Venezuela Will Get Worse Before It Gets Better


Anti-government demonstrators hold the names of people killed during months of deadly protests against Venezuelan President Nicolas Maduro, at a park in Caracas, Venezuela, Wednesday, Aug. 30, 2017. A new United Nations report chronicles swelling violence by Venezuelan security forces over four months this year, appealing to the main U.N.-backed human rights body to address the matter. (AP Photo/Ricardo Mazalan)


So much for the idea of better angels prevailing within the ruling Socialist United Party of Venezuela (PSUV). Despite not having enough seats to control congress, President and PSUV strongman Nicolas Maduro pulled the plug on the National Assembly, their legislative body, and turned it into a George Bush-esque Coalition of the Willing: a Constituent Assembly of left wing like minds. Maduro’s "my way or the highway" system of governing has proven to be no match for the opposition parties in the Democratic United Roundtable (MUD) coalition. Months of street protests have stopped. The trickle defection of some in the military has stopped. Hugo Chavez, PSUV’s founder, is God. Washington is, once again, to blame for the crisis in the country according to the Chavistas. And the sun is still shining on Latin America’s hardest left-wing political power.


Venezuela’s GDP will contract again. The bloodletting of cash and the increase in inflation will get worse before it gets better.

Triple digit inflation should further crush the economy. The latest figure from the Venezuelan Industrial Confederation (ConIndustria) shows a 731% increase in the average cost of production in the first quarter. The real economy is showing further declines in capacity for the manufacturing sector with even protected sectors like food production down 20.2% year over year in July, Nomura Securities in New York said on Friday.


A Conindustria survey recently reported deteriorating conditions across all size of industries and job losses across all sectors. The capacity utilization reached just 32.4% in the first quarter, down from 36.3% in the first quarter of 2016, meaning factories there are not firing on all six cylinders. They’re maybe running on two.  Five out of 10 sectors showed a decline in capacity utilization due to a combination of high political uncertainty and low demand.

"All of these conditions should worsen (due to) the negative demand shock from hyperinflation and no relief from financial contagion," says Siobhan Morden, a managing director for Nomura. "The counter response remains ineffective from a team that is distracted on politics and devoid of technocrats and the latest announcements reiterating the same failed policy prescription of minimum wage hikes that reinforces the inflationary spiral," she said in a note to clients today.


Ready to fight for PSUV. Target: Yankee Imperialists. Militia members shout slogans during a speech by the commander of the Venezuelan Bolivarian Militia, Gen. Carlos Leal Telleria, in Fort Tiuna, Caracas, Venezuela, Friday, Aug. 25, 2017. President Nicolas Maduro ordered military exercises in response to President Donald Trump’s warning of possible military action to resolve the country’s crisis. (AP Photo/Ricardo Mazalan)


The euphoria of regime change has receded with the consolidation of authoritarian control. The opposition remains focused on retaining whatever representation is possible during local elections next month, which most suspect will be rigged in PSUV’s favor.

President Maduro has shown no predisposition to negotiate with the opposition, once the majority in the National Assembly. Now that there is no National Assembly, negotiating with them matters even less.

"The Maduro administration still has to survive external shocks from a more aggressive U.S. sanctions program and/or an eventual hard default as well as a new worse phase of the economic crisis," says Morden, who has been watching this story closely because of PDVSA bonds. A near-term political transition continues to fade after many months of political crisis and no breakthrough on either a negotiated transition or a forced transition from within the high ranks of the military.


"We cannot rule out a sudden forced transition," Morden says, based on the combined external stress of sanctions that feeds back into the economy. "The next phase is the spillover to a worse phase of the social crisis with looting and violence that may eventually compromise Chavista support…in low income neighborhoods and rank and file military," she says. "Its not clear when or if the economic crisis could force the military to intervene and whether the corrupt ruling elite are responsive to a worse phase of the social crisis."

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