Chavistas’ loss in Venezuela’s election will bring confrontation, not quick reform

Smashing victory for the opposition, but no short-term fixes for Venezuela’s economy

The Venezuelan opposition MUD (Mesa de la Unidad Democratica) alliance has achieved a decisive victory over the ruling Chavista PSUV in parliamentary elections on Sunday. The opposition alliance has won at least 99 representatives in the National Assembly against 46 representatives for the governing socialist party, with 22 seats remaining undecided. While it is still unclear if the opposition will receive either a qualified majority (60% of the total) or a two-thirds majority (the opposition believes it has won at least 112 seats), it is clear that the opposition will have achieved a significant enough majority to influence government policies, though unfortunately its ability to affect short-term economic policy remains limited. A two-thirds majority opens the door for the opposition to recall President Maduro (or call for a constitutional assembly that would force Maduro to step down), but regime change remains a dangerous path.

Opposition lacks a coherent economic agenda

The opposition MUD represents a diverse range of political forces and ideologies, and remains more united on certain political issues than on an agreed-to economic agenda. The opposition is likely to focus its first efforts at passing an amnesty law to liberate political prisoners such as opposition leaders Leopoldo Lopez and Antonio Ledezma while also circumscribing President Maduro’s ability to use decrees to govern, as well as reducing Chavista influence over public entities such as the Electoral Council and Venezuela’s Supreme Court.

The opposition, though largely winning due to voter anger at the state of the economy, lacks a coherent policy agenda to end the country’s persistent economic imbalances and confront rising inflation, ineffective foreign exchange and price controls, and an economy that is suffering from a deep recession. There is no short-term solution that will not entail politically costly and painful adjustment measures, including cuts to government subsidies and a unification of the exchange rate systems at a severely devalued exchange rate.

Government resistance to new legislature likely to force political confrontation – crisis and default may result

Though President Maduro has admitted defeat for his party, it remains unclear how his administration will shift policies to confront an opposition-controlled National Assembly. The Venezuelan government remains in control of most public institutions and may pursue a strategy of severely curtailing the National Assembly’s role in policy-making and oversight, as the Venezuelan government has done in the past when it has faced defeat in state and local elections. This may further polarize the political environment in Venezuela, with the opposition likely reacting by attempting to leverage its majority to pursue either a constituent assembly or a recall referendum against the president. This dynamic would further curtail the potential for changes in policy to end the economic crisis in the short term, and precipitate a political crisis, increased social unrest, and a sovereign debt default in late 2016.

Significant changes to economic policy remain highly uncertain

As far as economic policy in the short-term goes, power remains in the hands of President Maduro. While major economic policy shifts may be announced before January 5, 2016 when the new, opposition-dominated National Assembly is seated, it is likely that President Maduro will announce major adjustment measures, if any, by late January 2016. President Maduro has been weakened by the election result, and will be hard-pressed to push through necessary economic measures unless he receives significant support from the opposition. The central battleground between the opposition-controlled legislature and the Chavista government will be over control of government institutions and authority, not over the appropriate economic policies to tackle the economic crisis.

The best short-term scenario for the economy is for a pact between the opposition and the government to push through necessary economic reforms to reduce economic imbalances and return Venezuela to a path of economic growth. Over the medium term, the best that MNCs can hope for is an orderly and democratic transition to a post-Maduro government (the potential to recall President Maduro becomes possible by April 2016) with the necessary political capital to implement not only necessary economic stabilization measures but also market-friendly reforms.

Prepare for a tumultuous 2016

Unfortunately, the reality is that Venezuela confronts a President with limited political capital, an opposition-controlled legislature without a clear economic policy agenda, and a monumental economic crisis that may culminate in a sovereign debt default in the second half of 2016. Investors should prepare for an even more turbulent 2016 in Venezuela, with the likelihood for a worsening near-term economic environment highly likely.

For more on how multinational companies are managing their investments in Venezuela, see our recent trip report from FSG's Latin America practice leader Antonio Martinez.