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Elections a new rupture point in Venezuela crisis

A Maduro loss in May's election could be a turning point, but recovery will be lengthy

On 20 May 2018, Venezuelans will go to the polls to elect one president, 233 state legislators, and 2,436 municipal councilors. Given Venezuela's long presidentialist tradition, in which the executive holds the reins of power, all eyes will be on President Nicolás Maduro's bid for reelection.

Venezuela's president will run against the former governor from the state of Lara, Henri Falcón, the only other viable candidate standing after the opposition bloc decided not to enter what they call a "fraudulent and illegitimate" presidential election. While Falcón has condemned Maduro's transgressions against opposition leaders and the government's manipulation of previous elections, he has also rejected the idea of sitting on the sidelines: "electoral boycotts have almost never worked anywhere in the world". Some have found Falcón's decision to participate to be suspect; he has old ties to the ruling party. They suggest that he and Maduro have a secret pact to either legitimise the upcoming elections or begin a transitional process in which Falcón guarantees amnesty to the Venezuelan president and his inner circle.

Either way, the electoral battle will come down to Maduro and Falcón. The other candidates, Christian priest Javier Bertucci, accused of involvement with the government's corrupt network; entrepreneur Luis Alejandro Ratti, who also leads the "Hugo Chávez National Front"; and Reinaldo Quijada, an engineer who is highly critical of Maduro but committed to the revolution, have not captured voter interest.

Oil economy in freefall

Voters head to the polls in a tumultuous environment. Venezuela's economy collapsed in 2017 following a nine-year run of steady crude production declines. But the last two years have been particularly brutal. According to the country's official reporting to Opec, average oil output dropped to 1.55m barrels per day in February 2018, down from 2.27m b/d at the end of 2016. This is problematic for an economy that is entirely dependent on oil; 95% of its exports, and consequently nearly all foreign currency earnings, are oil-related.

There is simply no positive economic news. While the Central Bank has not released inflation or GDP data since Q3 2015, the IMF estimates that inflation reached 1,133% in 2017, while the economy contracted 12%. In 2016, inflation ran at 303% and GDP shrunk 16.5%. No other country in the world has such negative indicators.

Five consecutive years of economic contraction have catapulted the Venezuelan people into poverty. A 2017 Encovi survey shows that 8.2m Venezuelans eat less than two meals per day; the bottom 64% have lost an average of 11kg (24 pounds) since 2016; 87% of families live in poverty. Venezuela now suffers an unprecedented humanitarian crisis, and a massive migration is well underway.

And 2018 does not look any better. Although PdV president and petroleum minister Manuel Quevedo has promised to increase oil production by 1m b/d, reality draws a completely different picture. PdV's cash flow problems have aggravated diluent shortages and payment delays to service companies, which combined with US sanctions, eliminate any hope that crude production might increase. Significant brain drain, corruption investigations, financial and operational mismanagement, along with massive equipment theft, play their role in the dark outlook.

IPD's current baseline production forecasts are for average annual output at 1.49m b/d for 2018, with output falling to 1.26m b/d by the end of the year. Net oil export revenue is expected to reach $21.2bn assuming an average Venezuelan basket price of $54.70 per barrel ($63/b Brent). Venezuela's debt service is $8.7bn for the current year, which would leave only $12.5bn for imports and services. But 85% of Venezuela's consumption has an imported component. The Maduro administration has already cut imports drastically, from $37bn in 2015 to $12.5bn in 2017. The gap before financing would still add up to $10.7bn.

A further drop in oil output will hit the Venezuelan economy hard. The president has little room to manoeuvre. Any further cuts to imports would be very unpopular and will have an exponentially negative effect on an already hammered Venezuelan society. Therefore, a full-blown sovereign default seems more likely. Consequently, Maduro's chances of winning reelection would seem slim. He already faces significant disapproval, which should, theoretically, jeopardise his aspirations. A February Datanalisis survey indicated that Falcón is leading Maduro by more than 12 points.

But Maduro has several aces up his sleeve. The government successfully used social benefits to manipulate voters in the last two elections. Its control over institutions like the National Electoral Council when coupled with the potential for opposition voter abstention can still thwart all logical expectations, leaving the Venezuelan president with a reasonable chance of reelection.

Of course, there is still time for more surprises in the perverse game of Venezuelan politics. The government could move the election date (again) or enable other opposition candidates in an attempt to divide the vote. The armed forces could also change Venezuela's political course; there is evidence that sectors of the military are increasingly unhappy with Maduro's performance. In short, anything can still happen.

Victory and oil

In the event that Maduro wins the election, financial sanctions will remain in place. As long as sanctions hold, PdV will not be able to obtain sufficient financing to increase oil production. There is currently no indication that China and Russia will be keen to provide fresh financing.

The European Union, Canada, the US government, and several Latin American countries have rejected the upcoming electoral process, insisting that the results of unfair elections will not be recognised.

A Maduro win would demolish the façade of democracy. The National Constituent Assembly, a newly created legislative body stacked with Maduro loyalists, will probably draft a new constitution with deep reforms. The concept of the state will likely be restructured to ensure long-term political control. And the economy will continue to spiral downward. The EU and the US will subsequently strengthen sanctions. Crude oil production will plummet, and Venezuela will fall into an even deeper crisis. This should lead to further destabilisation, lack of governance, and eventually to a regime change.

A Maduro win would demolish the façade of democracy

Still, a Falcón win may not necessarily be met with immediate approval of the international community. If that is the case, sanctions will not be lifted, and there will be no way to forge ahead with economic reform. Falcón will have to prove to the international community his willingness and ability to make substantial democratic and economic progress.

The oil industry can only begin the long process of recovery once major reforms are well under way. The extent of the sector's deterioration will make recovery, even under the best of political circumstances, a lengthy endeavour.

Institutional, operational and financial audits will take months. Regulatory and fiscal restructuring could take a year or more. Recovery of investor confidence, and access to financing, may take longer as investors look for signs of political sustainability.

IPD's estimates suggest that it would take about seven years to return oil output to 3m b/d, assuming Brent at around $65/b. This would require a new set of oil policies to attract investors, and more than $120bn in investment. Any new administration will have to attract massive capital, not only to recover the severely affected oil sector but also to rebuild the economy and the country as a whole.

Patricia Ventura, Kirsten Froede and David Voght are from IPD Latin America

This article is part of an in-depth series on Venezuela. Next article is: Venezuela's unprecedented supply collapse

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