2020: Parliamentary Elections to Stimulate Economic Illusions

Former Minister Victor Alvarez wonders whether the government will bargain off control of the oil industry to promote economic recovery and electoral gains in 2020.

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Is Venezuela’s oil industry about to be opened up to foreign investment to boost an economic recovery and an electoral victory for the government in 2020? (Reuters)
Is Venezuela’s oil industry about to be opened up to foreign investment to boost an economic recovery and an electoral victory for the government in 2020? (Reuters)
By Víctor Alvarez R. – Costa Del Sol 93.1 FM
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So far in Venezuela, political changes have been a condition for the economic changes that the country needs.

But in 2020, a year of crucial parliamentary elections, the sequence is set to be the other way around: the likelihood of economic change grows with the political-electoral scenario.

Chavismo is determined to reap the electoral rewards of an atmosphere of economic improvement which is currently being felt in the country. To that end, we can expect the government to extend policies of currency and price control liberalisation, and to open the economy to domestic and foreign private investment.

The government has also virtually liberalised foreign trade with the elimination of customs tariffs. Coupled with the destruction of the national currency, it has allowed dollarisation to advance so as not to block transactions due to a lack of liquidity.

In this new environment, trade reflects a sign of improvement, and, if liberalisation continues, it is quite likely that in 2020 the Venezuelan economy will stabilise and start growing.

To continue dollarising the economy, the government will surely authorise the opening of foreign currency accounts in local banks so transfers which are currently made through overseas accounts can be made through domestic ones. This will lead to larger amounts of foreign currency entering national circulation rather than being passed from one account to another within the international banking system.

Once commercial loans are pegged to the evolution of the official exchange rate, the next step will be to authorise the granting of foreign currency credit, including credit cards. The free movement of foreign currency in the national banking system will allow residents in Venezuela to receive deposits, wire money, issue checks, and make ATM withdrawals.

Incentives for foreign investment in order to ease sanctions

Maduro's government wants to use the lobbying leverage of large [foreign] oil companies to loosen sanctions against [Venezuela’s state-run oil company] PDVSA, thus increasing the extraction of crude oil. The incentives offered to foreign investors translate into increased pressure on the Trump administration to loosen and moderate financial and trade sanctions.

To alleviate the weight of public debt, the government can stimulate the conversion of debt into investment, delivering a percentage of the shares it owns in joint and public companies, to be managed by the private investor, as part payment. Through the Law of Concessions, it can also offer the operation of hotels, ports, airports, highways, etc to private companies.

In 2020, Venezuela may enter a process of China-ification of the economy, in which the government ratifies its socialist character and stimulates private investment with incentives in taxes, exchange rate, tariffs amongst others, which contribute to the economic revival. This revival will generate new sources of employment and foreign currency income for the country, expanding the spaces for a market economy where property rights and business profits are respected.

Allow a private majority stake on oil projects

PDVSA’s transnational partner corporations in the Orinoco Oil Belt joint ventures have complained about the Venezuelan firm’s tight control over oil field operations, an issue that results in bottlenecks affecting production.

Proper operation of oil fields requires a lot of efficiency when exploring, drilling and extracting, including decisions that require hiring suppliers, acquiring equipment and building infrastructure. These issues are hampered by the web of controls that govern public enterprises, which become a breeding ground for influence-peddling and corruption.

Lacking qualified staff, key decisions are left in inexperienced hands that make the wrong choices, and affect the smooth running of the oil industry.

If that were not enough, due to US sanctions, these purchasing and contracting operations become even more complicated. One way to manoeuvre around such obstacles would be to transfer the handling of these operations to private partners, but this would have to be done through granting them majority shareholder status. In a context where PDVSA’s accounts are heavily constrained by sanctions, reducing state participation would result in private partners having greater flexibility to mobilise resources in the international banking system.

For this reason, the government is evaluating the desirability and feasibility of advancing with a reform of the legal and regulatory framework [of the oil industry]. Some proposals focus on reforming the [2001] Hydrocarbons Law to allow majority stakes for private investors, while for others argue for modifying the terms and conditions of the contracts of the joint ventures to remove the clause preventing PDVSA from "transferring its role as an operator" in oil fields.

The crux of the issue is that foreign investors demand that contracts be approved by the [opposition controlled] National Assembly and not the [government controlled] National Constituent Assembly, which adds pressure to lift the illegal status in which the Venezuelan National Assembly finds itself in.

In this context, there is a scenario conducive to the achievement of political agreements that would strengthen the international lobbying in favour of loosening sanctions against PDVSA. In Chavismo there is wind blowing in favour of this openness and liberalisation.

The motivation for this is that by the end of 2019 - right before parliamentary elections - the recovery of oil production, economic revival, overcoming of shortages, the impression of abundance and the taming of hyperinflation are the best credentials that may allow pro-government candidates greater chances of winning seats in their respective circuits, and thus lead the government to regain control of the National Assembly.

With the opposition worn down and divided by its internal struggles, any mirage of economic improvement increases the chances of Maduro’s candidates to regain control of the legislative power. This would be the end of Juan Guaido as president of the National Assembly and the strategy that led him to the interim presidency with the recognition of more than 50 countries.

Undoubtedly, this is a powerful incentive for the Maduro government to deepen the liberalisation and opening up of the oil industry and the national economy.

Victor Alvarez R is a Venezuelan analyst, economist, and writer for left-leaning portals including Aporrea. He is an ex-minister for basic industries and mining (2005-06), and has previously held positions including president of the Venezuelan Guayana Corporation (2005-06), director of PDVSA, and president of the Bank of Foreign Commerce. He has won national prizes for science and literature, and is the author of “Venezuela: Where is the productive model going? From a bureaucratic state to a communal one, and keys for socialist industrialisation” (Venezuela: ¿Hacia dónde va el Modelo Productivo, Del Estado burocrático al Estado communal y Claves para la Industrialización Socialista.)

The views expressed in this article are the author's own and do not necessarily reflect those of the Venezuelanalysis editorial staff.

Translation by Paul Dobson for Venezuelanalysis.

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