Venezuela’s economy runs on oil and music

Venezuela’s battered economy is one of the main battlegrounds in Sunday’s presidential election, as President Nicolas Maduro hopes to convince voters that the country has turned a corner after years of conflict.

Thanks to his recent efforts to lower the cost of living, the outlook is slightly higher. In February, Venezuela finally said goodbye to rampant inflation that saw prices rise by more than 400,000% annually in 2019.

Annual inflation is now more manageable, but still high at 50%.

Mr Maduro is keen to take credit for the fall, saying it shows he has „the right policies”.

Unfortunately, however, those policies have done little or nothing to address the economy’s underlying structural problems—mainly, its historical dependence on oil, to the detriment of other sectors.

„Since its discovery in the country in the 1920s, it has taken Venezuela on an exciting but dangerous boom and bust ride,” says the American Council on Foreign Relations think tank.

Now President Maduro’s opponents are pinning their hopes for economic revival on a change in leadership and a fresh start under his electoral rival, Edmundo González.

„A victory for the opposition could lead to a renewal of Venezuela’s trade and financial ties with the rest of the world,” said Jason Duay, vice president of emerging markets at Capital Economics.

It would also mean an end to US sanctions imposed after Mr Maduro’s 2018 presidential victory, widely dismissed as neither free nor fair.

These have made it difficult for state-run oil company PDVSA to sell its crude internationally, forcing it to resort to black market deals at huge discounts.

But reversing the economic decline of the past decade will be a tall order, warns Mr Dove, with the huge investment needed to boost oil production and peak oil demand approaching.

„Venezuela’s economy will never return to where it was 15 to 20 years ago,” he tells the BBC. „It starts from square one and gets bigger.”

Venezuela’s 25-year Bolivarian Revolution — the name the late President Hugo Chávez gave his political movement — promised many things but failed to deliver what the country desperately needed: a broad-based economy.

Instead of divesting from the oil industry, the governments of Chávez and Mr Maduro doubled Venezuela’s mineral wealth.

With little regard for the future, they viewed PDVSA as a cash cow, milking its funds to fund social spending on housing, health, and transportation.

But at the same time, they neglected to invest to maintain the level of oil production, which has fallen in recent years – partly, but not entirely, as a result of US sanctions.

„Under Chávez, Venezuela was able to ride the coat-tails of an oil boom, until the global financial crisis,” says Mr Due.

„Fifteen to 20 years ago, Venezuela was a major oil producer, producing three and a half million barrels per day, on par with some of the smaller Gulf states.

„Now the oil field is completely empty, and it’s producing less than a million barrels a day.”

GDP has fallen by 70% since 2013. But Mr Maduro has tried to compensate for lower oil prices

Economic hardship has affected Venezuelans, with more than 7.7 million people fleeing in search of a better life – a quarter of the population.

But those left behind showed signs of improvement. Although the bolivar is still the official currency, informal dollarization has taken place, with US greenbacks increasingly the mode of payment in retail transactions – at least, for those with access to them.

It has stabilized the economy – but it has come with a social cost.

Residents of the capital Caracas are now subject to a two-tier economy. While US dollars fuel a consumption boom in high-end shops and restaurants, those paying in bolivars feel increasingly left out.

A symbolic event that highlighted these changes was Colombian reggaeton superstar Carol G’s recent appearance in Caracas as part of her current world tour.

Few mainstream artists perform in Venezuela these days, but despite ticket prices ranging from $30 to $500 (£23 to £390), he has no problem selling out two nights in March at the 50,000-capacity Estadio Monumental.

Meanwhile, 65% of Venezuelans earn less than $100 a month, according to Caracas-based consultancy Ecoanalitica, while only eight or nine million of the country’s 28 million people can be seen as consumers with real purchasing power.

„Those who are most closely connected to the regime or PDVSA are not affected by all this,” says Mr Due.

Another major economic challenge for Venezuela is what to do about its massive foreign debt, as are the needs to raise living standards and reduce inequality.

The country owes $150bn to bondholders and other foreign creditors. It has been in partial default since 2017, and despite Mr Maduro’s repeated promises of talks on a restructuring, nothing has materialized so far.

The issue was complicated by the fact that some bonds were issued by PDVSA using the company’s US refiner Citco as collateral. As a result, bondholders were able to pursue the issue through the New York courts.

Bruno Gennari, emerging markets strategist at investment bank KNG Securities, tells the BBC that the US will not recognize Mr Maduro as president after the 2018 election, leaving Venezuela in a „legitimacy crisis”.

This means that whoever wins Sunday’s election must be accepted by Washington if the US-sanctioned debt restructuring is to take place.

Mr Gennari did not rule out that the US would „turn a blind eye” if Mr Maduro wins the election under dubious circumstances, but he believes that is unlikely.

“This election will have a significant impact on the future of Venezuela. If the restoration can go ahead, we could see the start of a much more complex recovery process,” says Mr Gennari.

Once South America’s richest country, Venezuela now has a viable path back to stability — but whatever happens, its economic glory days are firmly behind it.