Published by Economist Intelligence Unit

With oil prices falling to their lowest levels in two years, Venezuela's economic problems are beginning to converge, forming what could be a perfect storm. The already unpopular president, Nicolás Maduro, is under pressure from hardline Chavista elements within the government to stay the course initiated by the late former president, Hugo Chávez (1999-2013). The Chavistas' influence is strengthening, while reformers are being sidelined. This will complicate Venezuela's ability to implement much-needed economic reforms to spur growth.

Venezuela continues to endure the fallout from Mr Chávez's (1999-2013) socialist economic policies more than a year and a half after his death. Currency controls have created shortages of basic products and fostered a thriving black market in the US dollar, which now sells for more than 16 times the strongest official exchange rate of BsF6.3:US$1. Annual inflation—data for which have not been released by the Banco Central de Venezuela (BCV, the Central Bank) for nearly two months—is above 60%. Foreign reserves have slumped to US$20bn (representing just three months of import cover), a decline of more than 30% since January 2013. With the authorities failing to publish fiscal data on the opaque non-financial public sector (NFPS) since 2011, some estimates put the fiscal deficit as high as 20% of GDP. The Economist Intelligence Unit estimates a deficit of 12.2% of GDP and a real GDP contraction of 2.5% in 2014.

Investors, cowering at the possibility of default, are pushing bond prices down to their lowest levels since early 2009, and the government is believed to be considering a debt-restructuring exercise. Bond prices have slumped in recent weeks, partly in response to an essay written in September by a former planning minister, Ricardo Hausmann, which suggested that the country would be justified in defaulting. Also in September Standard & Poor's, a US credit ratings agency, downgraded Venezuela's rating to CCC+, seven levels below investment grade.

These events have been compounded by a fall in OPEC's average basket of crude in mid-October, to below US$80/barrel (the equivalent of a US$75 Venezuelan basket). Around 95% of government revenue comes from oil sales. Venezuela's break-even point may be well over US$100/b, and the country is likely to see major complications should the price stay at US$80/b for an extended period. Each US$1/b decline in price translates roughly to a US$700m loss in fiscal revenue over the year. Furthermore, while export earnings are down owing to the low oil price, the government's inability to provide foreign exchange is dampening import spending.

Maduro is no Chávez

The country's economic problems are exacerbated by Mr Maduro's falling popularity. His approval ratings languish in the low-30s. At his peak Mr Chávez enjoyed figures high into the 70s. For this reason—and because he is keen to placate his base and maintain unity in the Partido Socialista Unido de Venezuela (PSUV) in the run-up to legislative elections due in late 2015—Mr Maduro appears to be taking a more ideological path. While his standing within the PSUV appears secure for the time being, the possibility of a challenge from within cannot be ruled out. Diosdado Cabello, the head of the National Assembly, is rumoured to be a potential challenger, although for now he routinely appears by Mr Maduro's side.

In September Mr Maduro reshuffled his cabinet, moving Rafael Ramírez—the then oil minister and head of the state oil company, Petróleos de Venezuela (PDVSA), and also vice-president for the economy—to foreign minister. Mr Ramírez was seen as the face of pragmatism and reform within the government, having proposed consolidating the three-tiered exchange rate and reducing generous domestic petrol subsidies. His demotion was seen as a move to a more ideological economic line, demonstrated by his replacement, in part, by military men known to be more closely aligned to Chavismo.

Massive debt payments loom

Venezuela faces debt payments totalling US$17.6bn over the next three years (US$5.9bn in 2015; US$4.7bn in 2016; and US$7bn in 2017). Mr Maduro insists that the government will pay its debts "down to the last dollar". Indeed, Venezuela's socialist government has never defaulted on a payment. However, concerns persist that the government will not have the funds available, particularly if policy becomes even less pragmatic in the wake of Mr Ramírez's ousting. Foreign reserves from the BCV were used to service Venezuela's 2014 global bond and interest of around US$1.6bn on October 8th, while another payment of US$3bn is scheduled to be made by PDVSA on October 28th. The oil company is rumoured to be planning a major restructuring of some of that debt; bondholders will probably be asked to exchange 2016 and 2017 bonds for other papers maturing between 2020 and 2023, although this has not been confirmed by PDVSA.

Mr Hausmann's essay suggested that, while the country had not defaulted on its bonds, it had already defaulted on citizens by failing to pay for imports and foreign companies, with revenue trapped in Venezuela (more than 20 major airlines are still owed as much as US$3bn by the government). Mr Maduro still has a chance to pull Venezuela's economy onto a more pragmatic track. The falling oil price may force him to heed some of Mr Ramírez's advice, for both political and economic reasons.