Now that I have your attention with that provocative title, I will give you my answer to that question right away and then I will try to justify it: I don’t think there will be economic collapse, dramatic social unrest or anything of the sort. I think that Venezuela under Chavismo will continued to plod along, drifting lower, as conditions get worse and worse, but I don’t think there will be some sort of dramatic collapse of the economy that will lead to some form of political instability.
My reasoning is simple, very few times in history do economies collapse in predictable fashion, nor do I think Venezuela is at an extreme. Yes, things are bad, but the Government has a number of degrees of freedom to act if necessary and it enjoys a level of popularity such that there is ways to go before its popularity is down to levels that could create sufficient social unrest for anything to happen.
Think about this year (2013): The Government had a shortage of dollars all year, it devalued to Bs. 6.3 from Bs. 4.3 per US$, Chávez died and was replaced by nebish Maduro, the Government spent like there was no tomorrow, inflation went up 100% from 25+% to 50+%, the unmentionable rate increased by a factor of 3.7 (It started the year at Bs. 17.4 per US$), scarcity went up from 20% to unknown and in the end, Chavismo actually got more votes than the opposition, with over 50% popularity in the Mayoral election.
Venezuela has The Devil’s Excrement, for better or for worse, we know the flow of foreign currency can sustain the types of distortions that the Venezuelan economy has enjoyed the last few years with total inaction. At some point, things will unravel. but I believe this will happen only after the Government devalues sharply, which it does not seem ready to do and/or attempts to fix some of the distortions in the economy.
Because it is precisely the fact that it has not tried to fix these distortions that will allow the Government to make some adjustments. It can reign in spending, it can cut Petrocaribe and Cuba, it can devalue, it can increase the price of gas, sell the gold, mortgage more of the future than it has take over the banking system to issue even more local debt, issue more foreign debt and many other measures, before its popularity goes below 40%. Think Mugabe, for example, he had gizillion inflation and even held on to power.
Oh yeah, things will get worse and people will be unhappy, nobody enjoys 75%-80% inflation like we will see in the first half of 2014, but the Government will blame Obama, Capriles, Economic War or even Martians for the problems. And given the control f the media they will sell it yet again, once or twice more, but it will not be enough at some point. But this is not close, oil needs to weaken, some measures taken and maybe, just maybe something will happen. But I doubt it will be in 2014 and I doubt it will be dramatic.
Of course, the longer they plod along, the bigger the distortions and the sharper the eventual collapse, but we are not there yet.
Oil is indeed the Devil’s Excrement. Just watch!
The Devil's Excrement 