“The most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001. The situation is made worse by the inability of the political system, at present, to address the situation”.
Venezuela, unlike most other oil exporters did not use the boom years to put some money aside. Former President Hugo Chávez used it to quadruple the foreign debt, allowing him to spend as if the average price of oil was $197 in 2012, when in fact it was $111. Chávez also maimed the private sector through nationalisations and import controls. With the end of the boom, the country was hopeless. In 2015, GDP declined 10%, following a 4% fall in 2014. Inflation reached over 200%. The fiscal deficit reached 20% of GDP, funded mainly by the printing press. In the free market, the bolivar lost 92% of its value in 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered. Imports, which were compressed by 20% in 2015 to $37bn, would have to fall by over 40% in 2016, even if the country stopped servicing its debt. Why? If oil prices remain at current levels, exports in 2016 will be less than $18bn, while servicing the debt will cost over $10bn. This leaves less than $8bn of current income to pay for imports, a fraction of the $37bn imported in 2015. Net reserves are less than $10bn and the country, trading as the riskiest in the world, has no access to financial markets. The Government is unwilling to seek the financial assistance of the maligned IMF. It has not even increased petrol prices: currently, $1 buys over 10,000 litres. “Even the best and most stable government could not avoid a lousy performance in such circumstances. But in the middle of a political crisis, things are bound to get very messy indeed”. The fallout for Venezuela’s neighbours and the global economy will be substantial: exporters to Venezuela are owed tens of billions of dollars of unpaid bills. It is probably too late to avoid a Venezuelan catastrophe altogether. A disorderly default, similar to the 2001 Argentine crisis, is almost inevitable. But to reduce its length and intensity, the country needs a sound economic plan to garner ample international financial support. This is unlikely while Mr. Maduro remains in power.