Latin America

VENEZUELA: Government Stability 23 MAY 2017 15:00 EDT

Short-term trajectory:

Long-term trajectory:

NEGATIVE

NEGATIVE

Political transition no longer question of if, but when • President Nicolas Maduro’s refusal to back down from his constituent assembly proposal will provide the opposition with sustained momentum to mobilize protests as the process advances in the coming weeks and months. • Persistent and increasingly violent unrest will eventually prompt key stakeholders to abandon Maduro and negotiate a rapid transition that sets a timetable for new elections; the precise timing is impossible to predict, however. • Nevertheless, the confluence of a unified opposition, acute popular frustration, divided chavismo, and a deepening economic crisis make it increasingly likely that Maduro will be forced from office before the end of his term (a 70% probability). . Venezuela’s social and political dynamics are entering an increasingly unstable equilibrium. Protests are now in their seventh week and the total death stands at 51, according to local NGO Foro Penal, surpassing the 2014 protests, in which 43 were killed. President Nicolas Maduro is not backing down from his planned constituent assembly proposal, even though it has failed to alleviate local unrest or international pressure. In fact, quite the opposite, street protests have persisted, while international pressure continues to mount, with the Trump administration imposing individual sanctions on the TSJ (see: VENEZUELA - Maduro’s constitutional overhaul will deepen political crisis, 2 May). Constituent Assembly process will add fuel to the fire The government is set to announce the selection process for delegates in the coming days as it looks to move the assembly forward relatively quickly. But the latter will only provide further momentum to the protest movement. Since the government cannot win (or control) any process that is open and representative, the government will heavily control the delegate selection, which will over-represent chavista-controlled or sympathetic groups such as the local communes. The latter will be evident immediately by design, and will only deepen the ongoing crisis by providing a rallying cry for the opposition. For its part, the opposition remains rallied around the streets as the most effective strategy to exert pressure on the government. The two most popular leaders within the MUD opposition coalition, Henrique Capriles (Primero Justicia) and Leopoldo Lopez (Voluntad Popular) are more united in strategy than in any other moment in the past. The opposition is also capitalizing on the fact that voter frustration is at an all-time high and there is a level of popular anger that is unique to this movement. Finally, the opposition seems to be emboldened by the fact that there are clear fissures within chavismo that are on public display. The most evident is Attorney General Luisa Ortega Diaz, who continues to challenge Maduro and is clearly positioning herself to play a role in an eventual transition. But her dissent, and increasingly vocal pleas from the relatives of senior chavistas is nevertheless providing the opposition with a sense that there are deep divisions within the ruling coalition that can be blown open.

While there is clear frustration with Maduro internally and reportedly among the security apparatus, key stakeholders are maintaining a mostly united front for now, given the fact that exit costs remain very high. Party leaders seem disposed to try to use the constituent assembly to stay in power, while the traditional armed forces, particularly the army, remain on the sidelines of the conflict, letting the National Guard and National Police repress ongoing unrest. Nevertheless, social dynamics are becoming more tenuous, suggesting that we are nearing a breaking point. The opposition continues to mobilize hundreds of thousands of participants to the streets in organized protests, while largescale looting and spontaneous violence is becoming more commonplace. Most recently, largely uncontrolled looting has occurred in the northwestern state of Barinas and in the Caracas suburbs of Los Altos Mirandinos. But as the below map shows, incidents of both large-scale organized unrest and looting have taken place throughout the country over the past seven weeks, including in traditional chavista strongholds.

We have long been of the view that the main catalyst that would change key stakeholders’ commitment to Maduro’s government is an escalation and widening of social unrest that leaves Maduro with no other choice but to call the army out into the streets, something that he has so far avoided. Our understanding of the army and particularly the officer corps, is that their strong preference is to avoid open conflict with civilians, so even if senior levels of the military are bought in Maduro’s survival and willing to use violence, it’s possible that their subordinates won’t be willing to follow orders. Should the level and scope of unrest and violence

dramatically escalate, it would therefore prompt an imminent transition. But the current equilibrium is likewise unsustainable. Over time, persistent protests of the current magnitude and a mounting civilian death count (which is averaging 7 per week), could also start to chip away at stakeholders’ loyalty to Maduro. In this scenario, the current conflict would be prolonged over multiple months, but it’s hard to see it continuing at this level over the medium-term without seeing existing fissures within chavismo widen to the point that there are major defections that prompt a negotiated transition. The latter could originate from different factions of chavismo, but large portions of the military will have to be complicit in order to be successful. In the unlikely event that the government is able to control the current bout of protests and they die down, then Maduro will probably be able to survive until the end of his term (elections are constitutionally mandated by end-2018). But even then, it will be difficult for him to successfully manipulate the rules of the game to stay in power beyond 2018, with the election the next major flashpoint. Popular frustration will continue to grow barring a meaningful rebound in oil prices, and the economic crisis is only set to worsen as the government faces increasing financing constraints and PDVSA continues to struggle (see: VENEZUELA - Del Pino's departure clouds already dim oil sector outlook, 29 March). Path towards regime change is irreversible Thus, regardless of the catalyst, a political transition is no longer a question of if, but when. The precise timing is impossible to predict, but we now assign an 70% probability that Maduro will be unable to finish his term, with the alternate scenario one in which the government stays on in an overtly authoritarian and highly repressive capacity. Vested interests in the status quo and the government’s willingness to use repression mean that the current conflict could very well be prolonged. But the confluence of a united opposition, a divided chavismo, a deepening economic crisis, and mounting international pressure mean that conditions are ripe for regime change, which could also happen in a matter of weeks. In the latter scenario, key stakeholders would likely come to the table to negotiate a transition that includes some guarantees for senior chavista and military officials in exchange for new, free and fair elections, and a rebalancing and restoration of powers at key institutions. To this end, the opposition leadership is increasingly focused on reducing exit costs for chavistas, as evidenced by the National Assembly’s move last week to create a commission that builds what will essentially be concessions to ensure a democratic transition. The opposition would be well positioned to win any new elections. The main opposition leaders are all at least twice as popular as Maduro and Vice President Tareck El Aissami, whose approval ratings stand in the low twenties, while all other chavista leaders are even more unpopular. Any opposition government would probably pursue a similar policy course focused on an overhaul of the economic policy framework with the help of the IMF and other multi-lateral institutions which would provide a cushion for unwinding foreign exchange and price controls. A new government would also likely look to restructure the country’s liabilities with creditors across the board, including China, Russia, and bondholders. However, because they will need market access it would likely be a market-friendly restructuring, and to the extent that it would be coupled with structural economic reforms, would provide investors with longer-term guarantees regarding future capacity to pay than the current, unsustainable trajectory.