Venezuelan economy seeks growth, while stuck between political crisis and ‘Chevron effect’

The expansion of multinational licenses for oil exploration have brought much-needed funds to the bankrupt Venezuelan treasury. However, serious bottlenecks persist, due to international sanctions and the collapse of the credit system

Signs show the price of goods in US dollars in La Candelaria neighborhood in Caracas, Venezuela.Getty Images (Getty Images)

Venezuelans saw prices increase by 8.5% last June, according to a calculation by the Venezuelan Observatory of Finance. Accumulated inflation in the country in 2023 – according to the same body – stands at 100.75%. There’s a consensus among economic analysts that this figure could reach 200% by the end of the year.

The triple-digit average – while frightening – is still far below what the country has suffered in its recent history. For instance, 2018 saw the height of hyperinflation, as well as a mass exodus of millions of citizens.

After the historic collapse of the economy between 2014 and 2020 – which took 80% of GDP with it, as a result of a drastic drop in oil production – Venezuela is desperately looking for space to expand. However, at the moment, these great expectations seem condemned to being trapped by a ceiling: the country’s political crisis.

The Venezuelan economy is growing, supported by an increase in oil production. Yet, the rate of growth is clearly insufficient. At the end of 2022, there was an exchange rate depreciation that almost froze productivity, which was further aggravated by new acts of corruption in the government. The country needs to have several years with double-digit growth rates to be able to recover any form of stability.

Today, the accumulated inventory has made it possible for many major commercial chains – such as Farmatodo, Central Madeirense, Excelsior Gamma and Beco – to put things up for sale, pushed by the need to move their merchandise. Import levels – traditionally very high – have seen a decline. National products – less abundant than foreign ones – are also more expensive, putting consumers up against the wall.

The monthly minimum wage (paid out in worthless bolivars, the Venezuelan currency) is equivalent to just five US dollars. Private sector salary scales are much more reasonable, as they’re often supplemented by dollar bonuses… but they still fall short. President Nicolás Maduro – who has been in power for 10 years – has decreed increases in the subsidies and food packages that the government delivers to certain groups of Venezuelans. Many people are holding down two or three jobs, each of them very poorly paid. It’s common to find citizens who survive on money they receive from relatives abroad.

Some economic analysts are expecting that the so-called “Chevron effect” will have a positive impact. This multinational has obtained a license to expand its operations in the country – a move that has brought some relief to Venezuela’s emptied coffers.

The weak oil production of Petróleos de Venezuela (PDVSA) – the state-owned oil and natural gas company – has seemed to recover some vigor, thanks to the efforts of Pedro Tellechea, the newly-appointed minister of oil. State-owned subsidiaries have also recovered ground. Meanwhile, other international oil companies have expressed interest in obtaining production licences in Venezuela, once the framework of international sanctions imposed against Caracas is revised. The licenses recently granted to the Italian firm Eni and the Spanish firm Repsol for national gas production will also bolster the Treasury.

The Maduro government has improved its tax collection and is applying harsh fiscal reforms to some economic activities. At the moment, the country is reaching 800,000 barrels of crude oil production per day – respectable, but far from the three million barrels it traditionally produced in the past.

“As we entered 2023, there was a slowdown in sales… [this] shattered the illusions of many people. We came from an excellent year. Things have been recovering, but less so than expected and much less than in previous times,” says Rafael Montaña, a businessman dedicated to the sale of foodstuffs – especially coffee – at the national level. “Under these conditions, [businesspeople] are fighting to stay in the market.”

What was once the fourth-largest economy in Latin America has dramatically shrunk since 2014. César Petit – former chief economist of the Economic Analysis Department at the Central Bank of Venezuela, who is now a finance analyst at an investment bank – affirms that, in a new context of political uncertainty, many private investment plans may be postponed.

Tamara Herrera – economist and director of the consulting firm Síntesis Financiera – believes that the implementation of a new tax on financial transactions at the end of 2022 had a serious effect on economic performance.

“The biggest problem in the country is that we need incentives to invest, as well as internal and external financing. None of that exists,” she notes. “Without credit from banks, there’s no production or consumption. The fundamental needs of the economy require profound changes.”

Given the limited information that’s provided by the Central Bank of Venezuela and the country’s authorities, economic actors are working to create their own analysis monitors, incorporating technicians that allow them to produce reliable data about where the country stands.

“The team of Ecuadorian advisors that assists the government has maintained the same four elements of economic policy since 2018,” Herrera explains. “Their focus is to restrict the amount of bolivars in circulation (to bring the currency’s value up), so that people don’t buy dollars… [this is meant to] lower the pressure on the exchange rate. Hyperinflation has passed, but this policy has recessive effects – inflation rates are still very high.”

The differences between the standard of living in Caracas and the interior of the country are very noticeable. In the capital, the population experiences the problems with public services less harshly. “To reach what I used to sell in a week, I have to work for a month,” laments Euclides Do Nascimiento, the son of Portuguese emigrants. He manages a winery in Boleíta, an industrial area east of Caracas. “Many people come to the business to ask for food. I can’t help everyone, I have to tell them to go away.”

“It doesn’t seem very likely that a new relaxation of international sanctions will come,” Petit observes. “If [former congresswoman] María Corina Machado continues to rise in the polls and Maduro feels that he will lose [the 2024] elections, a radicalization could come that creates a crisis and affects Chevron’s operations. In that case, the inflationary effect would be immediate.”

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