Venezuela

Politics:

• Analysis

  Venezuela politics: Quick View - MUD forced to battle the legacy of the dec

  Event

  As the campaign for the April 14th election gets into full swing, the ruling Partido Socialista Unido de Venezuela (PSUV) appears to be focusing its entire electoral strategy on the figure of the former president, Hugo Chávez, who died in early March.

  Analysis

  A casual observer might be forgiven for thinking that the PSUV's candidate in the presidential election is not Nicolás Maduro, the acting president, but Mr Chávez. Banners and posters mostly proclaim support for the former president and bear his photo: Mr Maduro's name is sometimes added as an apparent after-thought. Panegyrics for Mr Chávez are a constant feature of state radio and television. So often does Mr Maduro mention him in his public speeches that a website has been set up to keep track. By March 26th it claimed 4,404 references to the "comandante" since his death. Mr Maduro has apologised for the tally-but only because "I should have named him a million times".

  Leaders of the opposition Mesa de la Unidad Democrática (MUD) alliance admit that one of their key campaign objectives is to stress that "Maduro isn't Chávez". They are well aware that the former president's charisma placed him in a different league from other Venezuelan politicians, of whatever persuasion. Now, the ruling party is explicitly comparing him with Christ, and even accusing the opposition of conspiring to kill him with assistance from the US.

  So outlandish have the references to Mr Chávez's sanctity become that Catholic Church leaders, including Venezuelan cardinal Jorge Urosa, have publicly criticised them as idolatry. However, their words are likely to have little effect. Chavismo-as-religion will reach a crescendo by April 14th, the date of the election and also the anniversary of Mr Chávez's return to power after being briefly ousted in a coup in 2002. Already, government spokesmen are referring to the date as "resurrection Sunday". They will undoubtedly use the anniversary celebrations as a cover for campaigning even after the official campaign has closed. With their major electoral asset-Mr Chávez himself-no longer available to campaign in person, the cult of his personality appears to be the ruling party's best remaining option.

  March 27, 2013

• Background

  Venezuela: Political and institutional effectiveness

  During the forecast period (2010-14), Venezuela will continue to be the worst-ranked of the 12 Latin American countries that we cover in the business environment ratings for political and institutional effectiveness, and globally it will slip from 77th in the historical period (2005-09) to 80th (out of 82 countries). Although the heavy centralisation of power in the executive and the PSUV's dominance of the National Assembly have removed most obstacles to formulating and executing policies, the quality of policymaking is extremely poor. Under Mr Chavez, the decision-making process is likely to remain arbitrary and subject to frequent reversals. There is little discussion of policy proposals in the legislature or among the wider public, with new measures often announced by the president, Hugo Chavez, in his weekly television programme "Alo Presidente". Little thought will be given to the adverse consequences for the economy and the investment climate of the president's increasingly radical stance.

  The investment climate will be further undermined by a politicised judiciary and high levels of corruption. The Chavez government's increasingly aggressive stance towards some foreign multinationals (while granting more favourable treatment to other companies from countries with politically sympathetic governments) is expected to continue. Failure to address an incoherent, inefficient bureaucratic system will further complicate policy delivery in the forecast period. Concerns over the excessive size and poor quality of the bureaucracy will remain, and it is unlikely that the government will attempt any overhaul, owing to the perceived need to reward political loyalty.

  Institutional decay will accelerate

  Since taking office in 1999, the government has aggravated the chronic problems of institutional decay that it inherited. An array of new institutions were introduced rapidly and have become politicised, undermining their credibility. This trend will continue during the forecast period. In particular, there are concerns about an increasing lack of accountability as responsibilities are handed to unelected regional and local authorities, as Mr Chavez seeks to undermine the power of elected administrations, many of which are led by the opposition.

  Violent crime will remain a major problem, fuelled by impunity, shortcomings in law enforcement and the growing problem of cross-border drug-trafficking in the sub-region. The homicide rate has risen sharply in the last decade and there have been a number of high-profile kidnappings for ransom in urban areas, a development that has raised growing concerns over corruption and mismanagement of the police force. The decline will not be halted unless measures are adopted to improve the competence and effectiveness of law enforcement agencies.

  May 05, 2010

• Structure

  Venezuela: Political structure

  Official name

  The Bolivarian Republic of Venezuela

  Form of government

  Federal republic comprising 72 federal dependencies, 23 states, two federal territories and one federal district

  The executive

  The president is elected for a six-year term and appoints a Council of Ministers; after a shortened term beginning in 1999, Hugo Chávez Frías began a fresh six-year term in July 2000, a second full consecutive term in December 2006 and won the October 2012 presidential election to secure a third consecutive full term

  National legislature

  165-member unicameral National Assembly, headed by the president, which replaced the bicameral Congress abolished by the new constitution adopted in December 1999

  Legal system

  Supreme Justice Tribunal at the apex of the court system appoints judges and magistrates in consultation with civil groups

  National elections

  The next elections are September 2015 (legislative) and October 2018 (presidential)

  Main political organisations

  Government: the Partido Socialista Unido de Venezuela (PSUV) was created to unite the Movimiento V República (MVR) with other pro-Chávez parties, but some parties remain outside this grouping

  Opposition parties: Mesa de la Unidad Democrática (MUD), which includes Acción Democrática (AD); the Comité de Organización Política Electoral Independiente (COPEI); Primero Justicia (PJ); Convergencia Nacional (CN); Un Nuevo Tiempo (UNT) and minor regional parties. The leftist Patria Para Todos (PPT) occupies a middle ground between the government and the opposition

  Key ministers

  President: Hugo Chávez Frías

  Vice-president: Nicolás Maduro

  Office of the presidency: Francisco Ameliach

  Basic industry & mining: José Khan

  Communications & information: Mauricio Rodríguez

  Defence: Diego Molero

  Education: Maryann Hanson

  Energy & oil: Rafael Ramírez

  Environment & natural resources: Alejandro Hitcher

  Finance & planning: Jorge Giordani

  Food: Carlos Osorio Zambrano

  Foreign affairs: Elías Jaua

  Health & social development: Eugenia Sader

  Interior & justice: Néstor Reverol

  Labour: María Cristina Iglesias

  Prisons: Iris Varela

  Science & technology: Ricardo Menéndez

  Tourism: Alejandro Flemming

  Trade: Richard Canán

  Central Bank governor

  Nelson Merentes

  March 05, 2013

• Outlook

  Venezuela: Key developments

  Outlook for 2013-17

  • Political tensions have risen in line with the uncertain future of the president, Hugo Chávez (whose health remain very weak), but the ruling party's control of all the organs of state will assure some stability in the short term.
  • The likelihood of a new presidential election has risen significantly, but the opposition's chances of winning remain slim, giving growing internal divisions and low morale after two consecutive defeats.
  • After expanding by 5.6% in 2012, growth will slow sharply in 2013 and will remain weak in 2014-17, reflecting poor macroeconomic fundamentals, stagnating oil production and deteriorating infrastructure.
  • Venezuela's weak public finances and rising debt mean that, in coming years, the authorities' capacity to implement countercyclical policies in the event of an external shock will be very limited.
  • Annual inflation will remain very high in 2013-17, at around 26%, but with many people relying on the black market (where prices are higher) for staple goods, the cost of living will increase faster than official data suggest.
  • The continued build-up of supply/demand imbalances will force repeated currency devaluations, with the fixed exchange rate forecast to end 2017 at BsF12.4:US$1.
  • The trade balance, and oil prices in particular, will continue to determine current-account trends in the outlook period, with the surplus falling from a high of 8.6% of GDP in 2011 to an average of 3.7% of GDP in 2013-17.

  Review

  • After two months in intensive care in Cuba, Mr Chávez returned to Venezuela on February 18th to continue cancer treatment. His failure to appear in public continues to fuel speculation of a likely transition.
  • Political parties appear to be gearing up for possible new presidential election, with the ruling PSUV hiking its attacks against opposition leaders in a bid to maximise political polarisation, which has traditionally favoured Chavistas.
  • Despite broad acceptance of recent electoral results, Venezuela's ranking in our 2012 democracy index is poor, hindered by excessive concentration of power in the executive.
  • In an effort to correct fiscal imbalances, the government devalued the bolívar by 32% in mid-February to BsF6.3:US$1.
  • Backed by still-high government spending and strong private consumption, the economy expanded by 5.5% year on year in the fourth quarter of 2012. Full-year GDP growth reached 5.6%, the highest rate since 2007.

  March 05, 2013

Economy:

• Background

  Venezuela: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	29.5	Population growth	1.6
  GDP (US$ bn; market exchange rate)	382.5b	Real GDP growth	2.0
  GDP (US$ bn; purchasing power parity)	402.9c	Real domestic demand growth	3.1
  GDP per head (US$; market exchange rate)	12,957	Inflation	26.5
  GDP per head (US$; purchasing power parity)	13,650c	Current-account balance (% of GDP)	5.7
  Exchange rate (av) BsF:US$	4b	FDI inflows (% of GDP)	0.4
  a The Economist Intelligence Unit estimates. b Actual. c Economist Intelligence Unit estimates.

  Download the numbers in Excel

  Background: From 1958 until the mid-1990s two parties, Acción Democrática (AD) and the Comité de Organización Política Electoral Independiente (COPEI), alternated in power. Frequent economic crises and endemic corruption eventually led to a collapse in their support, culminating in the election in December 1998 of a former lieutenant-colonel and leader of a failed coup in 1992, Hugo Chávez, with a mandate for radical political reform. Mr Chávez's policy programme has exacerbated political polarisation, but he has survived several attempts to remove him from power. Mr Chávez won a referendum in February 2009 to remove caps on the number of terms that elected officials may serve. He stood for and won a fourth term in October 2012 but his ill health has raised doubts about his ability to complete his new term.

  Political structure: Although Venezuela is a federal republic, successive administrations-including that of Mr Chávez-have proved reluctant to devolve political authority, with the transfer of financial resources from the federal to local level still highly dependent on the central government. The political system is unicameral and elections for the 165-seat National Assembly take place every five years (a new legislature, with a large opposition presence, took office in January 2011). However, the executive has become increasingly powerful in recent years, at the expense of other branches of government.

  Policy issues: Political radicalisation has been reflected in increasingly heterodox economic policymaking in recent years, including an acceleration of the nationalisation of industries deemed "strategically important" and the introduction of a multiple fixed exchange-rate system in 2010. However, distortions created by the government's policy approach have become increasingly evident, with the economy growing by far less than its potential and with inflation remaining high in spite of price controls, reflecting import restrictions and weakening productivity. Failure to invest part of the oil boom in recent years has led to a startling decline in the country's physical infrastructure, resulting in recurrent electricity shortages.

  Taxation: The top corporate tax rate is 34% for non-oil companies and 60% for oil companies. As of April 2011, a maximum royalty rate of 95% applies to oil extraction. The VAT rate was cut from 14% to 9% in 2007, but, following the collapse in oil prices in late 2008, the authorities raised the rate to 12% in early 2009 in an attempt to boost revenue. A financial transactions tax was eliminated in 2006, reinstated in 2007 and eliminated once more in 2008.

  Foreign trade: Exports of US$92.6bn and imports of US$46.4bn led to a trade surplus of US$46.2bn in 2011, compared with a US$27.1bn surplus in 2010. The current-account surplus widened to US$27.2bn in 2011 (representing 8.6% of GDP).

  Major exports 2011	% of total	Major imports 2011	% of total
  Oil & gas	95.2	Intermediate goods	43.8
  Other	4.8	Capital goods	20.3
  		Consumer goods	18.7
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  US	43.1	US	35.4
  Netherlands Antilles	11.3	Colombia	18.7
  China	6.5	Brazil	13.2
  Spain	1.4	Mexico	4.4

  Download the numbers in Excel

  Download text file (csv format)

  March 05, 2013

• Structure

  Venezuela: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 05, 2013

• Outlook

  Venezuela: Country outlook

  Venezuela: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Venezuela's political outlook remains highly uncertain, as the populist president Hugo Chávez has been unable to govern since winning a fourth term in October 2012, for health reasons. Although Mr Chávez is back in Venezuela after a two-month absence in Cuba, questions surrounding a possible transition linger, even though the government, currently headed by the vice-president, Nicolás Maduro, claims that the president's health is improving and he is still involved in the running of the country. Control of all the organs of state has allowed the ruling Partido Socialista Unido de Venezuela (PSUV) to delay the inauguration of the next administration--originally scheduled for January 10th--and maintain some social stability. However, this has led to rising tensions with the opposition, which has criticised the government for resorting to highly controversial measures to ensure that new elections are not called within 30 days (as the Venezuelan constitution prescribes in the case of the permanent or absolute absence of the head of state). It has also put the government in a state of limbo, delaying key policy initiatives--including Mr Chávez's plans to move towards a communal state--and putting at risk important investment projects in the energy sector. That said, and despite questions over the unity of the various PSUV factions, broad political stability is likely to be maintained in the short term, partly because the relatively weak opposition has limited political resources, and given the interest of leading PSUV figures in portraying an image of continuity.

  ELECTION WATCH: Attention has shifted to the possibility of a new presidential election in the event that Mr Chávez dies or is declared permanently incapacitated. The likelihood of this has increased substantially, as Mr Chávez's chances of recuperating fully appear extremely limited after several operations (he was first diagnosed with cancer in mid-2011), and the government is unlikely to change the constitution in order to impede fresh elections, given that this would cause severe social and political unrest. Mr Chávez has named Mr Maduro as his chosen successor, and the latter would most likely be the preferred PSUV candidate, ahead of Diosdado Cabello, the head of the National Assembly. Although a power struggle between Mr Cabello and Mr Maduro may loom in the background, in the short term both are likely to accept the strategy put forward by Mr Chávez. Indeed, Mr Maduro would be likely to prove to be a better candidate, as he polls better with independent voters.

  INTERNATIONAL RELATIONS: A PSUV-led government would continue to focus on boosting relations with non-traditional allies, such as China and Russia, in an effort to attract investment and diversify Venezuela's oil export market. It would also retain close relations with a few radical leftist leaders in the region who continue to sympathise with the Chavista model, while seeking closer trade integration with southern-cone countries, following Venezuela's official entrance into the Mercado Común del Sur (Mercosur, the Southern Cone customs union) in July. Despite lingering differences, improved relations with Colombia are likely to prove resilient in the short to medium term. By contrast, relations with the US would remain tense, partly on the back of continued strong anti-US rhetoric and a close relationship with Iran, although outright conflict is highly unlikely, especially given the commercial interests of both countries. Were an opposition government to take power, relations with the US would improve, while countries such as Cuba and Nicaragua would suffer from a cut in aid. Relations with Colombia and China, however, would continue to deepen, owing to mutual economic interests.

  POLICY TRENDS: Severe macroeconomic distortions coupled with a volatile external environment pose considerable short- and medium-term challenges for Venezuela, requiring the government to take corrective measures on the macroeconomic front. However, a PSUV-led administration is likely to maintain a heterodox economic policy agenda, limiting reforms to addressing currency overvaluation--as highlighted by the recent devaluation of the bolívar--and enhancing debt sustainability. Currency, trade, fiscal and monetary distortions are set to continue, leading to high inflation, capital flight and a shrinking domestic production base. In addition, antagonism towards the private sector means that Venezuela's business environment will deteriorate further in 2013-17, remaining among the least business-friendly in the world. Difficulties in the business environment will be aggravated by rising labour costs, entrenched corruption, a constant risk of nationalisation and a very politicised and ineffective judicial system.

  ECONOMIC GROWTH: After expanding rapidly in 2012, by 5.6%, the economy is expected to lose considerable momentum in the outlook period. The announcement in February of an exchange-rate adjustment, combined with a moderate fall in public expenditure and a weak investment outlook (made worse by the current political uncertainty), will bring down GDP growth to only 0.4% in 2013. In 2014-17 GDP growth will remain well below potential, averaging 3% per year, largely as a result of continued domestic macroeconomic imbalances and deteriorating infrastructure, especially inadequate energy provision, which affects a large number of sectors. In the event that a new presidential election is called and the opposition manages to win, private investment and GDP growth are likely to be higher in the medium term, but tackling the current distortions would prove challenging and could lead to highly volatile economic performance (particularly in 2013-14).

  INFLATION: The deterioration of domestic productive capacity, coupled with tight currency restrictions--which force importers to rely partly on the more expensive black-market rate--will continue to fuel strong supply-side price pressures, keeping inflation at one of the highest rates in Latin America in 2013-17. Repeated devaluations of the fixed exchange rate will also prove inflationary, while the government's attempts to continue to control prices across all sectors of the economy will fail, increasing corruption levels and leading to persistent scarcity of basic goods. The government managed to bring inflation down in 2012 (to 20.1% by year-end), but its policy is unsustainable, as it requires high levels of fiscal spending on imported items. Inflation has already ticked up in early 2013 (it increased by 3.3% month on month in January); a trend that will accelerate in the rest of the year following the recent devaluation of the bolívar. After averaging 31.1% in 2013, inflation will fall but only gradually, to 23.6% at end-2017, in part owing to further exchange-rate and price adjustments.

  EXCHANGE RATES: Faced with a dire fiscal position, the government finally took the decision to devalue the main exchange rate by 32% from BsF4.3:US$1 to BsF6.3:US$1 in early February, broadly in line with the Economist Intelligence Unit's expectations. The authorities also announced the elimination of the Sistema de Transacciones con Títulos en Moneda Extranjera (SITME), a system overseen by the Banco Central de Venezuela (BCV, the Central Bank) which directed sales of government and Petróleos de Venezuela (PDVSA, the state oil company) bonds at an implicit BsF5.4:US$1 rate. Although the government claims that the new rate will solve currency distortions, the exchange rate system remains highly inefficient. This owes partly to the difficulties for individuals and private sector firms in accessing US dollars at the official rate from the official foreign-exchange rate agency. Combined with massive captive liquidity, this continues to put sustained downward pressure on the bolívar, with the black-market rate currently at over BsF22:US$1, up from around BsF11:US$1 a year earlier. The build-up of supply and demand imbalances in 2014-17, in line with a huge increase in local-currency liquidity, will eventually require further downward adjustments to the exchange rate, with the official rate expected to end 2017 at BsF12.4:US$1. The possibility of the introduction of a new parallel market or a dual exchange-rate system cannot be discounted.

  EXTERNAL SECTOR: We expect the current-account surplus to average a moderate 3.7% of GDP annually in 2013-17, backed by high oil prices. However, Venezuela's traditionally large trade surplus, at an annual average of 8.3% of GDP in 2013-17, will be much smaller than in the boom years of 2004-08, when it averaged 16.7% of GDP. This is largely because of the government's heterodox economic policies, which will lead to a smaller domestic production base, hitting non-oil exports and boosting import demand. It also reflects our forecast for stagnating oil production, combined with falling refinery capacity (which boosts demand for imports). The services deficit will remain at around its historical average (3.1% of GDP in 2013-17), while the income deficit will gradually fall, to 1.1% of GDP in 2017, as multinational companies continue to leave Venezuela.

  March 05, 2013

• Forecast

  Venezuela: Country forecast summary

  Country forecast overview: Highlights

  • The political scene will remain unstable in the forecast period (particularly in the short term), owing largely to a deteriorating social climate, political polarisation and uncertainty regarding the future of the president, Hugo Chávez, whose weak health makes it highly unlikely that he will be able to finish his current term, ending in January 2019.
  • Control of all the organs of state will help the ruling Partido Socialista Unido de Venezuela (PSUV) to maintain some social stability and retain the presidency in 2013-17. It will also lead to the gradual implementation of the necessary legal and political framework to create a parallel "communal state". However, in the longer term unity in the PSUV is not guaranteed, which could open the way for a transition away from Chavismo.
  • External relations under the PSUV will continue to focus on boosting agreements with non-traditional allies, such as China and Russia, in an effort to attract investment and diversify Venezuela's oil export market (at present, half of its crude oil production is sold to the US).
  • Although Venezuela will enjoy an important demographic bonus in 2013-17 in the form of a more rapid increase in the working-age population than in the overall population, it will struggle to deal with new entrants to the labour market, resulting in a further expansion of the already large informal economy.
  • Despite an ongoing oil bonanza, the economic outlook in the forecast period is fairly poor. After expanding by 5.6% in 2012, in line with a massive fiscal expansion, the economy will grow well below potential in 2013-17. High fiscal spending will keep the fiscal accounts in deficit in the forecast period.
  • Fairly strong oil prices will keep the current account in surplus, but will provide little boost to domestic engines of growth, as high inflation, capital flight and falling productivity will constrain the domestic private sector. Inflows of foreign direct investment (FDI) will rise gradually in the outlook period, but will remain well below 1% of GDP. A change in government, however, could potentially lead to a faster rise in FDI, especially in the oil and gas sectors.
  • Venezuela's economy will remain one of the weakest among emerging-markets in the forecast period. Weak institutions, oil dependency and poor prospects for an improvement in the policy environment will hamper growth. Not only is there little prospect of catching up to OECD levels, but Venezuela is forecast to slip even further behind developed economies.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	5.6	0.4	3.5	2.4	3.0	3.2
  Consumer price inflation (av; %)	21.1	31.1	25.1	26.0	25.0	24.3
  Budget balance (% of GDP)	-15.1	-7.0	-5.1	-4.3	-3.9	-3.9
  Current-account balance (% of GDP)	3.9	5.0	4.0	3.0	3.1	3.3
  Commercial banks' prime rate (%; av)	16.5	18.8	19.8	21.5	22.0	23.0
  Exchange rate BsF:US$ (av)	4.29	6.13	6.30	6.55	9.30	12.40
  Exchange rate BsF:€ (av)	5.51	8.15	8.27	8.32	11.72	15.64

  Download the numbers in Excel

  Download text file (csv format)

  March 05, 2013

View detailed map

Country Briefing

Total area

912,050 sq km, of which land area 882,050 sq km; inland waters, 30,000 sq km

Population

27.15m (2011 census)

Main provinces

Population (m), 2011 census:

 Zulia: 3.7

 Miranda: 2.7

 Carabobo: 2.4

 Caracas (capital): 1.9

Climate

Tropical, cooler in highlands; the rainy season lasts from May to November

Weather in Caracas (altitude 1,035 metres)

Hottest months, May-September, 18-32°C (average daily minimum and maximum); coldest month, January, 2-13°C; driest months, January-April, 8 mm average rainfall; wettest months, August-October, 145 mm average rainfall

Language

Spanish; Indian dialects spoken by 200,000 Amerindians in the remote interior

Measures

Metric system; local measures used in agriculture include 1 arroba=11.5 kg

Currency

The bolívar was redenominated in January 2008 to remove three zeros from the currency. The bolívar “fuerte” (BsF1=100 céntimos) was fixed at a rate of BsF2.15:US$1, but was devalued to BsF2.6:US$1 in early 2010. A secondary rate of BsF4.3:US$1 was established for non-essential imports. In December 2010 the BsF2.6:US$1 rate was also devalued to BsF4.3:US$1.

Time

4.5 hours behind GMT

Public holidays

January 1st; Thursday-Saturday of Holy Week; May 1st; June 24th; July 5th and 24th; October 12th; December 25th; there are other holidays for bank employees and those in certain other occupations, as well as local holidays

January 15, 2013