Venezuela (Bolivarian Republic of)

Easing of sanctions favors growth, but the economic situation remains critical

In 2023, although oil production improved following the easing of US and European sanctions, persistent galloping inflation and sharp currency depreciation at the start of the year weakened consumer demand, which weighed on economic growth. In 2024, activity is expected to pick up slightly, driven mainly by a further rise in oil production that is sustained by persistently high global demand and the further lifting of sanctions as Westerners seek an alternative to Russian hydrocarbons and re-engage cautiously with Venezuela. In particular, the US has extended the operating license of US oil company Chevron, which owns four joint ventures with Venezuelan state oil giant PDVSA, and generalised and extended this licence in October 2023 to all entities operating in Venezuela's oil sector. In addition, four US oil services companies (Schlumberger, Baker Hughes, Halliburton and Weatherford) were also authorised by the US Treasury to operate for a further year from November 2023. Increased oil demand and the further lifting of sanctions should enable drilling rigs to be re-commissioned and new rigs to be built to increase Venezuelan production capacity, bearing in mind that just two were operating in 2023 compared to a peak of 70 in 2013. However, although an improvement is expected, oil production is likely to remain well below its pre-2013 level (around 3 million b/d compared to a peak of 800,000 b/d in 2023) due to a lack of investment, as well as the poor state of energy infrastructures after years of inactivity. The government is attempting to remedy this by seeking technical assistance from Russia and Iran, but progress will only be minimal due to PDVSA's financial difficulties and lack of access to capital markets. While increasing production and keeping oil prices high should benefit PDVSA, the company may not be in a position to reap all the possible gains should sanctions return, forcing it once again to offer price reductions to buyers. On the demand side, consumer spending will remain weak in 2024. Despite the expected easing of inflationary pressures thanks to a restrictive monetary policy (characterised by a very high reserve requirement ratio) and the reduced risk of a return to hyperinflation thanks to the partial dollarisation of the economy, household purchasing power will remain severely affected given the low increase in real wages. Overall, the Venezuelan economy will continue to be severely weakened by its heavy dependence on hydrocarbons, as well as by poor macroeconomic management and abject governance, both of which discourage private investment.

Current account in good shape, but public accounts are still under the weather

The current account is set to remain in surplus in 2023 and 2024 thanks to higher oil export revenues, driven by sanctions relief, and buoyant remittances from expatriates, whose numbers have soared to six million or 20% of the population. The upturn in exports should be enough to offset the huge import bill, linked to the pressing need to import oil equipment and services. However, foreign direct investment will remain very low (forecast at 1.2% of GDP in 2024), which along with the State's drain on oil revenues maintains downward pressure on foreign exchange reserves (stable at around USD 10 billion, a quarter of the peak reached before the 2013 crisis). Reserves are also being eaten away as a result of central bank interventions to limit the depreciation of the bolivar, which has been abandoned by local players in favour of the dollar.

The budget balance remained in deficit in 2023 and is expected to narrow slightly in 2024. Largely dependent on oil, tax revenues should continue to rise due to the easing of sanctions on Venezuelan oil. In addition, non-oil revenues will remain low due to the high level of informality, which prevents the government from broadening its tax base. On the public spending side, the government is expected to support the economy and household purchasing power by increasing wages and pensions in the run-up to the 2024 presidential election. The deficit will continue to be partly financed by monetisation, which involves issuing securities to local banks, thereby increasing the money supply in circulation and helping to maintain inflationary pressures. Venezuela also has recourse to bilateral loans as the country is in the habit of borrowing (mainly from China) against repayment in oil, while siphoning off a large proportion of oil revenues to the detriment of PDVSA's ability to invest. In addition, the total amount of claims against PDVSA and other public entities has reached USD 175 billion, i.e., equivalent to several multiples of its GDP. Reducing public debt will therefore be futile until the sanctions hindering oil production have been definitively lifted.

Improved relations with Western countries and the opposition

Upheavals caused by the war in Ukraine, and the election of new left-wing South American Presidents, notably in Brazil, Chile and Colombia, have coincided with a reopening of dialogue between Venezuela and its neighbours, as well as with Western countries, resulting in an easing of sanctions on hydrocarbons. Nevertheless, the Venezuelan political climate remains particularly tense in the run-up to the 2024 presidential elections. While the government of Nicolas Maduro, whose re-election in 2019 was deemed illegitimate, and the opposition have reached agreement on the holding of a presidential election scheduled for the second half of 2024, uncertainty runs high as to which candidates will be allowed to stand. The results of the October 2023 opposition primary, won by the liberal Maria Corina Machado, were suspended by the Supreme Court at the request of the Executive, thereby threatening the holding of a free and fair Presidential election. Machado had already been banned from holding public office for 15 years. While a change of government in 2024 remains unlikely under these conditions, the political situation could nevertheless improve slightly. The lifting of US sanctions, dating back to October 2023, is conditional on compliance with the electoral roadmap agreed between President Maduro and the opposition, including the holding of the Presidential election in 2024 and the participation of all candidates. Several sectors are affected by the relief, including the oil and gas sector (until 18 April 2024), as well as the gold sector (no time limit), as the US Treasury seeks to reduce gold trading on the black market. In addition, the United States has once again allowed Venezuelan debt securities to be traded on the secondary market. Such relief, which is of vast importance to the Venezuelan economy, and the possibility of renewing it, could encourage the government to continue its efforts towards democratisation.

Last updated: March 2024