Venezuela: what has taken the country to the severe economic crisis?

Recently the president Nicolas Maduro announced an initiative to promote monetary reform and an attempt to overcome the hyperinflationary process (forecasts indicate over 1 million percent inflation in 2018 and 10 million percent in 2019) and make it possible for the economy to recover. Two new currencies were created: the bolivar soberano, that replaces the  bolivar forte, with the cutting of five zeros, and the petros, a cryptocurrency (therefore, one that only exists virtually) whose basic unit of currency will be defined with reference to the country’s oil reserves. There will be an exchange rate between currencies defined by the market. However, there’s still very much skepticism regarding this reform. The problem is essentially political – the government faces stark domestic and international opposition, and its legitimacy has been contested (which has gained momentum after the dissolution of the opposition-controlled parliament and the convening of a constituent assembly); and it is very hard to implement a successful stabilizing plan without sufficient support internally and externally. Besides that, it is necessary to deal with fiscal problems and provide conditions for the recovery of domestic consumption and domestic product. Analysts report that inflation is very likely to go down at first but then return later on.

What has taken Venezuela to said scenario? Runaway inflation, chronic lack of goods in the supermarkets and expressive growth in poverty with a huge influx of migrants to neighboring countries (especially Colombia and Brazil) present a Venezuela very different from the one in the 2000’s, in which Hugo Chavez made use of the rising petrol earnings due to high oil barrel prices for the goal of income distribution and granting social benefits to the population. The reasons are many and go from problems in macroeconomic and oil resources management by chavism to a chronic political instability promoted by an antipopular elite associated with foreign interests, especially from the USA. In the last few years, the sanctions promoted by the United States have been one more obstacle for the obtention of credit and the Venezuelan debt rollover.

The economist Rafael Bianchini Paiva gave a good summary of the Venezuelan economic trajectory in the following passage published on the Brazilian magazine Carta Capital’s website in referring to the time previous to and during the Hugo Chavez government: “According to data from the World Bank, in between 1961 and 1979, the Venezuelan GDP per capita went up 1,1% a year on average, level considered to be very modest when considering that the country takes part in the Organization of the Petroleum Exporting Countries (OPEC) and the 70’s were marked by the petroleum shocks. As the majority of Latin American countries, the external debt crisis hit Venezuela’s economy, whose GDP per capita has fallen 22,2% between 1980 and 1985. In 1998, GDP per capita was only 1,8% bigger than in 1960. In the late 90’s, while most countries in South America presented one-digit levels, inflation to consumers was at 35,8% in 1998, after peaking at almost 100% in 1996. Levels of unequality and poverty were typical Latin American stats: in 1998 the Gini index of the country was at 0,489 and 43,9% of households lived below the poverty line, being 17,1% below extreme poverty. In other words, contrary to a narrative that has become very common recently, Hugo Chavez became president in a stagnated country, with high inflation, very unequal society and with high levels of poverty. Under Chavez’s presidency, between 1999 and 2012, GDP per capita rose 1% a year on average, indicator similar to the one reached during the oil boom in the 60’s and 70’s. Between 1999 and 2006 inflation was around 20% a year, relatively low for Venezuelan standards. During this period the depreciation of the bolivar kept the real exchange rate relatively stable. The frustrated coup d’etat attempt in 2002 resulted in a deep recession. Between 2002 and 2003, GDP per capita fell 18,9%. At the end of 2003, poverty extended over 55,1% of the population, of which one quarter was in conditions of extreme poverty. Politically, chavism’s way out was to radicalize policies aimed at reducing poverty and improving income distribution. Due to these policies, in 2012 poverty was cut down to 21,1% of households, being 6,0% below the extreme poverty line. Unequality indexes are even better to express the consequences of the radicalization of chavism. The Gini index, which had a slight increase between 1998 and 2002, fell to 0,404 in 2012, level of countries like the USA. The portion of income earned by the richest 20% fell from 54,1% in 2002 to 44,8% in 2012, whereas the other four fifths had their portions increased. The change in income distribution is the economic index best suited to synthesize the growth in political polarization.”

However, going in the last few years of the Chavez period, the exchange rate was used to brake inflation in a booming economy, what brought on exchange rate overvaluation and aggravated the oil economic dependency, as much as the government had tried to diversify the economy. Venezuela suffered what is called “Dutch disease”, that is the coming in of a considerable volume of a strong currency (dollar) which then causes a steep currency appreciation and undermines production in other sectors. Maduro did not promote the necessary adjustments, especially in the fiscal front, what then fed inflation. The adoption in 2014 of a complicated multiple exchange rate, making it harder to set references to prices and the coming in effect of a fair-price law, which turned profit superior do 30% a crime, disencouraged the production and commerce, and made the supply problem lasting. Subsequent attempts to control prices in addition to the plummeting of oil prices made the Venezuelan economic situation even worse – currently with less than 10 billion dollars in exchange reserves, a figure nearing 10% of its external debt. Exchange manipulation and the controls that were implemented, but have not shown to be effective, made inflation reach the hyperinflationary stage it is in right now.

The passage in bold in the paragraph above shows that for almost a decade, between 2003 and 2012, chavism was able to pull off an extraordinary feat of reducing unequalities always existent in the country. That explains to a great extent the opposition to chavism in the more well-off classes. Mistakes in economic policy starting at the end of the Chavez government but mainly during Maduro’s mandate deepened the crisis. Another factor that has harmed the country’s economy is the persistent decrease in oil production, which has dropped from over 3 million barrels/day in 1999 to less than 1,5 million/day currently. Several problems that go from inadequate management, judicial disputes with foreign oil companies, debt payments (50 billion dollars) to China with oil, and subsidy to domestic consumption (Venezuelan gas is the world’s cheapest), among others, undermined the investment capacity of the oil company and resulted in less production.

 Still, there can’t be an omission regarding the sanctions adopted against Venezuela during the Trump administration in 2017, which resulted in a financial strangling to the country, adding up to an even more dramatic situation. It seems clear that the USA acts to take down the Maduro government and does so by financing opposition and sanctions. These make it difficult for Venezuela to acquire the resources in dollar to comply with international obligations and be able to import essential products. According to Deutsche Welle’s website on the sanctions: “The United States announced (…) new economic sanctions against Venezuela amidst escalating tension between the two countries. The decree signed by president Donald Trump forbids new deals with the government in Caracas or with the state oil company PDVSA. With this measure – that represents one more step in the imposition of tougher sanctions promised by Trump –, financial institutions are barred from providing capital to the Venezuelan government and to the oil company. Purchasing new debt securities or other financial assets from either one is forbidden, as well as the payment of dividends to Caracas, and transactions with securities that are property of Venezuela’s public sector. Even the PDVSA US subsidiary, Citgo, will not be allowed to send dividends back to the South American country. Although involving deals with the state oil company, the decree does not impose sanctions against the importation of oil from Venezuela, fundamental to the country’s economy and also to US refineries – the USA are a relevant importer of the product”.

As banks of the whole world make business with the North American market, Venezuela has found it difficult to work its finances. Venezuela, since Chavez, has sought to get closer to others players like China, Russia and Iran. It has signed partnerships in the oil sector with the Chinese and Russian for sale and exploration of oil, and has gathered billions of dollars in resources, but China and Russia do not seem willing to move more resources and increase its exposition to risks in the country. The biggest oil market for Venezuela is still the United States.

 Another factor that has not helped Venezuela is the ascension of hostile right-wing governments in South America, including Brazil and Argentina. Brazil, which for many years played an important role acting for distension in the negotiations between government and opposition, starting with the Michel Temer administration, adopted a position of support to the Venezuelan opposition and against the Maduro government in international forums, including Mercosul. Macri’s Argentina, in an attitude totally divergent from the collaboration existing in the Kirchnner period, has become another antagonist in a market perspective. The practical result of these stances has been an unwillingness in offering any kind of assistance to mediate and find alternatives to the polarized political dispute in Venezuela. The Maduro administration is currently with insufficient political support, internally and externally, which makes it much harder to overcome the grave economic and social crisis in which the country finds itself.

References:

PAIVA, Rafael Bianchini. A tragédia econômica venezuelana. Published in 30/08/17 on the Carta Capital website: https://www.cartacapital.com.br/blogs/conjunturando/a-tragedia-economica-venezuelana

DEUTSCHE WELLE. EUA aplicam novas sanções à Venezuela. Published in 25.08.17 on the Deutsche Welle Brasil website: https://www.dw.com/pt-br/eua-aplicam-novas-san%C3%A7%C3%B5es-%C3%A0-venezuela/a-40246608