RaboResearch - Economic Research

The impact of Chavez’s death

Economic Comment


The death of Hugo Chávez on Tuesday not only creates economic and political uncertainty for Venezuela, but also for some of its neighbors.

The death of President Hugo Chávez on Tuesday 6 March creates economic and political uncertainty for Venezuela. The country will soon face new presidential elections, but whoever will succeed him will have to deal with enormous challenges. Crime has risen to extremely high levels and state inefficiency and corruption are huge,  after Chávez nationalized more than 1,000 companies and assets and rapidly increased public spending. Meanwhile, non-oil production plummeted over the past decade and oil production has also fallen. This has resulted in shortages of many goods and an inflation rate of above 20% and a huge fiscal deficit. Despite a recent devaluation of the bolivar and many currency controls, the currency remains overvalued. Unfortunately, many Venezuelans may still have to find out that the present model is unsustainable. Just like Peronism in Argentina, Chávism may live on, as Chávez may well be remembered as the first to look after the poor in Venezuela. However, as nobody within his party has Chávez’s charisma and support base, he leaves a political vacuum behind, especially as Chávez put important institutions, such as the central bank, state oil company PDVSA and the judiciary, under his direct control and also created militias that were directly reporting to him.

Elections are now to be held within 30 days. Vice-president Nicolás Maduro, whom Chávez designated as his successor, is the most likely winner, as he will probably benefit from the sympathy vote. It is probable that his policies are in line with those of Chávez. Maduro is unlikely to become as popular as Chávez and will therefore probably not be in a position to convince his party to implement more moderate policies. The fact that Maduro just hours before Chávez’s death accused the United States of engaging in a conspiracy against Venezuela and its president, suggests that he does not intend to follow a more moderate course. It thereby remains to be seen whether Maduro will be able to hold the diverse Chavista movement together. Meanwhile, should the opposition, which is likely to unite behind Henrique Capriles Radonski, win the election, political and social instability could follow, as parts of the Chavista movement may not be willing to cede power over the institutions they control now. 

Figure 1: Oil price
Figure 1: Oil priceSource: Reuters Ecowin
Figure 2: Oil production of Venezuela
Figure 2: Oil production of VenezuelaSource: Reuters Ecowin

Impact on neighboring countries

The death of Venezuela’s President Hugo Chávez and the outcome of the elections will also have a big impact on its neighboring countries. Since Venezuelan oil revenues started to rise, Chávez begun to support like-minded governments with the introduction of PetroCaribe. Since 2005, eighteen Caribbean and Central American countries have received below market-price Venezuelan oil through the PetroCaribe scheme. Importing countries not only pay below market prices, but can also get favorable loans to buy the oil. As a result, several recipient countries have become indebted to Venezuela and highly dependent on the cheap oil.

In 2011, PetroCaribe shipped an estimated 200,000 barrels per day, of which 115,000 went to Cuba. This clearly indicates that Cuba will take a hard hit in case the program is downsized. It is even questionable whether Cuba will be able to pay its energy bill in case Venezuela ends its favorable oil deliveries. However, in case the program is revised or ended Cuba will probably get a special treatment, as Cuba has strong political, ideological and strategic tics with Venezuela (in return for the delivery of subsidized oil 40,000 Cuban health care workers are employed in Venezuela). Nicaragua also hugely benefits from PetroCaribe.  It is estimated that the discount it received in 2012 through PetroCaribe was worth USD 600m , equivalent to 7-8% of GDP. Moreover, Venezuela has provided USD 2.4bn in financial assistance to Nicaragua to finance its oil imports, which corresponds to about one-third of the Nicaraguan economy. Besides countries with leftist governments like Cuba and Nicaragua, also the Dominican Republic benefitted from subsidized oil deliveries from Venezuela. While lowering the country’s oil import bill, its participation in PetroCaribe also brought with it a gradual increase of the debt burden. Last year, PetroCaribe-related debt accounted for about 15% of total public debt in the Dominican Republic, which exposes the country to a change of the currently very lenient repayment conditions.

Whether the PetroCaribe program will be sustained first depends on the presidential elections. If vice-president Nicolás Maduro is elected there is a good chance that he will maintain the program. While opposition leader Henrique Capriles stated that he would stop the program during his 2012 presidential campaign. So in case, Capriles wins the elections the program will probably be ended. However, even if Maduro wins he might be forced to downsize the program in the future, as Venezuela is facing growing economic problems. 

Figure 3: Venezuelan financial support for Nicaragua to finance its current account deficit
Figure 3: Venezuelan financial support for Nicaragua to finance its current account deficitSource: IMF
Figure 4: PetroCaribe debt of the Dominican Republic
Figure 4: PetroCaribe debt of the Dominican RepublicSource: Ministry of Finance of the Dominican Republic
Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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