Venezuela's Economy Seeks Revival Amid Oil Reliance and Leadership Changes

Venezuela's economy, long dependent on oil, faces a potential revival as leadership changes loom and inflation stabilizes. President Maduro's policies have failed to address structural issues, leading to calls for a fresh start under electoral rival Edmundo González.

Venezuela's Economy Faces Challenges as Maduro's Policies Fail to Address Structural Issues

The outlook is slightly more optimistic due to his recent endeavors to reduce the cost of living. The rampant hyperinflation that had seen price rises peak at over 400,000% a year in 2019 eventually ended in Venezuela in February.

Currently, annual inflation is more manageable but remains excessive at approximately 50%.

Mr. Maduro has been eager to claim responsibility for the decline, asserting that it demonstrates his "correct policies."

Regrettably, these policies have failed to address the economy's fundamental structural issues, primarily due to its historical reliance on oil, which has had a detrimental impact on other sectors.

"Since it was discovered in the country in the 1920s, oil has taken Venezuela on an exhilarating but dangerous boom-and-bust ride," as the US Council on Foreign Relations think tank puts it.

Opponents of President Maduro are currently banking on a change in leadership and a fresh start under his electoral rival, Edmundo González, to achieve economic revival.

"An opposition victory would lead to a renewed opening of Venezuela’s trade and financial ties with the rest of the world," says Jason Tuvey, chief emerging markets economist at Capital Economics.

This would also result in the termination of US economic sanctions implemented following Mr. Maduro's victory in the 2018 presidential election, which was widely regarded as neither free nor fair.

PDVSA, the state-owned oil company, has been compelled to engage in illicit market transactions at substantial discounts because of the challenges of selling its crude oil globally.

However, Mr. Tuvey warns that the economic collapse of the past decade will be challenging to reverse, as the massive investment required to increase oil production and the approaching peak oil demand will make it formidable.

"Venezuela's economy can never get back to where it was 15 to 20 years ago," he tells the BBC. "It will be starting by and large from square one."

Despite the numerous promises made by Venezuela's 25-year-old Bolivarian Revolution, named after the late President Hugo Chávez, the country has yet to achieve its most pressing need: a diversified economy. Y

Rather than diversifying away from the energy industry, Mr. Maduro and Chávez's governments reaffirmed their commitment to Venezuela's mineral wealth.

They regarded PDVSA as a cash cow, using its funds to finance social spending on housing, healthcare, and transportation, with little regard for the future.

However, they simultaneously neglected to allocate resources toward sustaining the current level of oil production, which has declined in recent years. This decline is partially, but not entirely, attributable to US sanctions.

When President Chávez passed away in 2013, these issues were already apparent; however, they have become increasingly severe under his successor's leadership.

"Under Chávez, Venezuela was able to ride on the coat-tails of an oil boom, up until the global financial crisis," Mr Tuvey stated.

"Fifteen to twenty years ago, Venezuela was a significant oil producer. It produced three-and-a-half million barrels daily, similar to some of the smaller Gulf states.

"Now the oil sector has been completely hollowed out, and it produces less than a million barrels a day."

Venezuela's Economy Struggles Amid GDP Decline, Inflation Control, and Widespread Economic Hardship

The GDP has experienced a significant decline, with a 70% decrease since 2013. Nevertheless, Mr. Maduro turned to print money to finance spending to compensate for the lower crude prices, which led to the runaway inflation that the country has only recently successfully contained.

The Venezuelan population has been significantly affected by economic hardship. Over 7.7 million individuals, representing approximately 25% of the population, have fled in search of a better life.

However, there have been indications of progress for those who have been left behind. Although the bolívar remains the official currency, an informal dollarization has occurred, with US greenbacks becoming the preferred payment method for retail transactions. This is true for those who have access to them.

This has resulted in economic stability but has also incurred a social cost.

Residents of the capital, Caracas, are currently experiencing a two-tier economy. Although US dollars drive the consumption surge in high-end shops and restaurants, those paid in bolívars feel increasingly excluded.

Colombian reggaeton superstar Karol G's recent appearance in Caracas as part of her current global tour was a symbolic event that underscored these changes.

She sold out two nights in March at the 50,000-capacity Estadio Monumental, despite ticket prices varying from $30 to $500 (£23 to £390), even though few major artists perform in Venezuela these days.

Simultaneously, ecoanalítica, a consultancy in Caracas, estimates that approximately 65% of Venezuelans earn less than $100 per month. At the same time, only eight or nine million of the 28 million individuals in the country are considered consumers with actual purchasing power.

"Those with a very close connection to the regime or PDVSA have been barely affected by all this," says Mr Tuvey.

In addition to enhancing living standards and reducing inequality, Venezuela faces a significant economic challenge in addressing its substantial foreign debt.

Bondholders and other foreign creditors are estimated to owe the nation $150 billion. It has been in partial default since 2017, and despite Mr. Maduro's repeated assurances that negotiations regarding arestructuring would commence, none have yet transpired.

The issue has been further confounded by PDVSA issuing some of the bonds using the company's US refiner, Citgo, as collateral. Consequently, bondholders have been able to prosecute the matter through the courts of New York.

Bruno Gennari, an emerging markets strategist at KNG Securities, told the BBC that Venezuela is experiencing a "legitimacy crisis" because the United States refused to acknowledge Mr. Maduro as president following the 2018 election.

This implies that the victor of Sunday's election must be acceptable to Washington for the United States to approve a debt restructuring.

Mr. Gennari does not exclude the possibility that the United States could "turn a blind eye" if Mr. Maduro wins the election under questionable circumstances; however, he considers this exceedingly unlikely.

“This election will have a sizeable impact on Venezuela’s future. If restructuring can go ahead, we could see the beginning of a very complex recovery process," says Mr Gennari.

Once the wealthiest nation in South America, Venezuela has the potential to regain stability. However, regardless of the outcome, its economic heydays are securely in the past.