Venezuelans’ intolerance for gasoline price increases is well documented. A mark-up in 1989 sparked riots, looting and a military crackdown that helped give rise to Hugo Chavez’s political career.
The fact that his successor, Nicolas Maduro, is considering lifting the price from a world-cheapest $0.06 per gallon signals the new president is willing to implement unpopular measures to cut a soaring budget deficit and shore up foreign reserves that have plunged to a nine-year low. The move could help stem a rout that has pushed Venezuelan bond yields to 11.7 percentage points above U.S. Treasuries, the highest spread in emerging markets, according to Bank of America Corp.
A price increase would help “reduce the deficit, Venezuelan gasoline consumption as well as contraband to Colombia and allow Venezuela to export additional gasoline,” Francisco Rodriguez, senior Andean economist at Bank of America, said in a phone interview from New York.
Maduro is flirting with a topic that’s so taboo in Venezuela, home to the largest oil and gas reserves in Latin America, that the subsidized price hasn’t been touched since 1996. After riding the popular unrest that erupted in the 1989 riots into office a decade later, Chavez never boosted the price during the 14 years he served as president before succumbing to cancer in March.
“Chavez was always afraid to increase gasoline prices,” Jose Guerra, a professor at Venezuela’s Central University, said in a telephone interview. He was worried about “the potential social impact that he thought it would have.”
The proposal, which Vice President Jorge Arreaza said Dec. 9 would be debated first with Venezuelans, indicates a change in tack for Maduro as he tries to curb 54 percent annual inflation and halt a 73 percent plunge in the black-market currency rate this year.
In the run-up to municipal elections on Dec. 8, Maduro used the military to force price cuts at electronics stores and seized an Irish-owned packaging company, deepening his predecessor’s self-proclaimed socialist revolution. He has also pledged to lower prices for cars and commercial rent, warning business owners that he is “going all the way” after lawmakers gave him the power to rule by decree last month.
Maduro’s heavy-handed tactics caused yields on Venezuela’s benchmark bonds due in 2027 to soar to a two-year high of 13.8 on Dec. 3. Average borrowing costs for the country have jumped 5 percentage points since Maduro was elected on April 14.
The central bank’s scarcity index, which measures the amount of goods out of stock at any given time, rose to 22.4 percent in October, the highest since January 2008, as customers searched for milk, antibiotics and tires.
The government devalued the bolivar by 32 percent in February as it sought to narrow the budget deficit by bolstering the local-currency proceeds it gets from each dollar of oil exports. The shortfall will be equivalent to 11 to 12 percent of gross domestic product this year, Bank of America’s Rodriguez said. Foreign reserves fell to $20.4 billion from $29.9 billion at the end of last year.
“Mounting strains in Venezuela’s balance of payments continue to blot the economic outlook,” Capital Economics markets economists Neil Shearing and David Rees said in a report e-mailed to clients Dec. 11. “We expect the economy to slip into recession next year, while a sustained fall in oil prices could be the trigger for a crisis.”
Maduro, whose party won 44 percent of the vote in the mayoral elections, may use that political capital to implement measures such as raising gasoline prices and devaluing the bolivar, said David Smilde, a sociology professor at the University of Georgia who specializes in Venezuela.
The president now has room to make economic adjustments that have been postponed, Alejandro Arreaza and Alejandro Grisanti, analysts at Barclays, said in a Dec. 9 note.
Maduro’s administration has started scaling back oil subsidies to its allies in the region. Guatemala said in July that Venezuela had proposed doubling interest rates on loans used to pay for oil under the Petrocaribe alliance that provides cheap fuel to regional allies. The Central American country withdrew its petition to join the alliance in November because it disagreed with terms imposed by Venezuela.
In Caracas, Octane 95 gasoline costs 0.097 bolivar a liter ($0.06 a gallon) at the official exchange rate, the cheapest in the world, according to data compiled by Bloomberg. The same gasoline costs $0.01 at the black market rate. Venezuela loses about $1.4 billion a year to gasoline trafficking to Colombia, Oil Minster Rafael Ramirez said on Aug. 2.
Gasoline across the border in Colombia is about 70 times more expensive than in Venezuela. In Bogota, a gallon of gasoline costs about $4.30, compared with an average $3.27 in the U.S.
It costs Venezuela $5.3 billion annually to maintain the gasoline subsidy, said Asdrubal Oliveros, director of Caracas-based consulting firm Ecoanalitica. He said the opportunity cost of not exporting and selling that gasoline at international prices was about $32.1 billion. The government would have to increase prices by 694 percent to eliminate the subsidy, he said.
Oliveros estimates the government would lift the price to at least 0.77 bolivar per liter, the breakeven level, if it decided to carry out the move. Arreaza, the vice president, didn’t indicate how big the increase could be when he discussed it in a Dec. 9 television interview.
“In Latin America, as well as in the U.S., high gasoline prices are never a popular thing for politicians,” Roger Tissot, a consultant with Tissot Associates, said in a phone interview from Vancouver. “The safe thing to do” was wait until after the elections.