Venezuelan collapse: Political scenarios

Venezuela: Political scenarios

The Venezuelan economy is currently going through the worst economic crisis in its modern history. The country has been in deepening recession since 2014 and as of mid-August 2018, IHS Markit projects that the country's real GDP will decline by 17.0-17.5% in 2018. Venezuela is struggling to tackle hyperinflation and will also likely see oil production falling to about 900,000 barrels per day, its lowest point in decades by year-end.

The political scenarios outlined below are part of a larger report published by IHS Markit entitled Venezuela's collapse: Historical background, current policies, and prospects. The full report assesses: 1) Venezuela's recent history in order to ascertain the main reasons behind the country's economic collapse; 2) recent measures adopted by President Nicolás Maduro to contain the country's acute economic decline; 3) Maduro's ability to remain in power; and 4) alternative scenarios leading up to regime change.

The political scenarios cover the 12-month outlook, to which we have assigned probability weightings.

Scenario 1: Maduro stays in power over the next 12 months (55%)

Despite the ongoing economic crisis, the top military leadership has a vested interest in ensuring that Maduro stays in power. It also does not trust the opposition and fears that a regime change would lead them to lose the uncontested political and economic control they currently enjoy. This includes control over the country's governorships, ministries, and PDVSA; along with ports, airports, food and basic goods imports, oil services; as well as fuel smuggling, illegal mining, and drug trafficking activity. As the political opposition's main leaders are arrested or in exile, and given that those in Venezuela face intimidation and lack unity, the military maintains its support for Maduro while he prioritizes identifying and neutralizing internal dissent against his administration. The Directorate General of Military Counterintelligence (DGCIM) is likely to be given enhanced powers in this scenario, to weaken the opposition and detect and detain military officers suspected of participating in insurrectional plots.

Maduro remaining at the helm, with the support of Venezuela's military leadership and the upper ranks within the PSUV, leads the country to further international isolation (principally from the US, Europe, and other countries in Latin America that have urged Maduro to hold elections and do not recognize his government). Maduro is reconfirmed as president in January 2019, when the next six-year presidential term should technically begin (he was re-elected in May 2018 but the constitution states his new term starts in January 2019). The governing elite increasingly raid state and private resources to protect their powerbase and maintain the required patronage networks, but fail to provide basic goods and services to the general population. Migration flows to neighboring countries intensify, which somewhat alleviates domestic social pressure and reduces domestic opposition to the political elite, allowing them to entrench further. The frequency and intensity of protests declines and the political opposition remains divided or in exile. A single-party system is established and authorities award management of the Orinoco Belt and basic industries in Bolívar state to Chinese or Russian firms in exchange for financial support.

More prevalent use of the Fatherland ID (these IDs are already being used to centrally manage access to critical goods like food) improves the government's ability to control the population. Pro-government armed groups gain expanded territorial authority and are allowed to further develop their own patronage networks to better manage the population. This includes granting them expanded authority over urban planning and services, and increasingly allows them to engage in policies to coerce and intimidate the population, such as expropriating residential property from the middle classes and other population groups that threaten their influence.

Scenario 2: Transfer of power to another PSUV member (20%)

The current economic and political environment deteriorates further, with intensifying basic product shortages, rolling power blackouts, and water supply shortages lasting more than 72 hours, which triggers violent large-scale anti-government protests from shanty towns west of the capital, Caracas, near the Miraflores presidential palace. Protests to date largely have emerged from middle-class neighborhoods rather than shanty towns. Dissatisfaction among pro-government armed militia groups stemming from the government failing to provide them with sufficient funds or more seriously, insufficient basic goods is another potential trigger for them to become hostile to the government, and help instigate much larger and potentially de-stabilizing unrest emerging from shanty towns.

Uncontrolled, economically motivated unrest prompts the military and PSUV leadership to calculate that Maduro has become a liability and opt to remove him from power with the hope of appeasing protesters. The change in leadership is cosmetic and the military appoints a loyalist rather than a member of the political opposition. Cohesion among the ruling class reduces the likelihood of a coup or violence between competing factions within the security apparatus. The military elite, together with members of the PSUV party, ask for Maduro's 'voluntary resignation' and stage sham elections where a handpicked successor is selected. Although the new leadership is unable to address Venezuela's economic troubles, it remains reliant on Russia and China for financial support, and the government is forced to grant the Orinoco Belt and basic industries in Bolívar state to China or Russia. The government remains vulnerable to withdrawal of support and recurring potentially destabilizing unrest that is economically rather than politically motivated.

Scenario 3: Military coup followed by the scheduling of legitimate elections (15%)

As in Scenario 2, the economic situation deteriorates rapidly and the political elite face violent, large-scale, economically motivated unrest. Neither China nor Russia provides financial assistance to Venezuela and the government is unable to continue funding salaries for the security forces. The indiscriminate printing of currency is insufficient to maintain the loyalty and cohesiveness of the military under hyperinflationary conditions. Divisions among the political elite, including factions within the armed forces, lead to a coup, which removes Maduro from power. Dissatisfied mid-ranking officers lacking the privileges and economic benefits enjoyed by the top military leadership displace the current military elite.

A military junta takes control of the country and the PSUV leadership including Maduro are arrested or flee to Cuba. Political prisoners are released and the military junta negotiates with the political opposition to schedule elections within a 30-day period. In parallel, the opposition-controlled National Assembly appoints a new board to the CNE, and Canada, the EU, and the US promise to lift existent sanctions preventing the restructuring of Venezuelan debt after completion of legitimate elections. With the support of neighboring countries such as Colombia, the new government also accepts immediate international aid providing food and medicines to contain social discontent and slow outward migration.

Scenario 4: The Maduro government yields to international pressure and worsening economic conditions and agrees to schedule free elections (10%)

The economic crisis intensifies with the country experiencing hyperinflation levels comparable to or surpassing those in Zimbabwe (79,600,000,000% in November 2008). The government experiences recurrent waves of major anti-government protests, and neither China nor Russia provides a financial lifeline to Venezuela. Although the military remains cohesive, reducing the likelihood of a coup, there is no economic respite. Oil production continues its downward spiral falling to less than 500,000 b/d. The US government tightens sanctions and bans imports of Venezuelan oil, with broad international compliance with US sanctions cutting the Maduro administration from its main source of foreign exchange. This, combined with some financial sanctions specifically targeting members of the government and military elite, prompts the military to persuade Maduro and main leaders to accept a negotiated solution involving holding elections while granting them immunity from future prosecution and scope to take exile in Cuba. Political prisoners are also released, more locally credible electoral authorities are appointed, and the results of a presidential election are broadly recognized both domestically and internationally as legitimate.

Conclusion

Even if Scenarios 3 and 4 materialize, and the opposition takes control, it will take several years for Venezuela to revive its fundamentally dislocated economy, restore macroeconomic stability, and regain investors' confidence. Main challenges would include re-establishing currency credibility, with dollarization of the economy - as in Ecuador - being an option. The challenge of taking the country out of the current economic crisis will also require eliminating pricing and exchange controls, without triggering renewed capital flight, alongside creating the conditions for a major privatization program. This must be accompanied by the overhauling of the fiscal and contractual framework in the oil industry. For a real chance of success, reform would need to be underpinned by a major stand-by agreement with the International Monetary Fund of between USD80 billion and USD100 billion.

The population will be highly frustrated by adverse pressure on already squeezed living standards. To implement any structural adjustment program and prevent subsequent destabilizing protests, a new pro-business administration will need to negotiate the provision of immediate humanitarian aid (food and medicines). Governance also will be challenged by the collapse of the civil service, with the outgoing administration likely to destroy public records needed to diagnose the true economic position and build credible economic indicators. A new economic team will need to take on the complex task of restructuring the country's debt and negotiate a solution to the multiple outstanding arbitration claims. A security plan also would be required to deal with pro-government armed militias, organized crime, and potentially hostile groups including Colombian insurgent groups that could undermine its stability. The political, economic, social, and institutional weaknesses today are far worse than those experienced during the 1980s and early 1990s. Venezuela would be highly reliant on protracted official help during economic reconstruction - with precedents in such diverse locations as East German and Iraq highlighting that such rebuilding exercises are likely to prove lengthy and very expensive.

To read the full report, please reach out to us

Posted 07 September 2018 by Carlos Caicedo, Senior Principal Analyst – Americas, Country Risk, IHS Markit and

Carlos Cardenas, Head of Latin America, Country Risk, IHS Markit and

Claudia Wehbe, Senior Economist, Latin America Economics and

Diego Moya-Ocampos, LLB, Principal Analyst Americas, Country Risk, IHS Markit and

Francisco Tang Bustillos, Economist