Feb 6, 2016 | 17:02 GMT

5 mins read

In Venezuela, Things Will Get Worse Before They Get Better

In Venezuela, Things Will Get Worse Before They Get Better

Segments of Venezuela's opposition are laying the groundwork for a political confrontation with the presidency. There is a draft law in the National Assembly that could be used to effectively cut short the tenure of President Nicolas Maduro. Depending on how the legislative process plays out, Venezuela could become highly politically unstable in the near term. But even if the country avoids political upheaval, the long-term picture is still bleak. The next government — whether it comes to power soon or after presidential elections in 2019 — will have to oversee a major economic adjustment and cope with the ensuing threat of social upheaval.

On Feb. 2, an opposition party known as Causa R, short for the Radical Cause, presented a legislative proposal to cut the president's term down from six to four years, set term limits and hold new elections in December 2016. That an opposition party introduced the draft is no surprise. The rapidly deteriorating national economy has become a rallying point for the opposition to advocate for Maduro's removal. However, various factions of the opposition are calling for slightly different courses of action. Some opposition leaders, including the runner-up in the last elections, Henrique Capriles, have advocated a referendum approach, but the speaker of the National Assembly, Henry Ramos Allup, has publicly backed Causa R's proposal, which is notable in that it would put in place a legal framework that the president will have a difficult time opposing.

Causa R's aim is to enshrine the presidential changes in a constitutional amendment. If approved by the legislature, where the opposition holds a sizable majority, it would go to a national referendum. Such an outcome would be risky for Maduro. He could resist or reject the opposition's referendum but this would be dangerous. If the government refused to legally recognize the opposition's referendum call, the public may see the president as standing in the way of reforms that would address the country's severe economic distress. The result would be a severe political crisis that would stall economic reforms and fuel public anger at the government. Yet the opposition is incapable of exerting enough pressure from the National Assembly to break the resulting political stalemate. Therefore, it will be crucial to see which side the majority of the Venezuelan armed forces backs. Major unrest is of particular concern to military leadership — their troops, the national guard in particular, will be the ones tasked with controlling any protests. Maduro will need strong support from the military if he is to resist the referendum.

Critical Months for Maduro

For years, the stability of the United Socialist Party of Venezuela (PSUV) rested on the continued loyalty of the armed forces. Following the 2002 coup attempt against former President Hugo Chavez, the military was purged of dissidents and given significant social benefits to remain loyal. Officially-tolerated corruption, whether in the form of fuel smuggling to Colombia, currency arbitrage or cocaine trafficking through Venezuela, ensured the loyalty of some commanders. But the country's situation has dramatically shifted from the post-coup years. The rapid decline in global oil prices in late 2014 decimated Venezuela's already struggling public finances. The challenging economic environment pushed the Maduro administration's already cautious approach to economic policymaking into an even more risk-averse mode. Instead of implementing major economic measures to rapidly increase government income (at the expense of social stability and the administration's continued rule), Maduro chose to slash imports, which only worsened existing shortages. Consequently, the country's inflation has skyrocketed, which itself could eventually lead to widespread protests.

The next few months will determine whether Maduro will be able to fend off challenges to his power. Military commanders are likely preparing for the worst. Maduro's removal would not fix structural problems such as high inflation, but it could relieve some of the public anger at the central government and overcome the government's resistance to economic adjustments. With the country's political impasse worsening, substantive efforts at reform will be delayed as long as possible.

To make matters worse, the political landscape in Venezuela is deeply divided. The core leadership surrounding Maduro has an interest in worsening the political impasse to prevent direct threats to the presidency from the opposition-controlled National Assembly. Others, particularly leaders who face criminal charges abroad, are also concerned with saving their political futures — but they are not necessarily as concerned with preserving the current government.

Maduro's strategy of deferring reform is logical for him but comes at the expense of economic stability; inflation will probably continue accelerating, eventually spurring more frequent, though not necessarily organized, demonstrations. Although other factions within the government likely see the threat from impending protests, serious negotiations between the National Assembly, segments of the armed forces and the United Socialist Party of Venezuela are likely needed for a referendum on the president's rule to stand a chance of succeeding. Things could get even worse if Petroleos de Venezuela (PDVSA) were to default on its foreign debt, which, given that significant payments will be due in the latter half of the year, remains a possibility. Additional sales from the country's gold reserves could be necessary to avert that particular crisis. 

Whether Maduro can be removed this year and through a constitutional amendment depends on factors that could change at a moment's notice. But the picture for Venezuela is clear. Venezuela will not overcome its economic crisis without an economic overhaul to raise government revenue and erase economic inefficiencies, such as artificially low fuel prices and other heavy subsidy regimes. These sorts of sharp and socially disruptive adjustments, combined with a lengthy downturn due to depressed oil prices, will probably keep Venezuela politically unstable and economically depressed for several years, complicating the country's return to being a major oil producer.

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