Venezuela is turning to capitalism – but growth is in jeopardy

The UN Economic Commission for Latin America only expects growth of five percent this year. Inflation was 471 percent year-on-year in April, according to the independent Observatorio Venezolano de Finanzas (OVF).

Venezuela’s economy is struggling to recover

Venezuela today shows how difficult it is to stabilize an economy after an unprecedented crash and hyperinflation. Maduro reversed some of the socialist measures taken by his predecessor Hugo Chávez. He had expropriated and nationalized thousands of companies and controlled the local currency.

Maduro is now allowing private companies again. It also switched to accepting the dollar as a unit of payment and settlement in late 2019 after the government removed a total of 14 zeros from the national currency, the bolívar, since 2008 to stabilize it.

But the pricing still seems irrational. Because of high and hyperinflation, Venezuelans have lost the feeling for price relations: it can happen that all main courses in a restaurant cost 20 dollars.

A pastry and a coffee can cost twelve dollars in a simple sidewalk cafe, but a hundred yards away exactly half that. A handyman, they say, can charge $20 or $200 for a repair.

The same applies to wages: government employees, such as teachers, professors or nursing staff, earn an average of ten dollars a month. A shopping cart to meet the minimum needs of a family of four currently costs $500. A maid in Caracas can earn $300 a month – an engineer hardly more. Many people survive because they have relatives or friends abroad who send them dollars.

Growth in Venezuela is limited

There are now many Venezuelans who have emigrated: more than seven million people have left the country since 2015. There are probably 28 million people still living in Venezuela. But no one knows for sure, there hasn’t been a census for a long time.

At the same time, Caracas is experiencing a real estate and construction boom. New, mostly expensive restaurants are opening all the time in districts close to the city centre. At night, tall office complexes are lit up. A large shopping mall has just opened and is proudly displayed to visitors as evidence of the country’s recovery.

But at second glance, it becomes clear how limited Venezuela’s growth in consumption and services is: the glitzy new shopping center almost exclusively sells local brands. And like the new restaurants, they are rarely visited.

Reports that many of the Venezuelans who have become rich have not bunkered or invested their money abroad for several years could give the economy hope. They worry that their belongings or accounts there could be confiscated. That is why they are now putting their money into real estate, restaurants and luxury consumption – in Venezuela. Ferrari has now opened a shop in Caracas. How the Italian luxury cars get into the country is the manufacturer’s secret.

Because Venezuela has been on the US sanctions list since 2019: President Donald Trump imposed tough sanctions on the country because of election fraud by President Maduro. No US corporation or company that bills in dollars can purchase oil or derivatives from the Venezuelan oil company.

In Caracas, the term over-compliance is circulating in business circles. This keeps foreign companies from investing in the country or trading with Venezuela. Because imports of food, products for agriculture and also medical devices or pharmaceutical products are allowed.

But many companies that could actually export to Venezuela are hesitant to do so. They fear ending up on the US index.

The Venezuelan business association Fedecamaras is “hopeful” but “not optimistic” about the further prospects for the recovery. The acceptance of the dollar has led to a boost in confidence. The occupancy among the members has now risen again to around 40 percent, from just 20 percent two years ago.

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But such figures can hardly be generalized: all sectors are represented in the central association, from agriculture to tourism, industry and trade.

According to the association, one argument in favor of Venezuela as a location is that entrepreneurs could achieve high profit margins in an international comparison. However, companies should avoid doing business with the state.

Interest of German companies in Venezuela is increasing

The German Chamber of Commerce is also registering growing interest from medium-sized companies who see a potential market in Venezuela. There are business opportunities in the energy, telecom, agricultural and tourism sectors, says Mischa Groh, Managing Director of the German Chambers of Commerce in Colombia and Venezuela.

But it may be a challenge for Venezuela to attract tourists. The mobile network and the Internet work poorly in the country, and getting around is complicated because there is always a lack of petrol. In front of petrol stations with subsidized petrol, cars often queue for kilometers and hours. Also because of the constant police controls, even short cross-country journeys take far longer than the routes would suggest.

There are hardly more than a dozen international flights every day – none to the USA and hardly any to Europe. The first cruise ship with German tourists is said to have docked on Isla Margarita again. The holiday island is said to have recently been used primarily by Russian soldiers for relaxation, eyewitnesses report.

It is also unclear how the upswing will be financed when Venezuela’s largest source of income has almost dried up: The country with the largest oil reserves in the world and number six in natural gas reserves produces and sells only about a fifth of its former production.

For further investments in oil, energy and natural resources, the legal framework for foreign companies must be completely renewed, says a lawyer who wishes to remain anonymous. The state has a monopoly over the oil company PdVSA. Private investments in the oil industry and in mineral resources are hardly possible in practice.

In many cases, politicians, the military and entrepreneurs close to the regime are now investing in shops, restaurants and real estate, on the one hand to launder money, but also to invest the money. For a recovery of the oil industry or infrastructure such as energy or telecoms, however, high foreign investments are necessary.

US sanctions determine economic development

However, it was not foreseeable if and when they would come. “I would advise against anyone investing in Venezuela until the legal framework for private investments is changed,” says the lawyer.

The decisive factor for new investments will be whether the USA will relax sanctions against Venezuela. But for this to happen, the government must hold the upcoming elections in 2024 in such a transparent manner that they can be considered “clean”.

The government allowed election observers to attend the regional elections last year. The opposition promptly conquered around ten percent of the communities, although many candidates had previously been deprived of the right to stand as a candidate.

So it is up to the dictator Nicolás Maduro himself whether Venezuela’s economy will continue to recover.

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