President Trump’s cancellation of oil licenses for foreign companies in Venezuela is anticipated to worsen inflation by reducing dollar liquidity in the exchange market, diluting the local bolivar currency’s value. This decision presents an additional challenge for President Maduro, who has struggled with economic measures amidst ongoing tensions surrounding the disputed electoral situation.

U.S. President Donald Trump’s cancellation of licenses for foreign oil companies operating in Venezuela is expected to exacerbate inflation in the country by decreasing the availability of U.S. dollars in its exchange market. Analysts on Thursday highlighted the implications for the bolivar, Venezuela’s local currency, as it faces depreciation amidst rising prices.

This recent move represents an ongoing economic challenge for President Nicolas Maduro, who has historically implemented stringent measures to mitigate inflation, including restricting credit and public expenditure. Analyst Jose Guerra noted that suspending oil licenses would lead to a decrease in oil production and an uptick in service demand, resulting in fewer royalties and foreign currency, which will intensify devaluation risks.

Since the imposition of sanctions on Venezuela’s energy sector in 2019, particular oil companies were granted licenses to export Venezuelan oil. In late 2022, the Biden administration provided Chevron with a renewable license to resume operations and exports aimed at recovering debts, a decision that has since been reversed by Trump.

Trump’s reversal was justified by his claim that Maduro has not made sufficient progress on electoral reforms, even as Venezuela’s electoral authorities assert Maduro’s standing following a controversial election. The political uncertainty surrounding the election and Trump’s 2024 campaign has diminished dollar availability in the market, leading the Venezuelan central bank to allow currency depreciation, which has exceeded 30%.

According to analysts, Venezuela’s economy heavily relies on oil, with approximately 85% of its revenue stemming from crude exports. Local analyst firm Ecoanalitica has projected the oil revenue for 2024 to be around $15.4 billion, with Chevron and other foreign partners contributing around $4 billion to $4.5 billion of that due to the license cancellations.

The cancellation announcement prompted a fall in Venezuelan dollar bonds, reflecting deteriorating investor confidence, and raising concerns about a potential delay in debt restructuring hopes which had previously been buoyed by the possibility of negotiations under the previous U.S. administration.

The situation has also created uncertainty regarding the future economic landscape, as analysts from BancTrust & Co suggested it could be a negotiation tactic. Concerns linger about how this will affect bond prices and the Venezuelan dollar market.

Chevron’s released dollars previously helped stabilize the Venezuelan central bank’s operations, alleviating their need to provide the full amount of dollars for market transactions. Rising inflation, recorded at 48% last year, could escalate to 80% as currency depreciation compounds the situation, accentuating the need for increased bolivar printing to meet demand.

The cancellation of oil licenses by President Trump poses significant challenges to Venezuela’s already struggling economy, likely leading to increased inflation and currency devaluation. Analysts express concern about the impact on oil revenues and foreign currency availability, critical components of the nation’s economic stability. As the political and economic landscape evolves, the implications of these developments remain profound, warranting close observation.

Original Source: www.usnews.com

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