Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transferred $4 billion of Chinese loans to the central bank.

The government's principal cause for concern is the fact that the country is now in a much more dire economic situation than the year before. Venezuela's political direction in the new year will thus be defined by sharply declining revenue from oil production. This drop in dollar inflows has already exacerbated the effects of the country's steady economic collapse on public finances. The worsening situation will make 2015 a crucial year for Venezuela. The Maduro administration will likely reduce at least some public spending, but cutting subsidies to the party's support bases threatens the stability of Maduro's presidency.

 

Economic Constraints on Maduro

Regardless of how long the oil price slide lasts, Venezuela's public finances — which were already stressed by extreme social spending and heavily subsidized gasoline — will bear the strain of reduced oil prices next year. The country's depleted foreign cash reserves, a crucial source of money for imports and foreign debt payments, are worth several billion dollars but only provide a slim cushion against further declines in oil prices. Significant inflows of Chinese loans to bolster the reserves appear unlikely, given that Venezuela previously faced difficulties in paying off outstanding oil-for-loans agreements.

The Venezuelan government has delayed publishing economic data through the Central Bank or the National Statistics Institute for several months, but there are some signs that the reduced oil income is affecting Venezuela's ability to finance imports. Foreign currency disbursed through Venezuela's two primary foreign currency allocation mechanisms has fallen drastically. The Sicad I mechanism, which from October 2013 to August 2014 disbursed funds three to four times monthly, has not held an auction since Oct. 14, when the government held a special sell-off to cover imports for consumer goods. Similarly, the amount of currency allocated through the Sicad II mechanism dipped from an average of $55 million daily in March to about $20 million daily in November. The reduced flow of dollars through Sicad I and II — most likely due to lowered oil income — suggests that the shortages across Venezuela will worsen in the next year. Shortages and high prices on the black market will continue to affect Venezuelans' purchasing power and could lead to political consequences for the government.

It is clear that neither Maduro nor the United Socialist Party of Venezuela retain the political support or oil revenue to guarantee stable rule. The upcoming year will be especially problematic for Caracas because Maduro will face ongoing economic problems as well as a legislative election in 2015, tainted by increasing public dissatisfaction with his performance. Moreover, the global decline in oil prices, combined with Venezuela's outsized spending obligations, means that Venezuela will deal with these existing problems with even less financial leeway than before. With oil production between 2.1 million and 2.3 million barrels per day, Venezuela lacks the influence within OPEC to negotiate production cuts that would offer Caracas an economic lifeline. The government's current strategy of avoiding potentially controversial economic reforms while maintaining high deficit spending is untenable and likely to prompt steps toward increasing Venezuela's public cash flow next year. However, time is not on Maduro's side. His inability to conclusively address food shortages and rampant inflation will keep eroding the ruling party's standing in the polls, and a renewed outbreak of protests is highly plausible in the coming year.

 

Political Problems Ahead

In 2015, individuals and factions within the Venezuelan government will probably continue pushing for the implementation of potentially controversial measures to adjust Caracas' economic policy to offset the global decline in crude oil prices. It remains to be seen, however, whether these factions will be able to spur even slight adjustments to Maduro's economic policy. Logical attempts to mitigate the crisis, such as increasing the price of gasoline, slashing public spending or sharply devaluing the bolivar, will undermine the popular support underpinning the United Socialist Party of Venezuela's rule. If such measures were unable to fundamentally affect the fragmented party's continued reign, either former Venezuelan President Hugo Chavez or Maduro himself would have implemented them far sooner. Despite pressure from some quarters to undertake partial economic reforms, the potential for public backlash and the latent threat from officials involved in currency scams or fuel smuggling will continue to hamper meaningful steps in this direction.

If the political cost of reform is too much to bear, the government will rely on less controversial (albeit less effective) cost-cutting measures, such as reducing the flow of energy shipments through the Petrocaribe oil alliance. Mounting pressure in the ruling party suggests clear support for such decisions. On Nov. 30, former Vice President Jose Vicente Rangel called for increasing the price of gasoline, citing a poll that claimed 53 percent of Venezuelans back a price hike. The government also appears to be readying the legal basis for a possible de facto devaluation by allowing private and public entities to purchase dollars from any market, including the black market, where rates are unregulated. Currently, buying dollars on the black market — where the parallel exchange rate is hovering at around 160 bolivars to the dollar — is illegal. An enabling law approved by Maduro on Nov. 18, but released Nov. 26, permits transactions at the parallel rate in theory, but will require additional legislation to come into effect.

With voters steadily abandoning the ruling party, political challengers will continue to emerge throughout the coming year from factions within the PSUV and the opposition coalition Mesa de Unidad. A separate grouping of opposition parties has also emerged, although they lack the backing of major opposition political figures. None of these are yet a credible challenge to the PSUV, and their future influence will likely depend on how many candidates they can field in the 2015 legislative vote. Given the ruling party's significant influence at the national electoral council, these groups face an uphill battle. A leftist current within the United Socialist Party of Venezuela, known as Marea Socialista, has publicly criticized the ruling party for its economic mismanagement and arbitrary decision-making. In retaliation, the party expelled hundreds of its members from its electoral rolls in November, meaning that they cannot run for office as members of the ruling party. The group will decide on whether it wants to be a political party in March 2015. Although public approval of Maduro and other party elites has been heavily eroded, the new challengers' popularity remains uncertain because they have never competed in an election.

Next year will be crucial for the Venezuelan government's future. Venezuela is clearly beyond the point at which oil revenue can offset the significant costs of keeping all of the ruling party's political patrons satisfied. Public spending cuts are likely and could result in political backlash from either the public or other ruling elites. Even without controversial government actions, ongoing economic problems make another outbreak of protests likely in 2015.

 

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