Published by Economist Intelligence Unit

Event

The president, Nicolás Maduro, indicated in mid-December that his administration does not intend to raise petrol prices, currently the lowest in the world, even as a steep drop in global oil prices has a marked impact on fiscal revenue.

Analysis

In an interview with a leftist former vice-president, José Vicente Rangel, Mr Maduro claimed that there is "no hurry" to raise prices. Petrol prices are kept artificially low in Venezuela thanks to generous government subsidies that have an opportunity cost of around US$12.5bn annually. Mr Maduro admitted that the issue of raising petrol prices is politically sensitive; when a previous government tried to do so in 1989, widespread rioting broke out. However, Mr Maduro did say that the cost at the pump should at least cover production costs, implying that an increase would be a pragmatic move.

The economy continues to suffer from the recent sharp decline in global oil prices. The weekly price of the country's oil basket—which is around US$7 lower than international market prices, owing to the country's heavier crude—was released on December 14th, a Monday rather than the previous Friday (as is customary), in what represents another sign of worry within the government. The basket was priced at US$57.53/barrel, below the US$60/b budgeted figure. Annual consumer price inflation, last reported in September, was running at more than 60%. The country's currency has fallen by 65% on the black market this year alone, to BsF184:US$1 in mid-December, compared to the strongest official exchange rate of BsF6.3:US$1. In the interview with Mr Rangel, Mr Maduro reiterated his plan to adjust the Sicad II exchange rate, the country's third exchange rate, which currently stands at around BsF50:US$1. However, he insisted that the strongest rate would continue to be used only for priority goods. Many Venezuelans say that they are unable to obtain dollars at the preferential rate.

These developments continue to worry investors. The government's benchmark 2027 bonds fell following Mr Maduro's interview to their lowest levels (on close) since before the former president, Hugo Chávez (1999-2013), came to power. Although the government's willingness to pay its debts appears secure, its ability to do so could come under threat unless it makes much-needed pragmatic policy reforms.

Impact on the forecast

We have made no changes to our economic forecasts at this time and will wait to do so until an official policy announcement is made by the government.