Published by Economist Intelligence Unit

Predicting Venezuela's future since the former president, Hugo Chávez (1999?2013), came to power has not been easy. However, there is little doubt that in 2015 something will have to give, be it political or economic. A devaluation of the currency is needed, along with other pragmatic economic measures, but Mr Chávez's successor, Nicolás Maduro, lacks the political capital to implement them. With its economy now in freefall, a volatile year lies ahead for the country. How Mr Maduro deals with economic problems in this pivotal year will dictate not only his future, but that of Chavismo itself.

Although there is no presidential election in 2015, legislative elections will take place in September. The results will be crucial, holding the potential to pave the way for a possible referendum against Mr Maduro in 2016. In the run up to the elections the government's primary concern will be the poor state of the country's economy. Severely delayed economic data, released in the final days of 2014, showed that Venezuela was in recession for the first three quarters of the year. Annual inflation was above 60% in November, although this figure includes price-controlled goods, many of which are unavailable for purchase. The real figure, therefore, is likely to be substantially higher.

All of this hurts Mr Maduro's popularity, more so than it would have hurt Mr Chávez, given the more charismatic nature of the latter. The president's approval ratings are currently at 22% and are falling. The strongest supporters of Mr Chávez are quietly moving away from Mr Maduro.

Change is difficult

The president's sagging popularity could suffer further if he implements even some of the policy measures he outlined in late 2014, regardless of their effectiveness. Mr Maduro promised that 2015 will be a year of "great economic transformation". In the coming months he intends to reform the three-tier exchange-rate system (which has pushed many into the black market) as well as implement as-yet-unspecified measures to reduce liquidity and boost scarce international reserves.

Despite Mr Maduro's optimism, previous promises of reform have come to nothing. Reformers within the government (including Rafael Ramírez, who began 2014 as energy minister, head of Petróleos de Venezuela (PDVSA, the state oil company) and economy vice-minister) have been sidelined or demoted, while hardliners' demands for additional price controls and other socialist economic measures have gained approval. Although an official devaluation in the first half of 2015 (to BsF8.7:US$1 from BsF6.3:US$1 currently) is part of our central forecast scenario, this will not apply to the majority of goods and will therefore have a limited impact. More stealth devaluations, whereby importers are pushed onto weaker exchange rates, are expected. Devaluations increase the local-currency value of oil earnings in US dollars and, therefore, provide a temporary boost to public finances.

Existing policies such as maintaining the world's cheapest petrol prices, price controls and currency controls are likely to remain unchanged in 2015, despite their gargantuan financial cost to the government. There is a risk that Venezuela will default on some portion of US$5.9bn in debt payments falling due this year. Furthermore, Chinese loans appear to be drying up, meaning that if debt payments are made using foreign reserves, funds are unlikely to be replaced. A further US$11.7bn in payments will fall due in 2016 and 2017.

Any change in policy will be relatively minor, given the political cost to Mr Maduro and his party. Substantive policy changes would push the economy deeper into recession. Inflation would rise, further reducing the spending power of those that have supported—or at least have not voted against—the administration. Somewhat ironically, Mr Maduro's biggest asset may be the opposition itself, which is fractured and unappealing to disaffected Chavistas. The opposition's ineptitude will continue to offset Mr Maduro's waning political capital in 2015.

A conspiracy

Mr Maduro blames Venezuela's poor economic performance not on the country's failed economic model, but on an "economic war" waged by the US and the Venezuelan opposition; the president even attributes the recent steep drop in international oil prices—which has hit Venezuela's fiscal and external accounts hard—on a US conspiracy. February will see the one-year anniversary of protests that rocked Venezuela in early 2014, while also marking a year since the detention of Leopoldo López, a key opposition leader charged with inciting violence (Mr Maduro claims that the protests are the reason for the ongoing recession). The appetite of protesters for additional confrontation is low; many students, who were instrumental in the protests of early 2014, are now focused on their studies and securing visas to leave the country. Mr López is largely forgotten by Venezuelans, and his perceived popularity abroad surpasses that at home. María Corina Machado, a fellow opposition leader, may also face detention this year after being charged in 2014 in relation to an alleged plot to murder Mr Maduro.

With the opposition weak and its leaders in jail, the largest political threat to Mr Maduro in 2015 is likely to come from within Chavismo itself. Unlike Mr Chávez, who was skilled at uniting the country's various left-wing political parties, Mr Maduro is struggling to consolidate power. The left is now showing signs of fracturing, driven by a debate over the most prudent response to the economic crisis. While groups like Marea Socialista, a leftist faction within the ruling Partido Socialista Unido de Venezuela (PSUV), pose no serious threat to the government, they are an indicator of deeper—and higher level—divisions. High-ranking Chavistas are keen to take power, but are well aware that doing so would be a delicate manoeuvre. With Mr Maduro's popularity likely to fall further in 2015—in tandem with the economy—another leader from within the PSUV may win favour. Ultimately, however, although this will be the most trying year to date for Chavismo, we expect Mr Maduro to remain in power.