Venezuela defies sanctions with dollar-driven upswing

US sanctions have failed to dislodge Venezuelan president Nicolas Maduro so far, but they have compelled the government to ease economic controls this year, modestly improving the Opec country's 2020 economic outlook.

The sanctions "have forced the Maduro government throughout this year to erase most price controls, loosen capital controls, tighten controls on commercial bank loan operations and accept informal dollarization as it seeks to capture new hard currency streams and reduce hyperinflationary pressures," a Venezuelan central bank economist tells Argus .

Maduro's biggest economic achievement this year has been to curb hyperinflation, the economist said.

Opposition-controlled National Assembly advisers acknowledge the slowing inflation, but caution that inflationary pressures persist on years of structural distortions.

The advisers estimate cumulative inflation from January through November at over 5,500pc compared with the central bank's 2018 inflation estimate of 130,000pc.

They now believe it is likely that 2019 inflation could average about 7,000pc, a marked improvement over end-2018 forecasts from entities such as the International Monetary Fund that anticipated 10mn pc inflation in 2019. In October the IMF reduced its 2019 inflation forecast to 200,000pc, rising to 500,000pc in 2020.

The US sanctions imposed on state-owned PdV in January constricted oil revenues that historically accounted for up to 90pc of Venezuela's income.

The sanctions "accelerated PdV's crude output decline, crippled oil export operations by discouraging many buyers and logistics operators and suppliers from doing business with the company, and blocked our access to international financing," a PdV board member tells Argus .

The US sanctions forced Maduro to gradually erase most domestic price controls and loosen capital controls in a bid to encourage foreign investment and facilitate remittances from Venezuelans abroad, oil ministry and central bank officials said.

PdV's crude production has rebounded to more than 800,000 b/d in recent weeks, partly by quietly transferring operational and procurement controls to PdV's minority joint venture partners, including Russia's Rosneft, China's CNPC and Spain's Repsol, although fresh investment is still on hold.

Maduro's efforts to channel remittances totaling up to $4bn this year compared with about $2bn in 2018 through government-approved banks and exchange houses have largely failed because no one trusts the government, says Jose Guerra, a former central bank chief economist and current opposition deputy in the National Assembly.

Remittances in 2020 are expected to jump to about $6bn, equivalent to almost 80pc of the central bank's current hard currency reserves of $7.5bn. The trends are driving a robust black market in dollars and euros. Up to 55pc of non-oil commercial transactions are conducted in non-Venezuelan currency. In oil-producing Zulia state, almost 90pc of transactions are in dollars. Zulia lies on the border with Colombia, which hosts the bulk of Venezuela's diaspora.

Dollarization is a necessary "pressure release valve" that is allowing private-sector companies to secure hard currency to finance imports, Maduro said in October, adding "thank God for dollarization."

Food and medicine imports have rebounded, benefiting about 15pc of the population with access to dollars. The other 85pc scrape by on the equivalent of $1-$2/day.

Venezuelan business chamber Fedecamaras said this week the private sector will account for the first time in decades for up to 25pc of GDP in 2019 and likely more in 2020.

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