Venezuela has elected an opposition coalition – the ramifications could be huge
The election result in Venezuela – a country with some of the world’s largest oil reserves – marks a new chapter in its history. James McKeigue looks at what the future holds for Venezuela, and for investors.
Venezuela's voters made history recently. Despite a climate of state-sponsored intimidation, political assassinations and imprisoned politicians, an angry Venezuelan public voted overwhelmingly for the opposition coalition.
The polls, which decided the makeup of the legislative house, marked the first major defeat for the governing United Socialist Party of Venezuela (PSUV) since the late Hugo Chvez came to power in 1998. It leaves his successor, Nicols Maduro, in a much weaker position.
I don't write much about Venezuela because almost two decades of the Bolivarian Revolution' means it doesn't have many exciting opportunities for New World readers. But this latest election is worth analysing. It's a political earthquake shaking the power structure behind the world's largest oil reserves.
Why Venezuelans have had enough
The only other time I've covered Venezuela for the New World was back in early 2014 when the country was in the grip of mass protests. As I said back then, while the spark of the protests had been students' worries about security issues, the reason they became so widespread were because Venezuelans are angry about the chronic mismanagement of the economy.
During the boom years of high oil prices the government could afford generous subsidies that, coupled with a strong local currency, meant that consumers could buy imported goods at the supermarkets. The buoyant oil prices also encouraged the regime to pick fights with local economic groups, which hit domestic production and further tilted the economy to the business of trading state-produced oil for imported consumer goods.
Needless to say, when the oil price fell it's now at around $40 compared to almost $100 when Chvez died back in the beginning of 2013 that economic model started to run into problems. The country had done a remarkably bad job of saving anything from a sustained period of record oil prices.
It didn't have the buffers that helped countries like Russia and Saudi Arabia ride out low oil prices so it lacks the dollars it needs to feed its import hungry economy. That's leading to shortages in the shops, while the government's attempt to close the budget deficit by printing more bolivars is leading to massive inflation. The official figures stopped being printed a year ago but the IMF reckons it will come in at 120% for this year. The situation is exacerbated by price controls that merely serve as a disincentive to local producers and a ridiculous three-tiered currency system. As a result Venezuela's economy is a mess. London-based consultancy Capital Economics estimates that GDP will contract by 10% this year the country's worst recession since 1943.
Most Venezuelans probably don't care less about the official statistics or the estimates of Capital Economics. They have far more pressing concerns namely that it is getting harder to find food and basic necessities like toiletries. Of course Maduro doesn't admit that government policy is to blame. Rather he blames the external forces' that are waging an economic war on the country. Creating an other' to distract the masses is a common political tactic. However, judging by Sunday's election, Venezuelans have started to see through the charade.
But while the election was a groundbreaking moment for the opposition Democratic Unity Roundtable (MUD), this is really only the start of the process. The huge size of the opposition victory it got 67% of the seats in the National Assembly is crucial as it hands it a super-majority'. In theory this allows them to demand a referendum on Maduro's role as president and make him go to the polls again. It also allows them to replace high-court judges and draft laws. However, the opposition still does not have power over the executive. The Finance Ministry and the Central Bank are key to finding an economic solution and they remain under the control of the government. In an ideal world you might hope that Maduro would listen to the will of the people and work with the opposition but given his defiant post election address that doesn't seem likely.
The other problem is that the Democratic Unity may become less united once it takes power of the Assembly. As a coalition of disparate forces it has a range of different goals. For some the priority is obtaining the release of Leopoldo Lpez, a charismatic opposition leader currently languishing in jail on trumped up charges. While others may view Lpez as a potential rival in the future and prefer to focus on taking down Maduro. The fact is the economic medicine that Venezuela needs to take, such as reducing the deficit, cutting fuel subsidies and dismantling price controls, won't be popular in the short term. So some opposition figures may prefer to continue blaming Maduro for the economic problems instead of getting involved in unpopular and possibly unsuccessful attempts to find a remedy.
The next chapter
Given the messy situation and combination of political and economic factors, it's hard for investors to take a position on the Venezuela saga. When I wrote about the country two years ago, at the height of the protests, I said that support from the army, the poor and certain economic interests, would keep Maduro in power despite the protestors. That has proved the case but now there are interesting signs that his support is ebbing. Given the gerrymandering and attempted fixing that was reported, the fact that the PSUV only ended up with 33% of the seats shows that even its traditional support among the poor is waning. There were also reports that the army forced Maduro to accept the full extent of results, after rumours the numbers would be changed to deny the opposition a super-majority.
One of the most insightful comments I read came from Edward Glossop, emerging markets economist at Capital Economics. Noting that this is Venezuela's worst economic crisis for 70 years he says: "Recessions of this depth and duration are rare and tend to have consequence beyond just the real economy they can threaten the entire social and political fabric of countries. There's no reason to think that this time will be any different in Venezuela."
The Bolivarian Revolution has been an intense two-decade ride for Venezuela. At its peak it managed to lift a long-neglected poor out of misery. But it will be consigned to history for not managing the unprecedented oil boom more prudently. There will be plenty more twists in the story but this election result has started a new chapter in Venezuelan history.