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Summary: Venezuela – Scenarios and Next Steps

L-R: L. Martínez, F. Monaldi, R. Dallen, E. Farnsworth

October 26, 2017


  • Russ Dallen, Managing Partner, Caracas Capital Markets
  • Leopoldo Martínez, Chairman & CEO, Center for Democracy and Development in the Americas and IQLatino
  • Francisco J. Monaldi, Baker Institute Fellow, Rice University
  • Eric Farnsworth, Vice President, Americas Society/Council of the Americas

On October 26, Council of the Americas hosted a discussion on potential scenarios following Venezuela’s October 15 gubernatorial elections. Panelists analyzed the government’s bond payment schedule, the country’s deepening economic crisis, and the implications of the election results for the opposition. 

Debt servicing is increasingly challenging for Maduro’s regime

Caracas Capital Markets’ Russ Dallen discussed the upcoming bond payment schedule facing the government of Venezuelan President Nicolás Maduro. Between October and November, the government owes $3.6 billion in bond debt. In the past few weeks, it has missed several debt payments totaling around $350 million, but has a grace period to avoid default. Dallen warned that some upcoming debt payments do not include a grace period—and include, as collateral, a majority share in state oil firm PDVSA’s U.S. subsidiary Citgo.

Maduro’s government’s cash flow depends on oil exports to the United States. Rice University’s Francisco Monaldi explained the government only obtains dollars for 700,000 barrels out of the 2 million produced each day. Around 700,000 barrels are used to pay off debt obligations to Russia and China, 500,000 barrels are kept for domestic consumption, and 100,000 barrels are used to pay off imports of refined gasoline products.

Decreasing oil production capacity has restrained the government’s capacity to service its debt. The oil sector accounts for almost all government revenue, but production has decreased to around 2 million barrels a day. Oil production when Maduro came to power in 2013 was 3 million barrels a day. In the last few weeks, exports to the U.S. have declined to 500,000 barrels due to sanctions and diversification of shipments to new destinations, such as India, said Monaldi.

Panelists discussed how the government is sacrificing the wellbeing of its people by continuing to service its debt. The government has implemented import quotas on basic goods, leading to widespread shortages of food and medicine, and causing street market rates to skyrocket. However, Maduro continues to deny that a humanitarian crisis exists in Venezuela. In this context, pressure has mounted on the United States to resolve the situation. Panelists advised policymakers to keep in mind Venezuelan domestic politics, Russia and China’s geopolitical goals, and the role of Venezuela’s military when considering next steps. 

Widespread corruption disincentivizes economic reform

Venezuela is experiencing the deepest recession in the recorded economic history of Latin America, explained Monaldi. The International Monetary Fund predicts that in 2018 GDP will decline by 6 percent and inflation will reach 2,300 percent. Key examples of hyperinflation are appearing in Venezuela—the banking sector is collapsing, tax collection is contracting, and money supply continues to rise.

The government has not presented a plan to turn around the economy. Reforms made up until this point—such as the creation of carnet de la patria, which transfers subsidies directly to individuals—are focused on securing support in elections. Panelists agreed that it remains unclear what the regime’s strategy will be moving forward.

Corruption is endemic in Venezuela, and prevents any meaningful reforms. Those aligned with the government receive preferential access to basic goods and overvalued fixed exchange rates, which they turn to profit in overpriced black markets. Fixing the exchange rate, for instance, would help resolve supply system problems in the country. But there is currently no incentive to diverge from the status quo, said Dallen.

No clear path forward for the opposition

The opposition is increasingly divided in the wake of the gubernatorial elections. Some opposition leaders defend a long-term strategy with a focus on elections, while others support taking more immediate steps against the Maduro administration. Maduro will continue to capitalize on this division to conquer the opposition. Leopoldo Martínez, of the Center for Democracy and Development in the Americas and IQLatino, argued that, in order to unite, the opposition must develop a discourse that can create an emotional connection with its base, and develop a strategy with the support of the international community to divide the Maduro regime. 

Panelists agreed that Maduro has maintained support from his base despite the economic crisis because Hugo Chávez, the former president who died in 2013, remains the most popular politician in the country. With Leopoldo López and Henrique Capriles disqualified from running, the opposition lacks a competitive candidate.

Fraud played a part in election results, but abstention was the key determinant. The opposition’s base is disenchanted with the electoral process and its ability to bring about change. In this context, economic factors play a bigger role in the election. This leads to dependence on government subsidies, rising emigration and, therefore, lower voter turnout from the opposition’s base. Martínez argued that the opposition must continue to have faith in the electoral process or it will not be competitive in next year’s presidential elections.