World Economy

Venezuela is in trouble, and it only seems to be getting worse

Venezuela crisis seems to deepen
Venezuela crisis seems to deepen

In Venezuela, people have a hard time finding enough food to eat, and the anger that's already bubbling over into the streets is likely to get worse.

Last week, thousands of Venezuelans took to the streets, demanding a referendum to oust sitting President Nicolas Maduro.The New York Times reported last Wednesday that 73 protesters were injured after clashing with police in Merida, a city in northwestern Venezuela. This week, the Vatican interceded directly between Maduro and his opponents to try to head off more violence and dissuade protesters from taking to the streets again.

The latest mass protests were triggered after Maduro's government on Oct. 20 blocked a referendum that would've allowed for his legal removal from power. Had the referendum passed, Venezuela would have been able to elect a new president. But if it's not held before Jan. 10, Maduro's party will remain in power until 2019.

"After doing everything possible to slow down the recall effort of President Nicolas Maduro, the election commission finally suspended it all together. There's no legal mechanism left to remove the leadership, which means the resumption of major anti-Maduro street protests and demonstrations, and the state-supported repression to keep it under 'control,'" Ian Bremmer, president of research firm the Eurasia Group, said in a note.

Venezuela's oil-dependent economy capsized with the fall in crude prices that began in 2014, leaving whole swathes of the country's 31 million people without enough food or other necessities. Maduro's predecessor, Hugo Chavez, nationalized energy resources while crude prices were high. With oil prices now less than half of what they were in 2014, the government is left far short of its revenue needs, and with only an anemic private sector to generate taxes or jobs.

Separately, the government in Caracas put price controls in place that stripped importers of any incentive to bring food into the country. The controls also pushed products from store shelves to the black market.

Reggie Thompson, Latin America analyst at Stratfor, echoed Eurasia Group's Bremmer on the recent upswing in protests, saying "This is the culmination of several years of the opposition trying to get more power through electoral means."

"It very much looks like people opposing the referendum are delaying it as long as possible or just outright canceling it," he said.

The economic situation is quite dire. There is an extreme shortage of foreign exchange, which is making it increasingly difficult to import goods and, on top of that, you have rationed access to goods.
Brad Setser
senior fellow, Council on Foreign Relations

On the economic front, the International Monetary Fund expects Venezuela's economy to contract by 8 percent this year, and it sees inflation growing by a staggering 481.52 percent in 2016 and 1,642 percent in 2017. To fight off the dizzying inflation increases, Venezuela has hiked the minimum wage four times, the latest coming last week.

On Thursday, Maduro announced a 40 percent minimum wage increase to approximately 91,000 bolivars per month — or roughly $70 in the black market.

"The economic situation is quite dire," said Brad Setser, senior fellow at the Council on Foreign Relations. "There is an extreme shortage of foreign exchange, which is making it increasingly difficult to import goods and, on top of that, you have rationed access to goods," which has led to the creation of a black market.

Maduro has lost some of the few allies he had left outside Venezuela's borders, especially after the rise to power of Michel Temer in Brazil and Mauricio Macri in Argentina, said Jason Marczak, Latin American Economic Growth Initiative director at the Atlantic Council. Previous leaders in those countries had been more sympathetic, "or at least agnostic," toward Maduro's and Chavez's governments.

Macri has even called for the removal of Venezuela from Mercosur, a subregional bloc created to facilitate trade between its member nations.

"You're seeing increasing isolation of Venezuela in South America because of the economic situation and, most importantly, the humanitarian situation," Marczak said.

Opposition supporters take part in a rally against Venezuelan President Nicolas Maduro's government in Caracas, Venezuela, October 26, 2016.
Carlos Garcia Rawlins | Reuters

Venezuela has been dealing with a massive shortage of basic goods, such as food and medicine. In fact, earlier this year, six members of the Venezuelan military were detained by local authorities for stealing goats to feed themselves.

The lack of available food has led many Venezuelan immigrants living in the U.S. to send food to relatives back home.

The dire living conditions have also led to a spike in malaria cases. According to The New York Times, malaria cases in Venezuela rose 72 percent over the first six months of the year.

That confluence of events appears to be what led the Vatican to intervene, attempting to get both Maduro's party and the opposition to end their stalemate peacefully. It appears to have worked — for now.

"The fact that the Vatican is assisting in this process is a positive," said Diego Moya-Ocampos, principal political risk analyst at IHS Markit. Both the opposition and Maduro's party respect the Vatican, he said. But "if no concrete agreement related to an election comes out of those talks, I'm afraid protests and riots will continue."

Four political prisoners were released Tuesday in response to the Vatican's efforts, but the gesture is highly unlikely to appease the opposition or most regular Venezuelans.

"Maduro's just happy to have a smokescreen. All this just extends the economic and social damage. The long-term outcome is the same: Maduro can't hold on for much longer. But he can hold on for longer than many expected," said Eurasia Group's Bremmer.

Correction: This story has been updated to reflect that The New York Times reported last Wednesday that 73 protesters were injured after clashing with police in Merida, Venezuela.

— CNBC's Richard Washington contributed to this report.