Latin America

Inflation in Venezuela seen hitting 1,500% in 2017 as crisis goes from bad to worse

The economic situation in Venezuela continues to go from bad to worse, and things are unlikely to get better, experts have warned.

This week, Venezuela's congress was stripped of its powers over the budget, viewed as a move by the country's President Nicolas Maduro as an attempt to consolidate power.

On top of this, the country lacks many basic goods and inflation is out of control. Year-on-year inflation is expected to reach 700 percent this year and UBS forecasts it will reach 1,500 percent next year.

"This situation is vastly deteriorating," Diego Moya-Ocampos, senior Latin America analyst at IHS Country Risk, told CNBC Thursday. "We expect the economy to contract at least 11.5 percent, inflation to hit 700 percent, already the highest in the world."

The situation in Venezuela is deteriorating: Analyst
The situation in Venezuela is deteriorating: Analyst

The country also faces shortages of food and medicines, he added.

"Children are dying," Moya-Ocampos added. "The elderly are dying in Venezuela, and a recall referendum against incumbent President Nicolas Maduro, which was expected to (terminate early) his mandate and pave the way for a new leadership … Is being basically blocked."

Blame for the crisis lies on 15 years of populist policies by Venezuela's government, according to Michael Henderson, lead economist at risk analysis firm Verisk Maplecroft.

"The government has scared away private enterprise and nationalized large swathes of the domestic economy leading to stagnant growth and chronic inefficiency," he told CNBC via email on Thursday.

Police keep guard as people line up to buy groceries in a supermarket at Catia neighborhood in Caracas, on June 11, 2016.
Federico Parra | AFP | Getty Images

"Investment in productive capacity and infrastructure has been insufficient to meet growing demand, fuelled by super-loose monetary and fiscal policy. This is a toxic mix which almost inevitably results in a rapid acceleration of inflation."

The Venezuelan economy heavily relies on oil, so the collapse in oil prices in recent years hit the country hard, resulting in a balance of payments problem. Overall, the outlook for Venezuela is grim, says Henderson.

"Regardless of whether the government is able to avoid a debt default in the near term, an inevitable macroeconomic reckoning is approaching which will have painful repercussions for ordinary households and businesses," he added.

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