Venezuela In Crisis: Biggest Risk To Maduro Is Cash And Vanishing Oil

Venezuelan President Nicolas Maduro (center) attends a ceremony to celebrate the 81st anniversary of the National Guard in Caracas on August 4, 2018. A loud bang believed to be from a drone carrying a bomb interrupted Maduro’s speech during the military ceremony . (Photo by Juan BARRETO / AFP)

President Nicolas Maduro survived an odd drone attack recently, something the Socialists United (PSUV) leader immediately blamed on Colombia and not the CIA. Surprisingly. But Maduro has bigger problems than coup attempts—real ones and the imaginary kind. With every passing day, Venezuela falls deeper in distress.

Maduro may end up a much happier man retiring on Margarita Island and writing his memoirs than sticking it out in Caracas. Cash flow stress from low oil production promises to make things worse for him and his government. Loyalists could desert him. His country, which he professes to love, is in danger of bankruptcy.

Inflation is over 110% … on a monthly basis. Seashells have more value than the Bolivar, a currency many have deserted in favor of bartering, printing their own neighborhood currency or … stealing.

This Saturday, August 4, Maduro was interrupted in the middle of a ceremonial speech. It was a drone attack. The attack has been officially characterized as a coup attempt.

See: Socialist Venezuela Falls Apart As President Maduro Shockingly Blames Party — Forbes

Members of Venezuela’s Bolivarian militia and pro-government activists demonstrate their support for Venezuelan President Nicolas Maduro during a rally outside the Miraflores presidential palace in Caracas on August 6, 2018. (Photo by Federico PARRA / AFP)

Some people argued it was not a drone carrying a bomb that caused the explosive sound but a natural gas explosion in a nearby apartment building.

Maduro party critics called it a staged coup as an excuse for more repression, and a distraction tactic against the economic crisis Maduro only recently blamed on PSUV’s governance.

Eyewitnesses confirmed they saw a drone flying near the president when the explosion occurred, sending soldiers scurrying away from the scene.

There have been periodic uprisings against Maduro over the past few months with the real risk of an activist shift from within the Hugo Chavez loyalist wing of PSUV who see Maduro as a negative on the deceased leader’s legacy.

“There has been increasing tension from within Chavismo and open criticism at President Maduro with interests now aligning amongst his primary supporters that are all suffering from scarce resources,” says Siobhan Morden, a managing director at Nomura Securities in New York. “It’ll be increasingly difficult to buy the loyalty of (Maduro’s) constituents with fewer petrodollars … or enforce loyalty via repression.”

Thirsty Venezuelans collect drinking water in an avenue of Maracaibo, Venezuela, on July 29, 2018. High oil prices once propped up PSUV’s politicians. Today Venezuela is a failed state, and it happened on their watch. (Photo by Humberto Matheus/NurPhoto via Getty Images)

The increasingly tight cash flow due to the collapse in PdVSA oil production may yet pull the rug out from under Maduro. PSUV’s Chavistas will take over. There is little to gain from this as long as PSUV is at the helm at this point.

“Maduro is facing significant pressures from the military to improve the business environment in the country,” says Jan Dehn, head of research for the Ashmore Group in London. “There are still many years until the next election. Maduro appears to have decided to change economic policy.”

His government last week put forward legislation to liberalize the currency, though U.S. forex traders will likely stay away from it due to sanctions. Once the fake price-setting for the Bolivar is lifted, devaluation buys time as oil production continues to do the country no favors.

Deeper devaluation of the Bolivar will do nothing to alleviate inflation without broader economic adjustments.

The real economy is collapsing under the weight of hyperinflation, lack of oil production in this one-trick-pony town and a toxic government.

“There is widespread discontent within the broader populace,” says Dehn. “The (drone) attack illustrates the instability of the political situation.”

Moreover, there is some confusion on whether China interrupted a recent grace period on PdVSA debt payments and whether China will provide any new loans for their joint venture operations. It could look quite dire next year if oil continues to decline by 50,000 barrels a month without any cash flow relief from lenders like the Chinese and political reluctance to eliminate domestic gasoline subsidies.

If Maduro eliminated gasoline subsidies, it would be the death knell to PSUV among its poorest supporters.

Nomura estimates Venezuela to produce around 700,000 barrels monthly by the end of 2019, with a 30% decline in domestic consumption. If so, cash flow goes negative next year, meaning PSUV and Maduro will have a hard time paying its rent-seekers in the military and elsewhere. And this is where it gets worse for Maduro, assuming he is still in power.

The cashflow stress means less money in the PdVSA ATM machine to pay for loyalty and favors, and to pay off loans made by the Russians and the Chinese.

Not to mention foreign bondholders, many of them in the U.S.

To date, Maduro has been willing to make good (if not late and often defaulting) on PdVSA coupon payments. Who will the government pay in a severe cash-strapped scenario? Wall Street or angry Chavistas looking to save PSUV from a near-certain political death?

President Maduro and PSUV can count on the support of maybe a third of the population, at best. A vast majority of Venezuelans, those that still live in the country anyway, are against this government within varying degrees of disdain.

“Governability depends not only on sufficient funds for the top tier generals but also mid-ranking officers, rank and file soldiers and PdVSA public workers,” says Morden. “Targeted subsidies are inefficient or ineffective when resources are scarce and repression represents a high-risk of a backlash.”

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