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Holding the ruling PSUV party together against a troubled economic backdrop will be a significant challenge for someone with little charisma or leadership skills such as Vice President Maduro, the author points out. (Photo: MinCi)
Monday, January 14, 2013
Perspectives

Venezuela’s Looming Currency Crisis


A large economic crisis and a much needed currency devaluation are looming on Venezuela’s horizon.

BY CARLOS CARDENAS
Exclusive Analysis

On January 9, 2013, the Supreme Court ratified President Hugo Chavez in his post despite the fact he has not been seen in public since December 8 and that there is no date in sight for his return from treatment in Cuba. The Court also ratified in their posts all government ministers. These decisions effectively allow the ruling PSUV party to stay in power for as long as it considers necessary. The court ruling avoided triggering a constitutional article that would pave the way for an extendable 90-day transitory period which could eventually lead to a declaration of absolute absence and the call of fresh elections within a subsequent 30-day period.  

Vice President Nicolas Maduro has taken over the President's duties, and is supported by his closest rival, Head of Congress, Diosdado Cabello. Both appear willing to delay succession for as long as they need to solve their internal differences. This display of unity by Maduro and Cabello is in stark contrast to the situation within the opposition, which appears in disarray and without a clear strategy for how to respond to the on-going political crisis. 

The sooner an election is called, the higher the chances of the ruling PSUV party staying in office. This is due to the current financial weakness and disorganization of the opposition, as well as the fact that the PSUV candidate is likely to obtain sympathy votes from Chavez supporters. However, holding the PSUV party together against a troubled economic backdrop will be a significant challenge after securing power, especially for someone with little charisma or leadership skills such as Vice President Maduro. 

A large economic crisis is looming as all major economic decisions, including a much needed currency devaluation, are likely to be postponed until a new government is in place. In the meantime, foreign firms are likely to struggle to obtain foreign currency under the exchange controls. The currency is currently trading against the dollar at a rate 296 percent higher than the official rate.

On January 7 it emerged that the fiscal deficit had reached between 15-17 percent of GDP in 2012, compared to the 11.6 percent of GDP registered in 2011. Likewise, as of December 27, 2012, Venezuela had international reserves of $26.16 billion, but only $3 billion of this was in liquid assets. The lack of available cash has translated into less allocation of dollars from the Foreign Exchange Administrator CADIVI and the Central Bank SITME system.

Carlos Cardenas is the Deputy Head of Latin America Forecasting at Exclusive Analysis, recently acquired by IHS (NYSE:IHS).

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