Venezuelan opposition rejects Unasur agreement as economy continues decline

Thursday, January 26, 2017

Venezuela's government opposition, grouped in the Mesa de Unidad Democrática (MUD) coalition, has totally rejected the 21-point democratic coexistence agreement presented in the political conflict by mediators headed by the Union of South American Nations (Unasur).

Although the agreement was presented to the parties involved, the text of the document has still not been publicly disclosed.

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In its rejection of the document, the MUD stated in a release: "The experiment of 'dialogue' carried out in Venezuela between October 30 and December 6 is a closed chapter which will not be opened again," as there was no actual dialogue between the opposition and the government.

The MUD added that they intend to develop an alternative text outlining their demands and proposals to mediators and called on the Venezuelan public to ratchet up the pressure on the government by intensifying peaceful protests.

This time, however, the protests have not as large as those seen in September-October last year thanks to a certain loss of impetus due to the initiation of the government-opposition talks sponsored by the Vatican last October 30.

While in October the opposition demanded the removal of President Nicolás Maduro through a referendum, demands are now focused on regional and municipal elections that should already have been slated for 2017 but have still not been officially scheduled.

"It's up to us to raise spirits, to encourage people so Venezuelans don't lose hope," Henrique Capriles, one of the opposition leaders was quoted as saying by local paper El Nacional.

"We'll only achieve a powerful popular mobilization if the target is clear: the exit of Maduro and the regime once and for all," tweeted Maria Corina Machado, one of the MUD leaders.

The political turmoil has been sparked by surging inflation and a declining economy, but what are the causes of the dismal state of the Venezuelan economy and what can be expected for the rest of the year?

When oil prices were at US$100 per barrel back in 2014, the Venezuelan economy was already in recession, which went on to deepen as oil prices collapsed, leading to one of the highest inflation rates in the world as the bolívar depreciated and monetary supply expanded.

Annual inflation in Venezuela in 2016, according to the IMF's World Economic Outlook report for October, is expected to reach around 476% and could surge to over 2,000% in 2017.

According to data reveled by the Venezuelan government to news agency Reuters, in 2016 GDP contracted 19% compared to a 5.7% drop in 2015, the third consecutive yearly drop in the economy.

"To put this all in context, last year's drop in GDP was the biggest one-year fall in output of any EM [emerging market] crisis in modern history. The inflation rate of 490% is surpassed only by Brazil (1990), Argentina (1989), Peru (also 1989) and Poland (1990). Inflation in Venezuela is now above that of Zimbabwe during its period of hyperinflation in the mid-2000s," said UK-based research firm Capital Economics.

The immediate roots of the current crisis can be traced back to 2012 and February 2013 when the government drastically reduced the supply of US dollars to the market and established an official fixed exchange rate.

The gap between the value of the dollar on the official and black markets widened. In October 2012 annual inflation was at 18% and the exchange rate in the informal market was at 13 bolívares per dollar, but by the end of 2015 inflation shot up to 180% and the exchange rate reached 833 bolívares per dollar, according to economic analysis outlet Carta Maior.

And so it was that the depreciation-inflation spiral began.

While the official exchange rate is currently at 10 bolivares per dollar, in the informal market it surpassed the 1,000-bolívar barrier in February last year and spiked at nearly 4,600 bolívares in early December, but has eased somewhat to around 3,750 bolívares at present.

"The Venezuelan economy cannot recover under the current exchange rate system. It is a prisoner to the recession," claimed Carta Maior, adding that the huge difference between the official and unofficial exchange rates has created a very significant incentive for corruption.

To make matters much worse, oil prices have remained low for some time, forcing the government to print money to cover its expenses and thus continuing to fuel the inflation spiral.

"Low oil prices have undermined fiscal policy, resulting in large budget deficits and inflationary financing from the central bank," said rating agency S&P in February 2016.

While expected higher oil prices in 2017 should help to shore up public accounts and slow down the decline in economic activity (over 95% of Venezuela's foreign currency earnings are produced by the oil industry and revenues have dipped more than 50% due to low prices), which was projected to fall 4.5% this year by the IMF, inflation is expected to continue getting worse, possibly reaching over 2,000% this year, as mentioned previously

In December Venezuelan government announced the recall of 100 bolívar bills – equivalent to around 48% of the cash in circulation – to be replaced by six higher denomination bills, a measure which was officially designed to curb corruption.

However, "demonetizations fall into several widely different categories. The most dramatic and disruptive episodes are usually signposts on the highway to hyperinflation," wrote Jeffrey Frankel, Harpel Professor at Harvard's Kennedy School of Government, in Project Syndicate.

"They [the Venezuelan government] have demonetized as a means of confiscating wealth from the public, in effect, and transferring it to themselves. The fundamental problem is that the government spends way beyond its means, unable to finance the spending by taxation or borrowing, and so relies on debasing the currency", added Frankel.

Things don't look like getting better anytime soon, as though oil prices are on the up, the local oil industry is suffering because it has serious operational difficulties and production has fallen significantly in recent years.

Output has declined by around 50% from around 3.5mn barrels per day (boe/d) when Hugo Chávez came to power in 1999 to only 2.07mn boep/d at present, and with an recently OPEC-agreed production cut for 2017, the Venezuelan economy looks like it won't be getting any relief just yet.