Venezuelan government losing popularity contest

Jan Dehn, head of Research at Ashmore, discusses how President Nicholas Maduro’s popularity is collapsing ahead of the parliamentary elections on 6 December, but a strong win for the opposition may turn out to be good for the country.

Brazil’s economy sinks even lower as Fitch pushes the country’s credit rating one step closer to junk status. China’s growth rate and especially its trade balance beat expectations.

The government is desperately seeking to claw back some popularity ahead of the 6 December parliamentary election. Last week the government therefore raised the minimum wage by 30%, but in the context of 80% inflation this measure is unlikely to make much difference to the election result.

A new poll published last week shows that President Nicholas Maduro’s approval rating is now down to 20% from 27.4% in June, while opposition politicians stand to scoop up 66% of the votes in the parliamentary election.

What will the opposition do if it manages to snatch a sizeable majority of the seats in parliament? In our view, the opposition is likely to first to use its newfound powers to secure the release of political prisoners, particularly leaders such as Leopoldo Lopez.

They will then seek to force the government to increase transparency in a bid to reveal where all the oil money has gone. By exposing what they expect to be widespread corruption they hope to once and for all undermine the illusion that the Chavista government is acting in the interest of Venezuela’s huge population of poor people. Clearly, this will increase the pressure on President Maduro, whose options are narrowing.

Pressure on Maduro is also likely to be rising from within the Chavista movement itself. Maduro will therefore be forced into a choice – whether to become even more authoritarian even as his support wanes, which is clearly a very risky strategy, or to start to work with the opposition.

Our view is that neither the government nor the moderate elements of the opposition (the majority) favour a default. Instead, we think one outcome of greater cooperation between Maduro and the opposition could be a less adversarial attitude towards companies seeking to invest in Venezuela’s oil sector.

Fitch downgrade reiterates Brazilian decline

Two of the remaining three downside events for the Brazilian outlook were realised in part in the past week. The economy took another leg down when retail sales declined sharply (core retail sales were -6.9% lower yoy, while broad retail sales came at -9.6% yoy).

The broader economic activity index also softened sharply at -4.5% yoy in August. The continuing decline in the economy is putting even more pressure on the fiscal balances, so the second remaining downside event – Brazil’s humiliating demotion from the investment grade club – also took a step closer, when Fitch, a ratings agency, downgraded the government’s long-term external borrowing credit rating to BBB-, which is just one notch above junk. Fitch noted that the outlook remains negative and that Brazil faces more than a 50% probability of being downgraded to junk.

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