Venezuela: Electoral Turmoil Strains Social Fabric Further

Consensus Forecasts

Hugo Chávez’s successor, Nicolás Maduro, very narrowly won the snap election he called for April 14, according to official polls. Maduro received 50.7% of the vote while his rival Henrique Capriles netted 49.1%, leaving Venezuela ever more polarized. Recurring problems like soaring inflation and shortages of basic goods such as food and medicine continue to erode living standards, and the divisive election result will likely breed further instability. State mismanagement is a major factor behind these problems, with price, currency and capital controls creating huge imbalances in the economy. Price controls, for example, act as a disincentive to local producers, prompting them to cut output. The resulting scarcity forces up inflation, defeating the entire purpose of price controls in the first place. Indeed, Caracas inflation hit 24.2% (y-o-y) in March after February’s 22.1% outturn, and the recent 32% devaluation of the fixed-rate bolivar fuerte is expected to boost inflationary pressures further. Taking into account the growing despair over inflation, Mr. Maduro promised a hike in the minimum wage of 38-45%, to be implemented this year in three stages, while on the campaign trail.

In the wake of February’s currency devaluation, importers are still wrestling with foreign currency shortages, making it virtually impossible to pay for goods and services coming from abroad. Reliance on imported goods has soared since the Chávez era’s sweeping nationalisation programme, and electricity blackouts plaguing the country are hindering production further. Despite Venezuela’s vast oil wealth, petrol-related export receipts have not been enough to either significantly boost foreign exchange reserves (which stood at a measly US$6bn last year) or offset the budget deficit. Lack of investment in infrastructure has left the electricity grid crumbling and, with energy prices starting to fall back, Maduro’s new administration is facing the prospect of scaling back generous spending projects (including last year’s boom in social housing construction).

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