The recession in the Venezuelan economy is expected to continue in 2017, despite an expected gradual rise in oil prices. The limits of the policy of redistributing oil wealth, in the form of a range of benefits to disadvantaged classes, have been exposed in a context of low oil prices and it has exacerbated existing macroeconomic imbalances. Oil accounts for over 96% of the country’s exports, 50% of budget revenues and is virtually the only source of dollars. Internally, industrial activity is likely to remain limited by the accumulated shortcomings in terms of production capacity and diversification linked with the difficulty of obtaining imported equipment and intermediate products. The limits on access to foreign currency imposed by the government is further reducing the availability of the intermediate products and capital goods required for any recovery in local production. The productive capacity of the agriculture sector is also being hampered by inadequate levels of investment following years of neglect in favour of the oil and gas sector. Household consumption is likely to be particularly hard hit by the decline in purchasing power caused by the rampant hyperinflation driven by shortages in consumer goods and staples. Private Investment is set to continue falling, symptomatic of a legal environment that is not supportive of private companies (arbitrary seizures, intrusive State audits and inspections). In terms of foreign trade, oil exports are expected to suffer from the decline in volumes despite the predicted gradual recovery in oil prices.

The movement in the price of oil, accounting for almost half of budget revenues, remains the critical factor for the public finances in Venezuela. The low price of oil is acting to reduce the government’s room for maneuver and means that the risk of a Venezuelan payment default on its foreign debt is a credible one. The symbolic measures implemented by the government at the beginning of 2016 such as an increase in the price of fuel to provide additional revenues for the State, as well as the simplification of the exchange system to two rates (from the previous three) with the aim of revitalizing local production, have proven unsatisfactory in terms of reducing the macroeconomic imbalances and restoring growth. The risks of a sovereign (State) default and above all a quasi-sovereign (PDVSA) default remain high, but would appear to have been avoided for 2017 as a result of possible sales of the Central Bank’s gold reserves and the relative success of the PDVSA share exchange operation that made it possible to reschedule the payments due in 2017 to 2020. In terms of foreign trade, oil accounts for 96% of Venezuelan export earnings. The slow upwards shift in oil prices during the year should partly offset the decline in production, a result of inadequate investment. The balance of trade deficit will however remain, despite a sharp contraction in imports. The lack of competitiveness of the virtually non-existent manufacturing sector will also hamper any possibility of increased non-oil exports. FDI is at a very low level as a result of the lack of protection offered by the legal system, and the use of bilateral loans will not be enough to rebalance the balance of payments, which means a further decline in the reserves (of which almost 64% are in the form of gold) and by the appreciation of the dollar on the black market (nearly 1000 VEB to 1 USD mid-2016 against an official exchange rate of 10 VEB/USD).

The political situation in Venezuela is likely to remain extremely tense in 2017 with the political class seemingly lacking any notion of a strategy for getting the country out of its economic crisis. The political quarrels between the opposition coalition, the Democratic Unity Roundtable (Mesa de la Unidad Democratica, MUD), which has a majority in Congress, and the government of Nicolás Maduro (PSUV) which controls the executive, are not improving this paralysis. The opposition is likely to continue pushing for a presidential recall referendum against President Maduro in 2017, but his removal from office would have a limited impact as he would be replaced by his Vice-President (Aristóbulo Istúriz), unless early elections were called. The danger of social unrest is likely to remain significant, with the street clashes between the Venezuelan opposition and pro-Maduro factions likely to continue. The business climate will remain very flawed. The protectionist trading policies of the Venezuelan government have created huge obstacles against private companies, local and foreign, operating there (difficulty accessing foreign currency, price controls and controls on capital transfers, arbitrary seizures, etc.).