The Venezuelan opposition MUD (Mesa de la Unidad Democratica) alliance has achieved a decisive victory over the ruling Chavista PSUV in the parliamentary elections this week. The opposition alliance has won at least 99 representatives in the National Assembly against 46 representatives for the governing socialist party, with 22 seats remaining undecided. While it is still unclear if the opposition will receive either a qualified majority (60 percent of the total) or a two-thirds majority (the opposition believes it has won at least 112 seats), it is clear that the opposition will have achieved a significant enough majority to influence government policies, though unfortunately its ability to do so in the short-term on economic policy remains limited.
Multinationals should greet positively the opposition’s victory, but major economic changes in the short-term remain limited. And though a two-thirds majority opens the door for the opposition to recall President Maduro (or call for a constitutional assembly that would force President Maduro to step down), regime change over the medium-term remains a dangerous path for Venezuela.
Opposition is less united on an economic agenda
The opposition MUD represents a diverse range of political forces and ideologies, and remains more united on certain political issues than on an agreed-to economic agenda. The opposition is likely to focus its first efforts at passing an amnesty law to liberate political prisoners such as opposition leaders Leopoldo Lopez and Antonio Ledezma while also circumscribing President Maduro’s ability to use decrees to govern, as well as reducing Chavista influence over public entities such as the electoral council and Venezuela’s Supreme Court.
The opposition, though largely winning due to voter anger at the state of the economy, lacks a coherent policy agenda to end the country’s persistent economic imbalances and confront rising inflation, ineffective foreign exchange and price controls, and an economy that is suffering from a deep recession. There is no short-term solution that will not entail politically costly and painful adjustment measures, including cuts to government subsidies and a unification of the exchange rate systems at a severely devalued exchange rate.
Government resistance to new legislature likely to force political confrontation
Though President Maduro has admitted defeat, it remains unclear how his government will shift policies to confront an opposition-controlled National Assembly. The Venezuelan government remains in control of most public institutions and may pursue a strategy of severely curtailing the national assembly’s role in policy-making and oversight, as the Venezuelan government has done in the past when it has faced defeat in state and local elections. This may further polarize the political environment in Venezuela, with the opposition likely reacting by attempting to leverage its majority to pursue either a constituent assembly or a recall referendum against the president. This dynamic would further curtail the potential for changes in policy to end the economic crisis in the short-term, and would precipitate a political crisis, increased social unrest and a sovereign debt default in late 2016.
Significant changes to economic policy remain highly uncertain
As far as economic policy in the short-term goes, power remains in the hands of President Maduro. While major economic policy shifts may be announced before Jan. 5 of 2016 when the new opposition-dominated national assembly is seated, it is likely that President Maduro will announce major adjustment measures, if any, by late January 2016. President Maduro has been weakened by the election result, and will be hard-pressed to push through necessary economic measures unless he receives significant support from the opposition. The central battleground between the opposition-controlled legislature and the Chavista government will be over control of government institutions and authority, not over the appropriate economic policies to tackle the economic crisis.
The best short-term scenario for the economy and multinationals operating in Venezuela is for a pact between the opposition and the government to push through necessary economic reforms to reduce economic imbalances and return Venezuela to a path of economic growth. Over the medium-term, the best that multinationals can hope for is an orderly and democratic transition to a post-Maduro government (the potential to recall President Maduro becomes possible by April 2016) with the necessary political capital to implement not only necessary economic stabilization measures but also market-friendly reforms.
Multinationals need to prepare for a tumultuous 2016
Unfortunately, the reality is that Venezuela confronts a President with limited political capital, an opposition-controlled legislature without a clear economic policy agenda, and a monumental economic crisis that may culminate in a sovereign debt default in the second half of 2016. Multinationals need to prepare for a tumultuous and complicated 2016, with the likelihood for a worsening economic environment remaining high.
Actions to take
Multinationals should continue to closely monitor both the final confirmed number of representatives in the National Assembly for the opposition and the government’s response over the coming weeks as it confronts the first major loss of power since 1998.
As FSG clients evaluate their 2016 plans for Venezuela, they should leverage our reports on Venezuela, particularly Venezuela Decision Framework, Managing Risk in Venezuela and Managing an Exit from Venezuela.
For our latest updates on Venezuela, FSG clients can visit the client portal. Not a client? Contact us to learn more.