruling Socialist Party, and thus presents a major threat to the future of democracy in the country as President Maduro acquires even more power to make laws, grant and sign contracts, and manage the crisis-ridden economy. The court had already been overturning most legislation passed by the opposition-controlled AN since the latter’s victory in 2015; however, this is the first time that the court explicitly states that it will assume the role of Congress.
  • The government will continue to prioritize debt repayments. As Venezuela tries to keep its economy afloat and raise funds for its upcoming multi-billion bond payments, it has sought to sell stakes in oil fields to prop up its liquidity. However, congress had refused to authorize certain joint ventures between PDVSA and private companies, which the socialist government deemed an obstruction on the part of the AN since it was refusing to approve key economic decisions to overcome the country’s dire economic situation. Consequently, the court also ruled this week that it will authorize President Maduro to create joint ventures without the need for previously-mandated congressional endorsement.

Venezuela’s situation will continue to worsen as chances of change continue to decline

  • Despite foreign pressures, Venezuela’s various crises will persist. Notwithstanding widespread fears of Venezuela’s crumbling political system and impending democratic rule, the government is likely to continue to get away with its actions. While the Organization of American States (OAS) and foreign governments continue to push for the respect of the functioning of democracy, no consensus has been reached to suspend Venezuela from the OAS, and leaders have only pledged to monitor Venezuela’s situation to ensure the government engages in dialogue. Neighboring countries have expressed concern at the situation and United States has reiterated its call for elections given the “serious setback for democracy in Venezuela.”
  • Political change is unlikely. The effective neutering of Venezuela’s legislative assembly and takeover by the supreme court lowers the chances of substantial change in Venezuela in the near-term. For the moment, President Maduro’s government will remain focused on paying bondholders at the expense of all other needs while the country faces mounting supply shortages, social upheaval, political unrest and potential economic collapse.
  • The military is unlikely to act for now. Although the military, which does not uniformly support for President Maduro’s government, has received requests over the years from the opposition to intervene, it is unlikely that anything will change in the short term. However, the cost of the military not acting to defend democratic rule will grow in the long-term, particularly if Venezuela fails to hold presidential elections in 2018.

What can multinationals expect?

Rule of law is increasingly threatened, with declining probability of potential change in government in 2018 as state and municipal elections -which the opposition has been arguably heavily favored to win and had been postponed from 2016- are unlikely to take place this year. Venezuela’s current elected autocracy is increasingly likely to become an unelected autocracy next year, when presidential elections are supposed to take place (although there is a growing uncertainty this will happen).

Although the constitutionality and legality behind the court’s action are questionable, Venezuela’s condition will continue to worsen as policy continuity prevails. The devaluation of the bolivar and spiraling inflation will endure, worsening prospects for much needed economic course correction and fiscal adjustment.

FSG maintains its stance that Venezuela will remain in recession until substantial change takes place; given the low likelihood of near-term change, the country will not see growth before 2020. The country will remain in recession as the situation continues to deteriorate, giving multinationals even fewer reasons for optimism. It will continue to be a source of disappointment and likely losses for MNCs, offering limited risk-adjusted opportunities in the short to medium term. Unsurprisingly, multinationals will continue to prioritize away from Venezuela as the country faces an increasingly challenging short term.

For our latest updates and insights, FSG clients can visit the client portal. Not a client? You can purchase the 2017 Latin America Outlook from our online store.

Leave a Reply

Your email address will not be published. Required fields are marked *