Economics & Country Risk Blog

Is Venezuela on the brink?

Venezuela’s economy under President Nicolás Maduro, successor to late president Hugo Chávez, is deteriorating markedly, in large part because of the oil price collapse. Severe shortages of food and basic goods are increasing risks of intensified social protests and more widespread looting. If this social unrest gathers sufficient momentum, it could threaten Maduro’s hold on power.

Venezuela’s oil sector generates over 95% of the country’s export revenues, about 25% of its GDP, and around half of its fiscal revenues. Public and social spending levels are not sustainable under prevailing oil prices, yet the government lacks contingency plans to deal with the decline. Weak international oil prices, Venezuela’s severe difficulties in accessing new credit, and the high costs of existing borrowing are combining to damage the country’s already challenging business environment and prospects for economic growth.

The government has blamed, and will continue to blame the private sector for food and goods shortages. As a result, companies operating in these sectors face particularly pronounced threats of auditing, tax, non-payment, contract revision, and expropriation. In late January 2015, for example, board members of Farmatodo C.A., Venezuela’s largest pharmaceutical retail store chain, were detained for creating long queues and fomenting unrest (charges that the retailer denies). On February 2, President Maduro ordered the seizure of supermarket chains Día Día Practimercados and Cárnica 2005 (Corporación Cárnica 2005 C.A.) and the detention of their board members. The companies are the subject of a government investigation into allegations of hoarding, speculation, and overpricing, which the companies refute. Both companies will now be absorbed within state-owned food network PDVAL (Producción y Distribución Venezolana de Alimentos).

The government is highly likely to prioritize allocating very scarce foreign currency to strategic sectors such as food and pharmaceuticals. This will further restrict foreign-currency access for other sectors, including automotive, aviation, construction, manufacturing, and petrochemicals, which will struggle to import raw materials and components. The official inflation rate has reached 68.5% and the budget deficit is 15% and widening, further constraining policy options. Shortages of food and other basic products are likely to intensify, with queues of shoppers lengthening and rationing expanding. Hyperinflation is a growing risk in the next two years as domestic operators have little incentive to increase production.

Heading toward default?

Maduro acknowledged on December 8, 2014, that his government needs international financing to address the funding shortfall the recent sharp decline in oil prices has aggravated. Transfers of foreign-exchange reserves to the country’s development fund, FONDEN, since 2004 had eroded cash reserves to below $5 billion by 2014. At the same time, the country’s external debt has expanded significantly in the past five years, from $97 billion to $155 billion. IHS expects it to swell by almost 30% in 2015.

Despite this, IHS believes that Venezuela will continue to pay its international debt obligations this year and honor international arbitration ruling awards. Venezuela’s public-sector liquid net assets abroad amounted to $30 billion on December 31, 2014, above the level of a year earlier. Also, it has the ability to sell international assets (e.g., refineries) to help service its debts. The longer oil prices remain subdued, however, the higher the default risk becomes.

Government instability and social unrest

Political stability is linked intrinsically to the president’s ability to manage the country’s finances and prevent widespread social discontent. Oil revenues have been used to provide food at subsidized prices, but the sharp decline in oil export value has reduced the scope for imports of food and other staple goods. IHS expects the economy to contract at least 5.5% in 2015 and remains in recession in 2016, with inflation above 80% throughout.

The economic deterioration is forcing Maduro to take some unpopular measures, such as reducing subsidies and raising gasoline prices. The economic backdrop, combined with recurrent power blackouts, gas shortages, and violent crime, has significantly eroded support for the ruling United Socialist Party of Venezuela (Partido Socialista Unido de Venezuela: PSUV) and Maduro. Private pollster Datanálisis reported that Maduro’s popularity was down to 22% in January. 

This disillusionment is likely to grow within the pro-government grassroots support base, increasing the probability of protests in Venezuela’s poorest areas, which generally take the form of road blockades and damage to government property (mainly targeting vehicles and government offices). At least 43 people died in anti-government protests between February and June 2014, mostly in confrontations with security forces. More deaths are likely this year following the Ministry of Defense’s resolution on January 27 authorizing a strong military presence in retail stores and the use of lethal force to control protests. The government also banned people from taking photographs of people queuing outside stores and empty supermarket shelves.

In the first two weeks of January, media and IHS sources reported an increase in the number of arrests of people taking such pictures and tweeting against the government. In the first six weeks of 2015, scarcity issues accounted for 10-35% of all political chatter on Twitter. Social media activity for and against Maduro became more intense in the days before and after February 4, the date the government commemorates the anniversary of Hugo Chávez’s failed 1992 military coup against President Carlos Andrés Pérez (1989–1993). However, the strong display of discontent was short-lived and quickly lost momentum.

IHS analysis of social media intelligence (SOCMINT) reveals that core opposition and pro-government activists have been primarily driving the social media activity around the issue of scarcity. Indeed, this anniversary was an opportunity for pro-government activists to spin a conspiracy narrative, blaming the shortages on businesspeople and the United States. Ongoing IHS SOCMINT analysis will monitor whether more spontaneous social media chatter reflecting a groundswell of wider anti-government sentiment gains traction.

Venezuela’s parliamentary election, planned for the last quarter of 2015, will serve as an indicator not only of opposition popularity and of Maduro’s standing, but crucially of his capacity to give continuity to the Chavismo movement by keeping its civilian and military factions united. Three possible scenarios for the future of Venezuela’s leadership are explored below. The likelihood and impact of each is rated and indicators highlighted. 

Total foreign-exchange reserves in Venezuela, 1999-2016 (US$ billions)

Scenario one: Maduro concludes his constitutional term in 2019
Probability: High
Impact: Minor

The economy deteriorates gradually with shortages of food and basic goods, isolated protests, and looting in supermarkets and retail outlet queues. Anti-government protests vary in intensity but are geographically limited and on a scale the security forces can manage. The government has significant control over the powerful state-owned media network and increasingly over privately owned media. The opposition struggles to connect with voters outside the middle classes and fails to build political capital from growing discontent with President Maduro. The government continues removing opposition politicians from office or taking legal actions against them to weaken its potential election rivals in the wake of Maduro’s falling popularity. This is accompanied by increased editorial control over privately owned media. The ruling PSUV again secures a parliamentary majority in 2015, possibly after convincing the electoral authority (Consejo Nacional Electoral:CNE) to redraw electoral districts or amend the electoral law. 

The armed forces and the security and intelligence apparatus support Chavismo but not necessarily Maduro. However, they see the opposition as a threat to their leadership and political and business influence. To protect their interests, the military supports Maduro and top military commanders continue to play a key role in government and the private sector. The PSUV leadership remains united to prevent the opposition from gaining power. Maduro continues to face severe economic and social problems and his popularity wanes further, but not enough to threaten his hold on power.


  • Shortages of basic goods and food continue in Caracas and other urban centers but do not intensify significantly. The state-owned food network manages to meet basic needs and allocate sufficient foreign currency to the private sector to import essential goods.
  • The targeting of trucks loaded with food and medicine, as well as isolated looting incidents, becomes more common but not widespread. The media does not report on these incidents to avoid inflaming civilians.
  • Opposition politicians are successfully removed from office or marginalized, limiting their ability to channel anti-government discontent into votes.
  • Government threats of arrest and use of lethal force against protestors quell unrest.
  • Displays of discontent on social media are short lived and quickly lose momentum.
  • Divisions within the armed forces and PSUV are managed through internal negotiations and cabinet reshuffles but do not lead to fragmentation of the Chavista movement.

Scarcity tweet terms in Venezuela shown by size relative to proportion of chatter in 10% tweet sample

Scenario two: Maduro is forced to leave office by military intervention
Probability: Low
Impact: Very substantial

Disruptive anti-government protests intensify as shortages of basic goods worsen significantly, signaling that most grassroots Chavista followers have withdrawn their support for the president. Tens of thousands stage street protests in urban centers and shantytowns demanding the armed forces depose Maduro. Faced with widespread rioting and looting, the government represses the shantytown populations with hundreds of casualties, along the lines of the unrest in Caracazo in 1989. This accelerates existing fractures within the PSUV, which deepen and become public.

Maduro resigns due to direct or indirect military intervention, is arrested, or flees Venezuela. A provisional joint military and civilian government junta, composed of members of the armed forces, some top-level Chavista leaders, and possibly some opposition leaders, takes control for at least 180 days—pacifying the country, controlling protests, and creating the conditions for free elections to take place. The provisional government adopts urgent measures to change economic policy and provide a peaceful transition. A presidential election is called.


  • Shortages of food and basic goods continue to intensify and become a topic with much greater traction on social media, despite government measures to dampen this.
  • Further geographic concentration of pro-opposition social media chatter in urban centers.
  • Protests or widespread looting incidents occur in shantytowns and deprived areas targeting supermarkets, retail stores, and pharmacies located in areas of Caracas such as Catia, El Valle, and Petare; in suburbs such as Guarenas, Guatire, and Valles del Tuy in Miranda state; and in other key urban areas of Venezuela’s most populated states, including Carabobo, Mérida, and Táchira.
  • The government is unable to keep pro-government armed groups (colectivos) on the state’s payroll (these groups intimidate the population in shantytowns, preventing protests).
  • Disputes involving top-level government officials and military commanders become more public. These include National Assembly President Diosdado Cabello, Minister of Defense Padrino Lopez, Minister for Communes Elías Jaua (unlikely), or members of Hugo Chávez’s family, including his brother, Adán Chávez, the governor of Barinas state, Vice President Jorge Arreaza (who is married to one of Chávez’s daughters, Rosa Virginia), Deputy Ambassador of Venezuela at the United Nations María Gabriela Chávez (another Chávez daughter), or Minister of Oil and Energy Asdrubal Chávez (a Chávez cousin).
  • Postponement of parliamentary elections.

Number of tweets in Venezuela and moving average number of tweets by week

Scenario three: Maduro leaves office due to a recall referendum
Probability: Very low
Impact: Substantial

The opposition wins a majority in the 2015 parliamentary elections and forces the electoral authority CNE to organize a recall referendum for 2016. More than the required 20% of registered voters fill in the legal request for the referendum. A proposal to revoke the presidential mandate has full military backing, and the opposition mobilizes its supporters to force an eventual victory. This scenario depends on the government not abusing its control of the CNE to ensure it wins the election. According to the Constitution, if more people vote to remove the president from office than the number who voted him in, his mandate will be revoked and elections called immediately. For a referendum to be valid, at least 25% of those registered to vote are required to do so.


  • Anti-Maduro social media chatter accelerates organically and moves beyond opposition and pro-government activist campaigns.
  • Maduro’s government orders security forces to repress protests in shantytowns in the event of widespread unrest.
  • An opposition-led majority in the National Assembly appoints new CNE authorities and judges to the Supreme Court of Justice.
  • Sectors previously aligned with government actors and military factions sponsor a recall referendum.

Diego Moya-Ocampos is senior analyst, Americas, IHS Country Risk. Contributing to this article are Paula Diosquez-Rice, principal economist, IHS Economics; as well as Carlos Cardenas, deputy head, Americas; and Julien Grossmann, analyst, Indicators & Analytics, both of IHS Country Risk