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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.
