Maduro Is Doing a Cash-Strapped Campaign to Control Inflation

Economists Asdrúbal Oliveros and Jesús Palacios Chacín, from consulting and research firm Ecoanalítica, explain what we should expect from Venezuela’s economy following the new sanctions regime and the elections

“Venezuela needs to grow a lot and through a long time. The economy used to be around $400 billion, it contracted to $40 billion and is now around $100 billion”, says Asdrúbal Oliveros, one of Venezuela’s leading economists and director of research and consulting firm Ecoanalítica. “Today’s economy offers no wellbeing to the majority. Only a few –a few cities, sectors and people– are good”. Yet, Oliveros is clear that such growth can only be achieved by overcoming the political conflict. “Every scenario is very conditioned by politics”, Jesús Palacios Chacín, senior economist in Ecoanalítica, adds. “Economies have solid growth when institutions are believed and believable by all.”

And Venezuela is not pointing in that direction. After the Barbados Agreement was signed in October, the U.S. temporarily lifted sanctions on oil and gas for six months. Yet, after the Maduro regime kept the ban on María Corina Machado and blocked her proxy Corina Yoris from registering as a candidate, the U.S. reimposed sanctions on April. Nevertheless –in a stagnant Venezuela where public spending hasn’t materialized in an electoral year and inflation is rapidly decreasing– the U.S. has handed a series of new licenses to a new set of oil companies. What can we expect now? We talked with the two economists.

Will the GDP still grow this year?

Asdrúbal Oliveros: The Venezuelan economy this year gravitates around two axes. One is the sanctions regime and the other is the electoral dynamics. But now there is a new scenario where you have restrictions for oil operations with these new United States regulations, and an electoral campaign that is much shorter, so our estimates of the economy changed, and we are only expecting a 4-5% growth, focused on a few sectors and a much more moderate and limited execution of public spending than we expected.

With the current licensing scheme, do we expect oil production to increase or remain stagnant? The production of PDVSA and others have practically stagnated since 2022, but that of the joint ventures with Chevron grows and grows. Bloomberg reported an increase of more than 20,000 bpd… up to 860.000 bpd.

AO: In general terms, we are expecting that for the remainder of the year oil production will stay around 850.000 bpd. Although some companies will have these particular licenses, the immediate effect of increased production is not going to happen, and uncertainty still weighs heavily. We are not seeing significant drops either. So, due to this regime of particular licenses that the United States is providing, we’ll likely see next year a not very large increase in terms of production that will approach one million barrels. It is much more difficult to increase production above one million barrels if there is no deeper change. What we see is a stagnant oil sector.

And Merey crude oil, with or without a license, continues to be sold at a discount due to mistrust.

AO: Yes, it is sold at a discount due to mistrust [in Venezuela]. Right now, about 55% of Venezuelan oil production is sold at some degree of discount.

Jesús Palacios Chacín: Although the discount rate has gone down.

AO: Yes. The other 45% is sold at market price, but with part of that income linked to PDVSA’s debt payments.

Has the percentage sold at discounts decreased even with the return of sanctions?

JPC: Even with that general license, the government didn’t see many more investments in the sector because of the [six months] deadline, or a drastic decrease of discounts, which was gradual and did not reach the levels the government expected. It maintained its sales, especially to Asia, with a discount of close to 20%. That is much less than at the beginning of 2023, when you had discounts of almost 60% on the sale of crude oil. Now with the return of general sanctions on the sector, and some approved specific licenses, the discount will probably remain around 20-30 %.

AO: However, the government obtained a greater flow of revenue during that period, probably around an additional $700 billion per month. But its ability to maintain that over time with a six-month license is very limited. Secondly, the government was counting on the resources retained abroad to increase public spending. So far, the delivery of those resources has not materialized. It is another area, let’s say, of government annoyance amid this negotiation.

When Venezuela was sanctioned, it lived by diverting barrels through Malaysia or Oman to China. But now the United States is setting the tone by allowing licenses for only Western companies. Will Venezuela ignore the Asian market or will it do so through India, if the licenses for Indian companies like Jindal and Reliance are approved?

AO: For Venezuela, the Asian market is extremely important, beyond the sanctions. Because the Asian market, compared to other markets, is less mature and has a greater need for energy. So, a good portion of our oil goes to Asia. Even if sanctions are removed, Asia should play an important role, especially China and India. Sanctions turned Venezuela towards Asia, supported first by Russia, then by intermediaries through mainly Malaysia. This new stage within the framework of the negotiation, both in Barbados and Doha, led the U.S. to try to balance shipments from Venezuela by once again giving weight to the American market or to companies where the U.S. has more influence. There is a geopolitical element. But Venezuela is not going to stop selling oil in the Asian market, the one demanding a good part of its crude oil. Besides, we owe China around $15-18 billion dollars, a debt being paid mainly with oil.

But the state does not only depend on oil: you wrote that fiscal voracity impacts 60% of the operating margin of a company in Venezuela but that it is also ineffective because it is paid only by the handful of businesses that are in the formal sector… So, how does fiscal voracity impact the business sector and consumers in Venezuela?

JPC: Hyperinflation eroded the government’s tax revenue, which made collection in bolivars much more difficult and turned to nothing when the government converted that into dollars. But, since 2019 we have seen a very significant increase. Between 2019 and 2020, 150 million dollars were raised per month on average. This last quarter closed with 900 million dollars in average collection between March, April and May, based on new taxes such as the IGTF, the new accounting law, the new contribution law and above all the exchange appreciation. 

AO: Companies face three levels of collection: SENIAT, municipalities and state agencies that collect fees and contributions due to the science and technology law, sports law, the new pension contribution, etc. 

JPC: What is also worth explaining is what 60% of the operating margin means. It is when companies already deduct the costs of selling your raw materials or the most immediate costs and the administrative, rental and employee expenses. Of that income left, you pay 60% or more to the government. 

If I ran a company in the Dominican Republic, in Costa Rica, in Colombia, how much of my operating income would the State take?

JPC: On average in other countries, you are talking about less than 30%. It is justifiable to increase tax revenues, which is a task that another government could probably pursue, but by generating incentives for the collection base to increase: that is, the formalization of companies and employees. It would be the logical path that the government should follow to seek greater revenue.

In 2022, we saw an increase in sales and consumption compared to previous significant years. But then came the economic slowdown of 2023. Now… there is a slow recovery in consumption but not at 2022 levels, right?

AO: In 2021-2022, after we hit rock bottom, the economy was dollarized, the private sector somehow reinvented itself, some sectors and regions dynamized, the state became a bit more pragmatic in its relationship with the private sector, and we saw an indiscriminate entry of imports. This mix changed the landscape along with the collapse of the state and the elimination of subsidies that left many people unable to consume. Venezuela remains a volatile and fragile economy. In 2021-2022 it performed well, it fell again in 2023, during the slowdown, and now it once again has some very slight signs of recovery. We are going to be perpetually in that cycle until we solve our structural problems. The oil potential is not being used. An important base of the population has very precarious income. There is no access to credit and a serious lack of public services and infrastructure. All this limits grow. 

Consumption has been growing in categories such as food, medicine and personal care, approaching 2016 consumption levels. But this is not replicable to other sectors. In clothing and footwear, technology, or entertainment, there is no recovery at all. Only 8 or 9 million people have purchasing capacity, but there are nuances in consumption. It seems terrible to me that in the political discussion everything is reduced to the 80% who cannot buy vs the 20% who can. That is a simplistic reduction that does not reflect the changes that have occurred in the Venezuelan economy.

It’s also what you’ve called the triple inequality: regions, economic sectors, and income. Recently, my Peruvian friend’s dad asked me how is it possible that in a country with a humanitarian crisis people fill the Karol G concert in a US-sized stadium twice? I said: the triple inequality.

AO: Exactly. Last year, the Venezuelan economy grew at most 1 or 1.5%. But the food sector grew more than 10% and the medicine or health sector grew 8-10%. There are very strong differences.

JP: And 80,000 people at a concert is not a representative economic phenomenon. It is a country that must be analyzed a lot from a sectoral perspective and the sectors that are growing and those that are not. It is an increasingly federalized country in which the realities of a region, the central region above all and particularly Caracas, experience a very different reality from the rest. But you also have other regional differences such as the central west, in which Portuguesa has been highlighted as an example of recovery.

Now, in recent days the official-parallel dollar gap has surpassed 10%, which hadn’t happened in years. Now, Asdrúbal, you have always stressed that the official rate is overvalued due to the millions the Central Bank injects in the market, which is not sustainable in the long run. Has the end of the artificial dollar arrived? Will its value skyrocket again?

AO: I don’t like the word “artificial” because the dollar is there, people can buy it. It is a dollar that is obviously not at its equilibrium level. The key issue is price; the balance of the exchange rate in Venezuela. We have an exchange rate that is in some way contained, because the government strives to maintain it by selling dollars through banks. Those dollars serve to satisfy demand a little. What ends up happening? There comes a point where you have to sell more and more dollars to satisfy that demand. It becomes insatiable because the price, let’s say, is far below its equilibrium point. Now, this being an election year and reviewing the flow of the government, I would not expect a maxi-devaluation in which the government lets the exchange rate devalue and correct itself. So, I think that unfortunately the appreciation problem is going to be with us for a long time and that has negative implications for the economy. It obviously generates pressure on dollar prices. And that is terrible because even if you earn in dollars you lose purchasing power. It is worse if you are paid in bolivars. Second, it makes imported products more competitive over domestic products, impacting our manufacturing industry. And third, it generates these episodes of instability. So, distortions are generated again: sellers begin to charge only in dollars, they begin to use an exchange rate that is different. 

Let’s talk about inflation. After a significant increase in the past, of more than 100%, inflation in dollars has remained below 10%. In bolivars the drop is even more impressive: from 180,000% to 90%. Although it is a very high inflation by global standards, it is no longer the world’s highest. What is the reason for such a drop and how has it been maintained?

JPC: By containing public spending and ensuring the exchange rate does not devalue, and an [electoral] campaign designed to be shorter, the government was able to keep a little more fiscal discipline. It continues to prioritize exchange rate stability, price stability, even more than growth. You could have much greater growth, all of a sudden, if you did a bigger spending run.

AO: The government not only has political dilemmas but it also has economic dilemmas. They would love to have a campaign with more consumption that help a little to improve its popularity, but to achieve that it needs to spend. But it doesn’t have enough income to generate that expense, and if it intends to do it through the Central Bank, that causes devaluation and inflation. I believe that, although it was not the primary reason, did play a role in why such a short campaign was designed: there are not enough spending levels to sustain a long campaign.

And the increase in public spending has been zero. Two months before the elections, has public spending grown? Did fiscal responsibility win over the electoral party?

AO: No, lack of money won. I am convinced that if the government would have enough resources, it would spend them. This very austere campaign faces different conditions. Although there has been a modest increase in spending in recent weeks, the government is trying to maximize the little it has by focusing it on key groups like the Evangelicals, an important support base; women; young people; older adults. There is no spending on more expensive public works, which does not pay off immediately.

So far, in June, how much is the estimated increase with public spending analysis so far this year?

AO: So far this year we are talking, especially starting in April, of an increase in dollar terms of around 10%. Extremely shy.
You can watch the entire interview here.

Tony Frangie Mawad

Tony (1997) is one of Caracas Chronicles' editors, where he writes since 2016. He graduated in Journalism and Political Science from Boston University in 2021. Since then, he has written at Bloomberg, The Economist, Politico and others.