Venezuela is entering a moment of extreme danger. The social damage which the current economic crisis has caused is evident. Unless we act soon, we could be heading towards a catastrophe of a magnitude not seen before.
After 17 years of Chavista misrule, the country’s very foundations are rapidly crumbling. Now, we need real solutions, not the half-measures we have implemented in the past to address our economic crises.
This becomes evident when we ask ourselves how we arrived at our current situation.
In these times of penury, it seems like a fantasy to think that only three years ago we witnessed the most irresponsible extravagance in Venezuelan history. In 2012, the average price of oil was US$103 per barrel. According to the Venezuelan Central Bank (BCV), our exports amounted to US$97.3 billion while we imported US$ 75.3 billion in goods and services.
Despite the oil bonanza in 2012, the public sector left a deficit of 17.5 percent of GDP. This represents an astronomic, outrageous amount of waste when the government should have been saving for harder times ahead. In other words, during Hugo Chávez’s last year in power, his government squandered money as if it was selling oil at US$197 per barrel. And the regime covered the difference by amassing debt and printing money.
This year, we are witnessing the climactic result of profound economic imbalances, but the causes all lie in the past. Between 2006 and 2014, Venezuela experienced the most prolonged oil boom in the country’s history, but the foreign debt grew five-fold. Meanwhile, other countries took advantage of high commodity prices to strengthen their foreign exchange reserves by either reducing their foreign debt or purchasing assets abroad. Kazakhstan, for instance, created a savings fund equivalent to seven years worth of oil tax revenue.
The Venezuelan government, meanwhile, decided to wage war on the private sector. It tried to compete with cheap imports, it limited citizens’ access to foreign currencies, it expropriated or physically occupied private companies, it regulated prices and profits, criminalized stocks as well as exports, and imposed an endless amount of regulations that ended up destroying all profitability.
Naturally, this barrage against the productive part of the economy led to severe shortages of basic goods. Initially, the lack of products was camouflaged behind an enormous inflow of imports paid for with oil revenues and debt. This is how the illusion that socialism was possible and being realized came about. But as our productive capacity was decimated, the country became ever more vulnerable to an eventual drop in oil prices such as that which is now taking place.
Last year, Venezuela exported approximately US$37 billion, little more than a third of our exports in 2012. This meant that we were only able to import US$50 billion worth of goods and services (34 percent less than in 2012). Given our inability to replace imports with local production, such a drastic reduction in imported goods had nefarious consequences: massive shortages, long lines of shoppers looking to buy food and medicines, a minimum wage worth 51 percent less than before, 10 percent less production for the economy as a whole, and inflation levels above 250 percent.
How Is Venezuela Still Functioning?
But the question remains: how did Venezuela manage to import US$50 billion in goods and services when we only exported $US37 billion (62 percent less than in 2012)?
Furthermore, what is the source of the US$26 billion difference between what we exported and what we paid for in imports, interests, and debt principal?
The answer is that this sum was paid with falling foreign exchange reserves (US$5.7 billion), part of our gold reserves (US$3.5 billion), advances of a credit balance we had at Petrocaribewith a 45-percent discount (US$ 3.7 billion), International Monetary Fund (IMF) transfers (US$ 2.3billion), and CITGO debt incurred to pay US$ 2 billion of PDVSA dividends.
Furthermore, the Venezuelan government renewed a credit line with China (US$5 billion, and it’s difficult to assess how much of it was net financing), it liquidated assets (among them a refinery in Chalmette, Louisiana), and simply failed to pay an undisclosed amount worth of imports.
In sum, 2015 was one of the worst years in Venezuelan history. We had to empty our pockets since a barrel of Venezuelan oil sold for a mere US$45 in international markets. Meanwhile, we saw our assets liquidated while the government borrowed massively.
This would lead to an economic contraction of unseen proportions in Venezuela, only matched by enormous natural disasters or world wars.
The most pressing question now is how much Venezuela will be able to import in 2016 with an oil barrel worth a meager US$25.
Without imports, we will neither get the things we no longer produce in Venezuela nor the raw materials we need to produce those things we do know how to make. With the current international oil prices, Venezuela won’t be able to export more than US$22 billion this year. Our foreign debt service amounts to US$10.3, and there’s an additional US$6 billion owed to China’s special fund.
Even if we assume that China will renew our credit, Venezuela will have less than US$12 billion left for imports — which is just 25 percent of what the country imported in 2015. This would lead to an economic contraction of unseen proportions in Venezuela, a level of destruction matched only by enormous natural disasters or world wars.
No More Recourse in 2016
Long lines have become a staple of Venezuela’s Chavista regime. (Youtube)
You might then ask if we can liquidate reserves to be able to import more. The problem is that our net reserves, with gold valued at market prices and ruling out those that have been pawned, barely amount to US$10 billion. If we do this, we would be able to import US$22 billion, which is still 56 percent less than in 2015. But if we spend all of our reserves in 2016, we won’t have anything left to face 2017. And if we use PDVSA money to buy food and consumption goods, the state-oil firm’s productive capacity will fall even more than it already has over the past years.
What about issuing bonds abroad? That’s not an option anymore. Venezuela exhausted its credit line during the boom period and now has the world’s highest risk premium for sovereign bonds: 3,627 basis points or a 36.26 percent interest rate above US Treasury bonds for the same duration.
Other sources of credit, such as Venezuela’s Special Drawing Rights at the IMF or discounts for canceling oil debts were exhausted last year. In fact, Venezuela can only draw on a further US$700 million of IMF money. What’s worse: 84 percent of our remaining oil credits are with Cuba, Nicaragua, and Haiti, three countries which don’t seem able to pay their debt in advance.
Some have argued that all our woes would be solved by devaluing the national currency or by unifying the exchange rates. This would promote a more rational use of scarce foreign currency and eliminate incentives to overprice imports, the argument goes.
It is also argued that a devaluation would reduce the fiscal deficit, because it would increase the bolivar value of our oil exports. Even though they are right that these two measures — a devaluation and a unified exchange rate — would usher in efficiency in handling foreign currency, it is very unlikely that they will help to get rid of the fiscal deficit.
To understand why, it’s useful to point out that devaluations have a positive impact on the state’s budgets as long as there is a surplus in its balance of payments. Under current circumstances, a devaluation would increase the bolivar value of foreign currency income more than it would increase expenses in dollars. This would improve the final balance in bolivars.
But with the Venezuelan state’s current obligations in 2016, it’s unlikely that there will be a dollar surplus. Venezuela could export US$22 billion this year having imported US$26.7 billion in 2015, and the regime must still meet bond obligations ranging from US$10 to 16 billion, depending on debt restructuring with the Chinese. To have a foreign currency surplus, the government would have to brutally slash imports.
Devaluing the currency and unifying exchange rates is necessary, but not enough.
This has never happened in the history of Venezuela’s economic crises. Not in 1960, 1983, 1989, 1996, 1998, 2002, or 2009.
We didn’t have hyperinflation because, every time we got in trouble, we devalued our currency. And given the usual foreign-currency surplus, the fiscal deficit would decrease. But this time a devaluation will very likely increase the fiscal deficit, which in turn will increase the need to print money, accelerating inflation.
This new scenario is due to three factors: the five-fold increase in foreign debt, the colossal rise in state imports from US$3.2 billion in 1998 to US$33.2 billion in 2014, and the foreign currency controls that generate perverse incentives.
For these reasons, devaluing the currency and unifying exchange rates is necessary, but not enough.
Additionally, we need to reduce government expenditures. In broad terms, we need to redefine the role of the state in the economy, and reach a new social contract that defines what the state must do for citizens and what citizens must do both for the state and for themselves.
Where to Begin?
The current crisis is ravaging Venezuelans’ quality of life, and it’s affecting the needy above all. In order to leave this crisis behind and mitigate the suffering as much as possible, Venezuela must grapple with two possibilities that could allow us to get back on our feet and maintain the influx of imports while increasing our own production.
These options are to ask the international community for help and to restructure our debts.
These possibilities shouldn’t be evaluated ideologically, but rather in terms of practical criteria to ease Venezuelans’ plight.
The two options aren’t necessarily disconnected. An agreement with the IMF, the body that coordinates and channels international aid toward troubled economies, could also require debt restructuring. It has already happened with Greece, Cyprus, and Uruguay, among others.
According to the latest figures released by Venezuela’s Central Bank, the country’s debt amounted to US$138 billion in September 2015. This is the equivalent of over six years in oil exports at current prices. This number does not include pending litigation at the International Centre for Settlement of Investment Disputes (ICSID), nor the money owed to the private sector for delays in assigning foreign currency, nor the loans we need to exit this crisis.
The international community has created these mechanisms to coordinate the financial rescue of countries, not bondholders. The latter, in fact, already have an idea of what’s coming: their bonds are now worth 37 cents to the dollar because they assume that the Venezuelan government won’t be able to pay them in full. Debt restructuring would increase the value of bonds, give us a chance to recover, and allow us to have enough money to pay restructured debt.
This strategy looks like the only alternative to avoid that brutal cut in imports that would lead Venezuela to a humanitarian crisis.
Venezuela’s future with the IMF’s support and a renegotiated debt looks much more viable and promising. The country could aspire to receive between US$40 and 50 billion in two to three years. Considering a scenario similar to that of Greece, it could be US$53 billion.
The much-needed funds would have very low interest rates, in contrast to those that international markets are demanding from Venezuela and those of bonds already issued. Besides, a deal with the IMF would allow Venezuela to receive an additional US$10-15 billion over a period of three years from the World Bank, the Inter-American Development Bank, and the Andean Development Corporation.
Under today’s conditions, this strategy looks to be the only alternative to avoid the brutal cut in imports which would undoubtedly lead to a humanitarian crisis in Venezuela.
This would allow us to restart production, investment, and consumption as we rebuild our diminishing international reserves. In order to obtain the necessary financing, however, Venezuela needs a new administration that can bring back hope and optimism and change expectations regarding the immediate future.
A Viable Alternative
Countries do not disappear, but they do go through extreme hardships that leave lasting wounds. The Chávez-Maduro administrations have not only brought about the current economic catastrophe after 17 years of nonsensical economic policy; they also remained motionless as conditions rapidly worsened, trying to hide from reality by presenting excuses such as the “economic war” supposedly waged on the Venezuelan regime, or conjuring some cheap slogan like their “thirteen engines [of economic growth]”.
This is the tragedy that we Venezuelans have to endure. Without a government that seeks international aid and promotes debt restructuring, Venezuela won’t recover.
We don’t mean to say that those measures will immediately and painlessly end the crisis. Suffering is inevitable when the government is characterized by improvisation, paralysis, and its insistence on implementing a failed model that has destroyed the economy. But it is possible to minimize the pain, accelerate the recovery rate, and pave the way for reconstruction.