Oil Discounts Deepen Venezuela’s Financial Freefall

Venezuela’s economy is in tatters, putting additional pressure on the country’s embattled leader, Nicolas Maduro, at a time when the U.S. Administration is increasing its military presence in the Caribbean region and striking alleged drug boats offshore the world’s largest crude oil reserves holder.

The economic collapse of Venezuela, exacerbated by the U.S. sanctions on its oil industry and exports, has left many Venezuelans increasingly disillusioned with the regime and supporting an ousting of Maduro.

This year, Venezuela’s economy is expected to edge up by 0.5%, but inflation will surge to 548.6%, from 47.2% last year, the International Monetary Fund (IMF) forecast in its Regional Economic Outlook for the Western Hemisphere last month. GDP will sink by 3% next year when inflation is set to hit 628.8%, the IMF has estimated. Projections of government expenditure, primary balance, and general government gross debt were not made, considering the lack of reliable data and the deep economic crisis.

“In Venezuela, growth is forecast to decelerate to 0.5 percent in 2025 amid mounting macroeconomic challenges. Trade and political uncertainty have increased, reigniting economic distortions and weighing on domestic demand,” the fund said in the October report.

Despite the sanctions, Venezuela’s oil sector has held relatively stable so far this year, at about 1 million barrels per day (bpd) of crude oil production.

However, “lower oil prices, larger price discounts, and logistical issues have weakened oil export proceeds, triggering a generalized FX scarcity,” the IMF noted.

The Venezuelan currency has crumbled this year and is expected to continue tumbling, further pressuring most households that struggle to pay for necessities.

“Fiscal deficit has widened, leading to a larger monetary financing of the deficit. Against this background, the depreciation of the Bolivar exchange rate is expected to continue, with the Bolivar losing about 80 percent of its value in 2025,” the IMF said.

“Despite larger FX interventions and efforts to control price increases, inflation will reverse its 6-year downward trend and rise to about 549 percent. Venezuela remains in a deep economic, political, and humanitarian crisis, which has led to about 8 million people (25 percent of the population) leaving the country since 2014.”

Many people in Venezuela’s capital city, Caracas, are so desperate that they wouldn’t mind a U.S. intervention.

“If the gringos are going to intervene, let them do it already,” a shopper at the supermarket told the Financial Times.

“We tried voting and they threw us in jail, and now we’re scraping by, so what else can we do?”

According to Erik Meyersson, chief EM strategist at Nordic bank SEB, “A trifecta of factors strengthens US incentives for promoting regime change in Venezuela. These include domestic US political incentives, the benefits of harnessing Venezuela’s vast natural resources, and a chance to reduce China’s geopolitical influence in the region.”

The economic opportunities that could arise from a regime change include Venezuela’s previously untapped investment and export opportunities in crude oil and downstream products, with the possibility of significant revenues for U.S. firms.

“Both President Maduro and opposition leaders have reportedly courted Trump with competing offers to reap the benefits of Venezuela’s energy and mineral wealth,” Meyersson said.

Last week, the U.S. Senate rejected a resolution that would have required Congressional approval for any military action by President Trump on the ground in Venezuela.

However, an invasion looks unlikely, analysts say.

“US voter opinion leans against large-scale intervention, and markets see a low likelihood of either invasion or US boots on the ground, but the probability of a direct military engagement between the two countries’ armed forces is effectively a coin-toss, even though the corresponding probability of the incumbent’s exit this year remains low,” SEB’s Meyersson said.

By Tsvetana Paraskova for Oilprice.com

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