Venezuela, the day after

There are three dimensions to the conflict: one, in the streets; another, at the international community level; and the third in the economic-financial sphere. Español

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Orlando A. Ochoa Francesc Badia i Dalmases
25 May 2017

Opposition activists holding candles protest against the deaths of 43 people in clashes with the police during weeks of demonstrations against the government of Venezuelan President Nicolas Maduro. Caracas,May 17. VWPics/SIPA USA/PA Images. All rights reserved.

Francesc Badia: The accelerating deterioration of the situation in Venezuela is a matter of global concern. We are witnessing extreme political polarization, and it is important to know what hope is left of finding a common ground, for preparing a solution to this situation - whether it be an orderly transition, or an agreed electoral calendar -: a solution that can bring some hope in these difficult moments. Meanwhile, the economy has gone down...

Orlando Ochoa: Yes, indeed. Whatever form a political way out takes (an election timetable, President Maduro’s resignation, an agreed transition), we must leave all doors open. We have been experiencing a period of very rapid economic deterioration over the last four years, but particularly in the last three. Gross Domestic Product, total and per capita, has fallen from 4% and 7% in 2014 and 2015, according to the official figures – which are unreliable, because of political pressures on the board of the Central Bank – to 18% and 21% last year (2016), according to unofficial figures provided by the same Central Bank. The accumulated GDP fall over the last three years is at least 30%. An economic collapse such as this happens only in countries at war. In the case of Venezuela, two things – not war - are currently happening. One, runaway inflation, which is in the hundreds (again, it is hard to check the figures): estimates range from 500% to 800% last year, with salary adjustments by presidential decree lagging behind and covering less than half at the very best. There is thus an impoverishment of the population, basically due to the fall in purchasing power. On the supply side, moreover, Venezuelan industry and agriculture are not getting supplies - imported or from basic state-owned companies. They do not get supplies because there is no foreign currency to pay for them. And there is no foreign currency because there are exchange controls, because the price and the volume of oil exports have fallen, foreign currency reserves are exhausted, and exports other than oil have been disappearing because of the economic distortions and expropriations of the Hugo Chávez governments.

What we have had in the last three years is a very fast impoverishment process.

In this context of deterioration, where agricultural and industrial production are falling due to lack of supplies, there is the added problem of the distortion of the exchange rates, which are controlled by some ministers and are affected by extensive corruption. This has led to large public imports, basically of foodstuffs, medical drugs and some other items, leaving out all other elements of modern life, which the private sector has been able to import sometimes, at risk of being persecuted for price fixing at black market exchange rates, and therefore repressed. Hence, the intermittent supplies of basic goods and black market prices rising to levels even higher than the average inflation. In short, what we have had in the last three years is a very fast impoverishment process.

FB: How does this fast impoverishment affect the search for a political way out? What impact does time pressure have?

OO: The time to look for a political solution could indeed be calmer, notwithstanding the pressures of the politicians. But the speed of the socioeconomic deterioration, the fact that it is linked to macroeconomic problems, to the rate of inflation, to the way in which the fiscal deficit is financed (through the Central Bank), to the existence of a dysfunctional exchange rate, high corruption, and a declining private sector, produces a situation where time is not on our side, and therefore the search for a solution to this problem has to do with timely political change - a political solution. For there are strong ideological and populist elements embedded in the causes of all these socio-economic problems.

The radical left ideological element, and the classic - left or right-wing - populist element, which consist in subsidizing the voters to include them in a state patronage network, and in having an argument to defend national sovereignty before the traitors of the motherland, with its strong polarizing effect, always tend to present the situation as a battle in the class struggle, in the traditional 20th century Marxist-Leninist sense. So, the economic problem is first and foremost contingent on a political solution and the abandonment of an anti-market and de facto undemocratic ideology.

There are strong ideological and populist elements embedded in the causes of all these socio-economic problems.

FB: Let me then ask you about the attitude of the opposition. We know that the government is on the defensive, isolated, trying to weather the storm, but the opposition has a very determined agenda and is trying to unlock the situation. The opposition is made up of several parties – the so-called G-4, or G-4 + 5, or G-9 -, which have adopted a strategy of street protests that, on the one hand, weakens the government, but on the other hand introduces an element of additional tension which is not only quite unbearable, but also quite dangerous stability-wise, and makes things even more complicated. What do you think the opposition should do?

OO: The opposition is aware of the difficult situation generated by the socioeconomic deterioration, and one of the main points it is demanding in order to proceed with the agenda the country needs is for the government to acknowledge this emergency situation. This could lead to the establishment of a humanitarian channel, to opening the door to humanitarian aid, which has already been offered for special medical drugs and nutritional support. It is a painful situation. On the other hand, the opposition - which consists of what you have rightly called the G-4 (four major parties) and the G-9, including five other small parties - has an essential coordinating task to do, and this means that sometimes some differences arise, and so they should - it is quite normal. The opposition has tried to negotiate with the government when the national and international perception was that they should be talking to each other and, today, it tries to reach an agreement on an electoral timetable - in short, it is saying: we are going to comply with the gubernatorial elections, then the mayoral elections, and finally, if possible, early presidential elections.

FB: Why?

OO: Because this is an unheard-of crisis situation, at least since the beginning of the 20th century. In more than a century of data on Venezuela, you cannot find anything like it. This is a crisis that we can define as endogenous, produced from within, for self-inflicted political and economic reasons - no external conflict and no civil war. Faced with this situation, the opposition’s task is a complex one: it must focus on finding a political solution in order to be able to focus, then, on how to deal with the critical socio-economic situation. On the other hand, the international community has discussed how to approach the situation in Venezuela – from the OAS and the UN, which has already adopted a more active position in several fields, to Mercosur and the European Union.

This is a crisis that we can define as endogenous, produced from within, for self-inflicted political and economic reasons.

FB: We are clearly facing a multidimensional conflict, the way out of which will have to be worked out on different fronts, right?

OO: Yes. I think we can talk about three dimensions to the conflict: one, in the streets (the opposition’s mobilization); another, in the international community; and the third in the economic-financial sphere (where the critical situation is, unfortunately, self-inflicted). The government, by ignoring the National Assembly, has been left without a budget and a public credit law, and without them there is a real risk that financial operations in the future will be unknown. In this, the constitution is categorical: it states, as in practically all parliamentary systems, that the budget laws must be approved by parliament. So, in the financial field, the government has an added problem: debt servicing on government bonds and the state-owned oil company (PDVSA), in addition to the servicing on other important debt, including debt contracted with China, which is heavy, particularly after 2018. It lacks liquidity to guarantee basic imports, equipment supplies for the oil industry, gasoline (Venezuelan refineries are not currently working well), and thinner for extra-heavy oil, which is very expensive. So, this is a government harassed on several fronts.

FB: You have already mentioned it, but I would like to dwell on the role of the international community in the current conflict. Do you think the multilateral actors have a role to play, considering the positions adopted by different countries?

OO: The discussions on Venezuela, the international resolutions of the different agencies, the exhortation messages of the different governments, the messages of the heads of state in direct talks with the Venezuelan head of state, all this has created a climate in which Nicolás Maduro's government feels pressured. They are being scrutinized on questions which, when Chavismo came to power, were very dear to them: interest in social issues; respect for human rights; democratic legitimacy; and international recognition of Venezuela’s very active role and influence, in Hugo Chávez’s first years, on politics and sectors on the left in several countries. The effect of international pressure has been twofold. On the one hand, it has encouraged the protests in the streets: international recognition and following-up of these protests, along with their tragic dimension, has spread through all the means technologically available, which have made it possible to witness, practically live, young men falling during confrontations with the police, to see the symbols of both sides in the conflict, and let them be known globally. But international pressure has also hit public finance. When a government with a public credit law has problems with debt maturities, it can do a so-called rollover - it can re-finance the debt. But Nicolás Maduro's government cannot, for it lacks that law. Financial institutions, seeing that agencies such as the OAS have defined the situation in Venezuela as a breach of the democratic order, have been falling back on financial agreements. They have also felt that this not only entails a reputation problem for the financial institutions involved, but poses also a serious risk of non-payment – all of which has meant a good deal of anxiety on the part of the government, an anxiety which it does not show in public, but which economists are well aware of. Faced with these three dimensions - confrontation in the streets, international pressure, and financial realities -, what we have is a besieged government.

We are talking here about a deficit of gigantic proportions. And yet, what we are thinking of is redesigning institutions, in the midst of a crisis and with a totally polarized country.

FB: But this pressure does not seem to be giving results in terms of progress or openings.

OO: What happens is that the government’s ideology leads it to entrench itself. And now it is proposing to convene a National Constituent Assembly, which not only seems a mechanism to elude the electoral timetable, but is something like a "nuclear bomb" for the existing institutions, to the extent that it opens the way, through a procedure that has been questioned by both the opposition and several countries, to redesign all public powers, suspend the existing powers and put together something new - all of which entails economic costs. And this at a time when the Venezuelan public sector deficit, measured as a percentage of the size of the economy, has been in the last five years between 15 and 21/22 percent of the GDP. We are talking here about a deficit of gigantic proportions. And yet, what we are thinking of is redesigning institutions, in the midst of a crisis and with a totally polarized country.

FB:  I would like to ask you a question about the day after.Let us imagine that the political crisis has been left behind and that the conditions for macroeconomic stabilization and the carrying out of the necessary social measures are finally there. What is the roadmap for a stabilization plan to move forward?

OO: We can scarcely fathom the political solution to this crisis. But whatever it is - elections, resignation of the president, transitional government, whatever... -, immediately after finding a way out, the very next day, the problem will be how to stop the economic downfall, the social mess and the suffering related to it. How to recover the huge fall in oil production, how to reset Venezuela's financial obligations and be able to answer the question of how we are going to pay back our creditors. And then, also, how we are going to set up and carry out a stimulus and - literally - reconstruction plan of the private sector of the economy (industry, agriculture, services, infrastructures) and the big public enterprises (steel, aluminium, electricity, petrochemicals and the companies that were nationalized by the governments of Hugo Chávez. Some are currently in a state of near paralysis or, in some cases, are operating at between 5 or 10% of their productive capacity and a maximum of 30 to 40%. The deterioration of social conditions requires, in addition, a social emergency plan. Of course, we are now thinking and weighing ideas to see what can be done. But it should not be a plan designed exclusively by the opposition: it should be a national plan, it should be inclusive - even the political way out could be, and should be inclusive. A country still in conflict would find it so much harder to have a credible economic emergency plan.

A country still in conflict would find it so much harder to have a credible economic emergency plan.

FB: So, what should be done?

OO: Start with a stabilization plan. Lower inflation, stabilize the exchange market, order it with a single rate - which requires ordering public finances -, and devise a plan to gradually close the public sector deficit. But we also need a plan for Venezuela's core activity, oil production, since the private sector has virtually disappeared from exports. Twenty years ago, non oil-related companies, public and private, accounted for almost 25% of the country's exports; now it is down to only about 4%.

A macroeconomic plan and an oil plan, and a financial plan to cover the needs of the macroeconomic plan and the oil plan - that is, our export activity to generate foreign exchange. To this must be added a social plan, which has to be financed and which should therefore be part of the plan to reduce the fiscal deficit. Finally, we need a sectoral incentives plan for the recovery of the private sector.

In order to work, however, these plans must be simultaneous. Venezuela would require funding to carry them out and, for that, the first thing that comes to mind are, of course, multilateral mechanisms. There are institutions which exist to help stabilize, others to finance infrastructures, and others to help with projects for the private sector.

FB: But Venezuela possesses a strategic resource that will necessarily be part of the financing solution: hydrocarbons. How should it be used?

OO: Venezuela has an obvious special muscle: oil. Practically half of the oil production is in the hands of joint ventures between Petróleos de Venezuela and foreign partners; the other half is entirely in the hands of Petróleos de Venezuela: it is our own production. Addressing oil production would require an effort to reorganize this relation and to get the necessary financing to get on with production. But for producing oil and stimulating investment on the part of our partners who are already here, and the new ones who could be coming in, you need the foreign exchange market to work, because the costs of producing oil at the official (overvalued) exchange rate are enormous. But for the foreign exchange market to work, we must have a fiscal, monetary and financial plan. There is clearly an interaction in all of this, which means that Venezuela's recovery plan is going to be the most complex one in our history: it has to be simultaneous, and it must also have all the political support possible, for it is actually the country's central short term objective. Everything is intertwined: economic recovery, social plan, oil plan, financial plan, and also sectoral policies, which begin to make sense once stabilization gets going.

It will be a complex challenge of coordination and execution, but it can, and should, be done.

FB: So, you are optimistic?

OO: I am optimistic to the extent that I believe we can do it. There are interdisciplinary teams working on it. But this is a task that will really begin the day after and, of course, getting the right political climate would be most convenient. Not a divided, in-fighting country, not what we are currently witnessing. It will be a complex challenge of coordination and execution, but it can, and should, be done.

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