IHS Markit analysis: Venezuela's parallel government

Friday, January 25, 2019

Analysis by IHS Markit

On 23 January, Juan Guaidó, head of the National Assembly, assumed the position of interim president of Venezuela, invoking the constitution. The proclamation was quickly recognised by most Latin American governments, as well as the United States, Canada, and the European Union. President Nicolas Maduro swore himself in for a new mandate on 10 January, and currently retains control over the government and military despite escalating protests.

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Head of the national assembly - and interim president - Juan Guaidó is likely to continue gaining strong international support.

Guaidó proclaimed himself president on 23 January in front of thousands of supporters and immediately received the recognition of the US, Canada, the EU, and most Latin American countries. These countries do not recognise Maduro's inauguration for the 2019-25 constitutional term over allegations that he was elected through an electoral fraud. Given the international support he has already received, Guaidó is likely to appoint diplomatic representatives in several countries, multilaterals, and international institutions that are most likely to recognise him. According to Article 233 of the Constitution, if there is a presidential vacuum, the head of the National Assembly is entitled to become interim president and call for new elections within 30 days.

Civil unrest in the capital of Caracas, which has extended to traditionally pro-government shanty towns, is likely to erode Maduro's support, including among the armed forces.

Anti-government protests are likely to escalate in the coming days and weeks, especially in the low-income, western neighbourhoods of Caracas, which have traditionally been Chavista strongholds. The Miraflores presidential palace and other key seats of government are also located in west Caracas. Violent repression of protesters in this part of the city increases the likelihood of mutinies among the military and police officers reluctant to use violence against civilians. This is likely to cause splits among senior military officers, who so far have supported Maduro unconditionally, in return for control of the economy, including oil production, ports, and imports. Statements of support for Guaidó from select military factions or credible evidence of emerging dissident groups being armed would indicate an increasing civil war risk.

The US recognition of Guaidó's presidential self-appointment increases the likelihood that the US will look to impose additional targeted sanctions, or even sectoral sanctions, to pressure Maduro to step aside.

As it has already done, the US is likely to continue to target individuals and firms with ties to the Maduro government for sanctions. US President Donald Trump warned that "all [economic and diplomatic] options are on the table" in case Maduro refuses to transfer power to Guaidó. Should Maduro seek to retain power, it increases the likelihood that the US will look to apply more expansive penalties including sectoral sanctions on Venezuela's critically important oil sectors. These could well take the form of prohibitions on exports of refined oil from the US to Venezuela or on imports of crude oil from Venezuela for US refining. Maduro has also given 72 hours' notice to all diplomat delegations of countries that have recognised Guaidó to leave the country, but it is understood that many delegations, including the US, will ignore these calls as Guaidó has urged them to stay.

In addition to the two million Venezuelans who have already left the country, hundreds of thousands more are likely to migrate to Colombia and neighbouring countries if Maduro stays in power, with negative economic dislocations in the region.

Shortages of food and basic goods, including medicines, are likely to become more widespread if Maduro's increasingly isolated administration survives US sanctions, international pressure, and protests in the three-month outlook. China and Russia will support Maduro in terms of diplomatic statements but are unlikely to provide enough funding to reverse the collapse of the health system and the crumbling of the electricity, water supply, transport, and oil sector infrastructure, at a time when the economy, according to IHS Markit, is likely to contract at least 15% in 2019, CPI hyperinflation to reach of 3,000,000%, and oil production to decline below 900,000 b/d. This will increase migration flows into Colombia and neighbouring countries, undermining their stability as their ability to provide basic services to their own population in border areas would come under enormous stress, while impairing economic growth.

By Diego Moya-Ocampos, Americas principal analyst, IHS Markit