Caracas Chronicles

“Nothing is agreed, until everything is agreed” was the premise in the negotiation process between the Colombian government and the Revolutionary Armed Forces of Colombia (FARC) almost 10 years ago. In the case of Venezuela, despite recent partial announcements, progress in political negotiations is still in its initial phases. Last week, new general licenses were granted for six months that allow oil, mining, and gas exports to the United States. The measures also included the withdrawal of Banco Central de Venezuela, Banco de Venezuela and Conviasa from the OFAC list and the possibility of American citizens trading in Venezuelan bonds. But, while the government of the U.S. shows some clear incentives to Maduro, these sanctions lifting is still temporary, partial, and conditioned to the government releasing political prisoners and ensuring electoral guarantees in the coming weeks.

How do we see OFAC measures’ economic impact in the short and medium term?

First, despite the relief, it will be difficult to counteract the negative scenario for the end of this year. Consumption has been very low in 2023 and could increase in the remaining months, due to the change in expectations and the increase in official spending. However, greater dynamism in consumption will hardly change the result of the year: which at Ecoanalítica we expect will be a GDP growth close to 0%.

But that’s for what remains of 2023.

These broad licenses could change the economic scenario for 2024: we expect greater public spending and a gradual increase in oil production, which in any case will hardly reach one million barrels before 2025.

Thus, we see a potential increase in production conditional on the extension of the licenses beyond the original six months. In turn, these licenses are subject to compliance with political agreements with the Chavista government, which is already insisting on generating doubts about their compliance.

However, and in the meantime, the measures will contribute to reducing the price discount of the Venezuelan barrel by selling it to our most natural market: the United States. This will drive oil exports away from China, where Venezuelan crude competes with the discounted Iranian and Russian sanctioned oil seeking buyers.

Considering all this, in Ecoanalítica we project three possible scenarios for the economy following the sanctions relief.

Three scenarios for the Venezuela economy

In our first scenario, following the important changes aforementioned, the license is renewed and the country moves towards a GDP growth close to 12% in 2024: more than double than what we expected if the status quo was maintained. While this growth is considerable, it’s coming from a very low base as Venezuela’s economy would need to grow around 360% to recover its pre-crisis size.

These broad licenses could change the economic scenario for 2024: we expect greater public spending and a gradual increase in oil production, which in any case will hardly reach one million barrels before 2025.

This scenario implies growth in important and productive sectors that have been left behind in recent years, such as mining, the basic industries of Guayana and perhaps manufacturing. In addition, we would expect a higher credit portfolio and more access to it. 

An intermediate scenario implies a return to the 2023 status quo –with only a handful of restrictive licenses for companies like Chevron– if the new licenses are not renewed after April. Before the sanctions relief, we expected a GDP growth close to 5% in 2024 due to an increase in oil production, more measured commercial practices and more credit.

A third scenario implies an increase in political pressure on the country if the government doesn’t fulfill its Barbados agreements. The U.S. could, for example, remove even the original Chevron license. In the past, when Donald J. Trump withdrew from the Iran nuclear deal, the U.S. deepened its sanctions regime after a thaw. This scenario would once again give us very low growth levels or even a possible contraction. 

But, what is happening now and what can we expect? 

On the other hand, and as we expected, the bond market is today showing a rapid response to the license issued last night by the Biden administration that allowed US investors to trade Venezuelan bonds for the first time in four years.

Without the default and the very limited fiscal sustainability of the Maduro government –barely 10% of the GDP in tax revenue– this measure would open the possibility for Venezuela to access international markets. But right now, the country has another urgency: to face an unfulfilled debt that represents around 200% of the GDP and for which an extensive and difficult restructuring process will be necessary.

The implementation processes of these licenses will be full of mistrust and uncertainty, as to whether Chavismo will comply with the political agreements that it must assume if it wants to obtain a renewal of the licenses next April.

Soon after the agreements, Venezuela’s bonds soared by an average of 110% but slacked after the primaries, as expectations regarding the agreements diminished. Nevertheless, PDVSA bonds are moving this week between 12 and 13 cents per dollar –70% more than before the agreement– with the exception of the PDVSA 2020 bonds which are trading over 80%. Meanwhile, Venezuela’s bonds are trading between 17 and 18 cents per dollar –60% more than before the signing of the agreement. 

The implementation processes of these licenses will be full of mistrust and uncertainty, as to whether Chavismo will comply with the political agreements that it must assume if it wants to obtain a renewal of the licenses next April.

For this reason, the next few weeks will be crucial to see the degree on which some relevant players in the energy and mining market will deal with Venezuela and also who will have an appetite to operate in this territory as the agreements become more sustainable. Foreign investments are not expected to soar with a short license, conditioned to electoral reforms that aren’t clear, but PDVSA and the private companies that are already present in Venezuela will be able to quickly increase their income – which will generate multiplier effects throughout the Venezuelan economy.