Venezuela Economic Update


Maduro brings new cooperation agreements with Russia

Desperate for funding after restrictions, Venezuelan President Nicolás Maduro traveled to Russia on December 4th to meet with his counterpart, Vladimir Putin. In this meeting, the countries signed new agreements for US $6 billion to finance projects in the oil and mining sectors. The Venezuelan president said that US $5 billion will be used to finance projects in Venezuelan-Russian joint ventures with the objective of “raising oil production by almost 1 million barrels a day.” The remaining money will be used for gold mining projects. With this new loan, Russia has lent Venezuela US $23 billion between 2006 and 2018. The Russian government also confirmed that it will continue to provide support to Venezuela. (1)

China increases influence in Venezuela

The Chinese tech giant ZTE is providing the technology for the “Carnet de la Patria” (Fatherland Card) in Venezuela. The Fatherland Card is a national identity card that has been used as an instrument of social control by the government of Venezuela. It was inspired by a similar project implemented in China by ZTE that enables the Chinese government to monitor the social, political, and economic behavior of its citizens.

The Fatherland Card was implemented in Venezuela in January 2017 and stores information such as date of birth, family information, employment and income, properties, medical history, state benefits, social networks, political party membership, and voting registries.

According to the government, the objective of the card is to gather information about the socioeconomic status of the population and expedite the social assistance programs. To promote the card, the government provides handouts, cash bonuses, cheap groceries, discounted medical care, and subsidies for gasoline.(2) However, the card has also become a tool of pressure for public employees, who are required to add this card in the Socialist’s Party registry. It has also been used for purpose of electoral identification, although this use is ostensibly prohibited. (3)

This is not the first time ZTE has provided services to the Government of Venezuela. In 2016, ZTE began to centralize the video surveillance system for the whole country, although this project was dropped due to financial constraints.

Citgo under threat of embargo after payments from Venezuela have not materialized

Attempts to forestall the Citgo embargo have failed. The Canadian mining company Crystallex International has annulled a US $1.4 billion expropriation agreement with the Venezuelan government that took place in 2011 because it violates the court order that allows the mining company to seize the shares of Citgo. Crystallex and Rusoro Mining (another Canadian company with an expropriation agreement with Venezuela) will force the auction of the refinery if the economic crisis and cash flow in Venezuela worsen.

Venezuela is running out of oil and gasoline

The decline in Venezuela’s oil production is compromising the country’s ability to pay its creditors, mainly China and Russia, and generating fuel shortages in various regions of the country. The shortage of gasoline is mainly attributed to refineries owned by PDVSA, the state oil company, working at less than 25% of their capacity. According to the latest report from OPEC, oil production in Venezuela has decreased to 1.137 million barrels per day, its lowest level in 15 years. This underutilization of current infrastructure is a consequence of a lack of personnel and raw materials and technical deficiencies in the fuel supply chain. Mass resignation of personnel has resulted from deplorable working conditions and hyperinflation eroding purchasing power of salaries. To address the shortfall in production, Venezuela has imported oil: Venezuela’s imports of crude oil and petroleum-derived products from the United States in over the first three quarters of 2018 registered an increase of 70% compared to the same period in 2017.

Venezuela uses its oil to repay debts with creditors. Igor Sechin, president of the Russian state oil company Rosneft, met with Venezuela’s president Nicolas Maduro claiming delays in oil shipments to repay debts. Sechin showed that Venezuela maintained its compliance with shipments of oil to China but was short 380,000 barrels to Russia.

Saudi Arabia will cover Venezuela’s production quota in OPEC

According to preliminary figures from the Organization of Petroleum Exporting Countries (OPEC), Saudi Arabia has increased its oil production levels by 1.8%. According to cartel representatives, this increase is intended to compensate for the decrease in the contribution of Venezuela.

Venezuela delivers economic data to the IMF

To avoid new sanctions that would imply the definitive end of external financing, the Venezuelan Central Bank provided the International Monetary Fund macroeconomic data corresponding to the year 2017. The data shows that the Venezuelan economy contracted 15.7% in 2017. This contraction is driven by shrinking in oil (15%), manufacturing (25%), and construction (53%). Inflation was estimated to be 860%. In 2016, the economy contracted 16.5% and inflation was 274%.

For 2017, there is no data related to the balance of payments, liquid international reserve levels, net asset position, direct investment and portfolio flows, non-oil GDP growth, or monthly inflation levels. The government has not disclosed figures for 2018. However, the General reported the Venezuelan economy contracted by 29.8% in the third quarter of 2018, implying that Venezuela would have negative growth for the fifth consecutive year.

Total closure for the Industrial Sector in 2019?

December began with the closure of the tire manufacturer Goodyear in Venezuela. A union representative confirmed that the 400 employees of the multinational will not continue to work. Among the causes attributed to this closure are the difficulties in accessing raw materials, the rising production costs driven by the hyperinflation, and the significant decline in domestic demand as a result of the deep recession that has been in the country for the last five years.

The closure of this company is a sign of what is to come. In a Quarterly Outlook Survey, the president of the Venezuelan Confederation of Industrialists Juan Pablo Olalquiaga pointed out that 700 companies stopped operations in Venezuela during the third quarter of 2018, representing 22% of the total number of companies that still operate in the country. The main reasons cited by respondents include the difficulties accessing domestic credit as a result of the new legal reserve applied to private banks and the generalized negative perception about whether the country outlook will improve in the medium-term. Olalquiaga also said that it is expected that at least 50% of the remaining small and medium active firms would close during the rest of 2018 and 2019.(4)

Maduro decreed new minimum salary increases

Nicolás Maduro decreed a new increase in the minimum wage of 150% (the fourth in 2018). The new minimum wage is Bs.S. 4,500 (USD $11.30) (5) and was to take effect in December 2018. In addition to the new increase in the minimum wage, the Venezuelan president also announced new transfers through social protection programs, which include pensions and Christmas bonuses.

The previous minimum wage increase was in August 2018 and was followed by a hyperinflationary spiral. From August to October, inflation grew by 727.3%, (6) and the parallel exchange rate depreciated 400% monthly on average during this period. (7) These numbers provide evidence that Maduro’s “Recovery, Growth and Economic Prosperity Program” has not helped to mitigate inflation nor generated confidence to reactivate the private sector. This program is characterized by being ambiguous, deeply ideological, and lacking economic foundations. We expect a deepening of the hyperinflation spiral, including a more aggressive depreciation rate, and closing of the few remaining small businesses and commercial establishments in the short run.





(5) November 29th 2018 exchange rate according to DolarToday.

(6) Own calculations based on the National Consumer Price Index presented by the National Assembly of Venezuela.

(7) Own calculations based on the statistical information of DolarToday.

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