Once again the Venezuelan government’s response to rapidly deteriorating economic conditions is woefully inadequate. On February 17 President Nicolas Maduro announced a series of economic policy changes that would have been insufficient even before the collapse in oil prices over the last eighteen months. Multinationals should continue to expect the economy to further deteriorate in the months (and likely years) ahead, with the most important changes to gas prices and the foreign exchange system completely inadequate relative to what the economy (and the government’s fiscal conditions) demand.

Revised exchange rate system solves very little

Multinationals hoping for easier access to foreign exchange should not expect much improvement with the revamped exchange rate system. The major changes are the following:

• Devaluation of Cencoex exchange rate by 37%: The Cencoex exchange rate (used for food and medicine) was devalued from 6.3 BsF/USD to 10 BsF/USD
• Elimination of SICAD exchange rate system: The SICAD exchange rate (previously at a 12 BsF/USD rate) has been eliminated, with transactions slated for this exchange rate moved to the SIMADI exchange rate (currently 200 BsF/USD)

These devaluations are barely any adjustment. With a black market parallel exchange rate over 1,000 BsF/USD, these adjustment measures will not materially improve access to foreign exchange nor improve the government’s ability to repay importers.

6,000% increase in gas prices is not nearly enough

The Maduro administration raised gas prices for the first time in 17 years, announcing a 6,000% increase in the price of 95 octane gasoline, from 0.097 BsF per liter to 6 BsF per liter (approximately USD 1 cent per liter at the parallel exchange rate). 91 octane gasoline received an increase to 1 BsF per liter. This is still well below market prices, and the government should have gone further. While a step in the right direction, this reform will have limited impact on cutting the fiscal deficit as President Maduro will use extra revenues to fund social programs instead of helping alleviate PDVSA’s financial situation (which would have reduced the need to print additional bolivares and helped with fiscal consolidation).

Other measures will only worsen economic imbalances

Other announcements made by President Maduro only increase uncertainty for multinationals operating in Venezuela, and do not strongly tackle the roots of Venezuela’s economic crisis. Among the other measures are a reaffirmation of price controls, a restructuring of the public food distribution system, another promised tax overhaul, and a 20% increase in the minimum wage. These measures are unlikely to significantly mitigate the current trajectory of the Venezuelan economy or its politics.

Venezuela’s further economic collapse remains the baseline expectation

FSG’s baseline scenario for Venezuela remains the same despite President Maduro’s new measures:

• Prolonged economic collapse: Severe economic deterioration, with the likelihood of a sovereign default increasingly likely, and hyperinflation increasingly a danger as oil prices remain low. Consumer purchasing power will be progressively precarious and investor sentiment falls further into the abyss
• Severe political polarization and gridlock: Discord between the legislative and executive branch leading to a severe institutional crisis, with the end result being either the removal of President Maduro from power, or an unconstitutional revocation of powers of the legislative branch
• Worsening social conditions: Increasing risk of social protests, particularly if the opposition is stymied from leveraging its legislative majority to implement any policy changes by a recalcitrant government

Multinationals should continue to explore their options

The Venezuelan government is not seriously confronting the severe internal economic imbalances that President Maduro has worsened over the last three years. Multinationals should evaluate whether they have the right operational footprint in Venezuela given the likely persistence of an adverse political, economic, and business environment. Executives should leverage FSG’s Venezuela Decision Framework to determine the right path forward for their companies in Venezuela.