Given that oil exports account for 50% of the national GDP, it is not surprising to find that the markets are taking a very nervous view about a nation whose economy has been grossly distorted by recent experiments with state-controlled socialism.
The hard left rhetoric of the late Hugo Chávez and current president Nicolás Maduro may have squeaked by when the oil price was trading above $100/Barrel. However, the current level of oil prices are just 48% of what the nation needs if it is to balance its books this year. Since the oil price decline began in June the government has floundered as it copes with ever-heightening macroeconomic dislocations that have created huge difficulties for Venezuelan industry.
Shortages of staples in Venezuela has led to grocery shopping becoming a hit and miss affair with ever-lengthening queues. Photo: Thinkstock
The crippling level of inflation and uncertainly over whether or not invoices will be honoured has gummed up the supply chain so that bottlenecks continue to fetter trade, limit business activity and thereby further reduce revenue into the government’s coffers.
The upshot is that fiscal resources are stretched and are so close to breaking point that there is a genuine prospect of a sovereign default. The yield on two-year state debt has accelerated from 9.234% on June 1 this year to a jaw dropping 29.822% last Friday as the markets closed.
The limited flow of revenue into the state has quite rightly spooked the markets as Venezuela has to meet obligations worth $28 billion of debt over the next two years. Meanwhile liabilities keep rising at a time when the balance of foreign reserves decreased to $20.5 billion in October 2014 from $21.3 billion in September 2014. This is the lowest since August 2004 when they were $20.7 Billion.
We must be careful not believe the apologists for the current administration. They claim Venezuelan citizens have access to basics i.e. food produce and medicine. That does not explain why Maduro has blocked access to eggs, milk and ironically oil.
Shortages of staples like meat, milk, soap and toilet tissue have become a chronic feature of daily life in this once wealthy nation. The sad fact is that grocery shopping has become a totally random hit or miss affair marked by ever-lengthening queues. The shortages affect both the poor and the well-off; so much for socialism helping the poorest in society.
The difficulties have been bubbling under the surface for some years now and were always masked, cosmetically, by the healthy oil revenues that the nation could earn. Dogma-driven nationalisation of the consumer goods industries led to a lack of competition and incentive so productivity has declined, which implied that increasing amounts of consumer demand was met by imports to cover the shortfall.
As is the way of any society where control is next to total within the centre, nods and favours were granted by Chávez to his favourites and their connected parties so allowing access to dollars at 6.3 bolívares fuertes for a dollar (USDVEF), and reselling them on the black market for USDVEF 97.
This has created a surge in demand for dollars and put downward pressure on foreign currency reserves as the Banco Central de Venezuela has fought to stave off currency outflows. In short, Venezuela is being squeezed in a pincer movement by falling currency reserves and diminished export.
Expert opinion, with or without Excel
Although still somewhat scared by their Excel file errors, I believe the Harvard economists Kenneth Rogoff and Carmen Reinhart are very much worth listening to. On October 16, they said that Venezuela is so badly mismanaged that real per capita GDP today is 2% lower than it was in 1970, despite a 1000% increase in oil prices.
The rating agencies all place a negative outlook on the national debt as the ratings are listed as Moody’s Caa1, S&P CCC+ (Substantial Risks) and Fitch B (Highly Speculative).
Looking deeper into the national accounts one can establish that Chávez and Maduro have accumulated unpaid bills of $3.5 billion for pharmaceuticals, $2 billion payment for food, and nearly $4 billion owed to airline companies.
Venezuela already has accumulated many domestic defaults and given the economy is spiralling ever downward, an external default is highly likely and aggressive vulture funds are circling as they sense another Argentina moment.
Recently Maduro has criticised the Reuters news agency for daring to publish articles that were critical of Venezuela’s economic problems. However, he cannot ignore that fact that the latest phenomenon to grip the capital city is for “pop-markets” to appear, ready to sell illegal, black market consumer goods at prices far higher than the price floor that the government has imposed.
Prices are set so ludicrously low, that companies and producers cannot make a profit. This means that farmers grow less food, manufacturers cut back production and retailers carry reduced inventory. Consumers are increasingly turning to such pop-ups as they find the access to certain consumer items that are not the “basics” are becoming increasingly rare.
They will pay excessive prices if it means they are able to obtain what they want, when they want it. This is simply creating another gaping hole in the revenue collection net of the state government.
Maduro may attack the US and other Latin American countries such as Columbia for waging an economic war on Venezuela. However, patriotism is always the last refuge of the economic scoundrel.
– Edited by Gayle Bryant
Stephen Pope is managing partner at Spotlight Ideas. Post a comment below or follow Stephen to engage with Saxo Bank's social trading platform.