Caracas Chronicles

Without a doubt, economic activity in Venezuela will exceed in 2024 the real contraction registered in 2023. The slowdown in prices, combined with the small rebound in bank credit and greater public spending –yet limited by aggressive exchange rate interventionism– will have driven greater spending by households and private companies, which will translate into a year-on-year increase of 4.2% in the domestic market. In this sense, 2024 will be the first year since 2013 in which growth is recorded along with annual inflation below 100%. With these indicators, Venezuela will be the only Latin American country with a GDP increase greater than 4% by 2024, according to projections from the World Bank and the IMF.

This upturn could be considered a “rebound effect” after the accumulated collapse of the last decade. But this growth continue for the next years? In the medium term, will we see the economy recover or exceed the size it had until 2014?

A closer –and updated– review of our market in several dimensions tells us that growing will be more than a difficult task, even in the midst of a macroeconomic stabilization program, with institutional reforms or under a new government.

Income drop

Although internal and dollar-denominated inflation have been decreasing in the last year, a significant fraction of the workforce continues to operate in informal activities and is exposed to recurring delays in salary adjustments.

Since 2018, many private companies stopped paying their workers, as their operating expenses began to increase exponentially with the onset of hyperinflation, and internal demand was suddenly curbed by higher prices, in addition to the consequences of the drop in productivity from work. Those that did adjust salaries did not do so in accordance with the increase in prices, but more recently they have reduced wage increases due to the inflation slowdown. As for the public sector, a major part of the fiscal discipline has focused on fewer salary adjustments and “informalizing” the remuneration (more bonus payments and direct subsidies, only for certain positions).

These income constraints coincide with restrictions on bank credit, which inhibits consumer loans –due to reserve requirements and banks’ measures to minimize the risk of non-payment– that many Venezuelans used to acquire basic goods and services. In this context, price stability is no longer enough to increase real incomes in Venezuela and make easier spending decisions, even with a more “friendly” environment for companies to produce.

Restrictions on private investment

Discretionary regulation of domestic business activity and foreign trade, among other things, influenced capital spending. “Special” tariffs on certain importers or legal inspections of businesses add costs and reduce investors’ interest in such sectors. The legal framework that oversizes the role of the State in the economy –with its history of excess regulations and controls– continues to generate distrust in investors and lenders, as well as the fear of expropriations.

Price distortions and real contractions have reduced the competitiveness of national goods, adding uncertainty to the effective rate of return on any investment. The tax burden reached more than two-thirds of companies’ net income by 2022, according to Ecoanalítica. External factors, such as US sanctions, generate over-compliance that continues to limit domestic companies’ access to foreign capital. And the latest public investment incentives are limited to “promises” of future payments or tax refunds (such as the Special Economic Zones policy), which are often subject to delays in refunds and/or operational problems.

Infrastructure collapse

In addition to the destruction of the manufacturing sector, the closure of basic industries and the lower use of installed capacity –as a consequence of the collapse of investment and a capital outflow of around 34% in recent years, according to Ecoanalítica– the Venezuelan economy remains severely constrained by the low quality of basic services such as water and electricity.

The state of the power network harms the performance of all sectors, including the oil industry, whose production of raw materials and derivatives has been impacted to general electricity cuts. Although perception has improved since then, in 2023 the national electricity service was rated as negative by 7 out of 10 Venezuelans, according to the National Observatory of Public Services (OVSP). Furthermore, companies are often forced to solve these public problems privately –by acquiring power plants or water wells– which increases their costs, just as happens with fuel shortages.

Another critical aspect is the loss of human capital to emigration. For many years it was one of the biggest concerns of the manufacturing industry, according to the Conindustria Qualitative Survey. For example, the president of the National Federation of Flour Workers explained that –in addition to the closure of the country’s largest mill in 2023– the baking sector has seen part of its workforce migrate to Aruba and Curacao.

The Venezuelan economy will grow if conditions for the private sector improve, if the State is managed better, and if household income recovers. The presidential election is an almost unique opportunity for re-institutionalization, support from multilaterals and public policies to get out of the crisis and ensure high and sustained growth.

However, even if there is a new government administration, we must be prepared to see for some time an economy growing below what is needed to sustainably improve the quality of life of all Venezuelans.

Sunday may define our path to the country’s economic recovery. Whatever that outcome, however, the road will remain rocky.