The Impending Collapse Of Venezuela
The Impending Collapse Of Venezuela
On Tuesday January 13th, the ratings agency Moody’s downgraded Venezuela to Caa3, one step above default. This comes as no surprise – markets have been pricing in the likelihood of default for some time now.
Curiously, though, Moody’s changed the outlook from negative to stable:
“The stable outlook is based on Moody’s view that even if the oil price drops further, expected losses to bondholders are likely to be consistent with a Caa3 rating and unlikely to reach levels associated with lower ratings.”
This is too generous. Moody’s assessment assumes that Venezuela’s problem is mainly a balance of payments crisis caused by a rapidly falling oil price and inadequate foreign reserves. But the reality is different – and far worse.
The balance of payments problem is bad enough. The falling oil price is causing a widening foreign exchange gap. Venezuela needs an oil price of $100 per barrel to balance its external accounts, but oil is falling rapidly towards $40 per barrel and so far, Venezuela has failed to persuade other oil producers to reduce production in order to support the price. Venezuela’s foreign exchange outflows now substantially exceed its inflows, not least because it is supporting a complex and unhelpful exchange rate system: its US$ reserves are down to $22bn and falling fast. Venezuela will probably attempt to staunch the bleeding with tighter price and exchange controls, but all this will do is accelerate demonetization of the economy as more and more trading shifts to the black market.
But the real issue is Venezuela’s domestic economic problems. Venezuela has been in deep recession for most of the last year. Its budget deficit in October 2014 – before the most recent catastrophic oil price falls – was 17%. Inflation is officially at 65%, unofficially probably far more. Import controls, inflation and the overvalued bolivar are causing shortages of essential goods.
Shortages are nothing new in Venezuela. Indeed, a shortage of toilet paper has been the subject of global amusement for quite some time. But recently, the shortages have become much worse. Last week, a government official was jeered for saying that long lines indicated that “Venezuela has plenty of food”, when rows and rows of empty shelves in stores were telling a different story. Bloomberg reports that people are queueing overnight for necessities such as soap, milk and diapers. This is very dangerous. Venezuela is already one of the most violent societies on earth. And when shortages start to affect little children, people get angry.
Fearful of public unrest escalating into something more serious, the government has now deployed troops to control queues of disgruntled shoppers at the country’s half-empty stores. And it has introduced a system of rationing, limiting shoppers to two days per week at government-controlled stores. As Bloomberg cynically put it, “Venezuela reduces lines by trimming shoppers, not shortages”.
President Maduro returned empty-handed from his recent whirlwind global tour: China didn’t want to lend him any money, and oil producers didn’t want to cut production. However, he does seem to have swung some sort of financing deal with Qatar to soften the balance of payments problem. But in his absence, his opponents seized the opportunity to liven things up. Claiming that the country was “in a state of emergency”, the opposition leader Henrique Capriles called for people to “mobilize in the streets”. It is all too easy to see where this is headed.