Hanging by a Thread: A Look Into the Venezuelan Crisis

August 15th, 2016

By Marta Luzes – Research Assistant 

Three years after the death of the revolutionary president Hugo Chaves, Venezuela finds itself in the worst economic and political crisis that the country has experienced. Hunger, crime and a shortage of medicines are just a few of the problems that Venezuelans face daily as the country goes bankrupt and political unrest keeps increasing. Being one of the countries with the highest oil reserves in the world, Venezuela was severely hit by the oil crisis that has been felt throughout the world. With prices plummeting for some months now, they are a third of what they were in 2014, the country has seen its most important export, which accounts for 96% of export revenues, diminish severely (approximately a decrease of 40% this year)[i]. The economic situation of the country is further worsened by the levels of foreign debt that the country has accumulated throughout the years and that is now incapable of paying (the country has $120 billion of foreign debt and in the final quarter of this year must make a payment of almost $7 billion). This economic crisis is reflected by the lack of security that is felt throughout the country and has led the current president, Nicolas Maduro, to declare a state of emergency[ii].

Nicolás Maduro, the successor of the late Hugo Chavez, has been ruling the country for the past three years and is now facing the threat of being overthrown by the main opposing party. The opposition declared a humanitarian emergency back in January but these claims were dismissed by the President, which is now trying to undermine the petition for a referendum for the recall of votes. As the Venezuela’s National Electoral Council, controlled by the government, keeps on raising problems trying to delay the referendum until next year so that by this time if Maduro is forced to step down, the next in line would be the party’s vice-president and there would not be a change in regime[iii]. Meanwhile, high inflation keeps soaring, the black market keeps increasing and there is no visible change in the economic or political policies that the government pursues.

Unfortunately, the consequences of the crisis go well beyond the country’s economy and worrying humanitarian situation. As Venezuela’s situation continues to worsen the impacts on the international community are sure to be felt. The risk of default will have significant repercussions on Wall Street and international markets, whilst simultaneously posing a great threat to the stability of the whole Latin American region.

Country Analysis

With no money, no food and no electricity the country is entering into complete chaos, with healthcare one of the most prominent casualties. The rate of child mortality increased by more than 100 percent, from 0.02 percent in 2012 to over 2 percent in 2015, according to a report provided by lawmakers[iv]. Maternal health also increased by almost five times during the same period of time. Hospitals are operating with very basic facilities, there are no medicines, there is no power to enable medical instruments to work, there are no doctors and in some hospitals there is not even water to clean surgeon’s tables, as infrastructure’s malfunctions are very common[v]. However, the president continues to deny claims of a public health emergency. “I doubt that anywhere in the world, except in Cuba, there exists a better health system than this one”, declared Mr. Maduro when asked about the situation of the healthcare system in Venezuela.

Other basic services hit by this crisis are energy supply and food stocks. As the country goes bankrupt energy cuts have become an everyday reality. This has not only influenced hospitals, schools and households but it has also contributed to the reduction of days that government offices are open, having decreased to two days a week. Meanwhile, the queues at food stores are endless. The food shortage is the worst that Venezuelans have ever seen, largely caused by the reckless economic policies pursued by the government and the lack of money the country has to import goods. More than 80% of goods have disappeared from supermarkets shelves[vi] and malnutrition is rampant not only in children but also in adults. On the 17^th of July the borders with Colombia, which had been closed since last year, were temporarily reopened and Venezuelans were allowed to cross into Colombia in order to buy food and basic toiletries. It is estimated that as much as 100,000 hungry and desperate people crossed the border to go and buy food[vii].

This shortage of food and basic items is reflected by the growth of the black market and the increase in robberies and crime. According to several news agencies, Venezuela is now considered one of the most dangerous countries in the world, with crime rates soaring as the food shortages increasing. Additionally, the increase of drug gangs and street groups across the capital Caracas make it very difficult for security forces to maintain control that on the other hand do plenty of killing themselves[viii]. Violence just keeps escalating and it seems more and more difficult to stop and is sure to influence the countries around Venezuela, as gangs and narcotraffic increase in the region.

However, the humanitarian crisis should not be the only concern for the international community. The country is entering into a deep economic crisis, one of the worst the country has ever seen, and this is sure to have ripple effects for the world economy. The former policies implemented by Hugo Chavez and the continuation of the same economic model by the current president, have led the IMF to declare that the Venezuelan economy is expected to shrink by 10% this year and the inflation rate that is now at 500% may increase up to 700%.  As money runs out the subsidies that were created during the Chavez regime are now impossible to maintain as the country has considerably reduced its state revenues. Nationalized companies (over 1,200) do not have funds to continue working either, as it is the case with the energy sector; poorly managed and kept oil infrastructures are also failing; unemployment rates are now at 17% but are expected to increase up to 30% until next year[ix], all of which has left a huge hole in the country’s public finances and has turned Venezuela into an high-risk debtor. As we approach October, when a payment of 1$ million to international bond holders is needed[x], the country’s default risk increases as it becomes clearer that Venezuela will not be able to pay its debts to creditors such as countries like China that now owns a large percentage of the country’s debt. In the case that Venezuela fails the payment and defaults an immediate impact will be seen across the global markets and regional neighbours. Colombia has already felt these effects when its borders with Venezuela were closed last year and Colombian exporters were left with billions of dollars with unpaid bills[xi]. China faces the same risk, having lent Venezuela billions of dollars that is now trying to renegotiate with the opposition[xii].

Despite all of the difficulties the country is experiencing, there is no sign that the government is ready or willing to restructure the economy and implement economic policies that, more than beneficial, are necessary.

A resources trap

Venezuela’s commitment to a socialist “populism” has been hurting the country for decades and it is now one of the political explanations for the lack of action by the government. The country has a long standing tradition of spending state revenues on generous social welfare benefits in order to keep the population happy, failing to save for more tumultuous times, like the one they are experiencing today. The severe decrease in oil prices in the last months has had a strong impact on the nation’s finances. On the meantime, the government keeps hoping that the oil price will go up and that their economic problems will be quickly solved: the country will have liquidity again so it can pay off the debts and normal life can be restored to its population. However, the price of oil is not expected to increase in the near future[xiii] and, despite having the means (large reserves of oil) to be a wealthy country, Venezuela is runs the risk of becoming insolvent.

Instead of focusing in solutions such as investing and developing other industries or finding effective ways to start fight corruption and enforce tax payments the government in charge has been unable and unwilling to implement necessary reforms and is now on the verge of collapse. This unwillingness to change policies, such as eliminate the exchange rate controls (the country currently has at least four exchange rates), increase the domestic price of gasoline, that is currently the lowest in the world, has forced the government to take up other measures such as shutting off imports and energy consumption, in order to avoid becoming insolvent[xiv]. Venezuela has run out of money, its foreign reserves are now 11.9$ compared to 20$ just two years ago, imports of food (which account for almost all food consumption) are barely close to nothing. However, as it has been previously unmasked, these measures are extremely hurtful for the population and completely unsustainable. Experts say that this could be “the largest and messiest emerging market sovereign default since the Argentine crisis of 2001”[xv].

The problem with inflation and exchange rates is one of the biggest economic challenges that Venezuela needs to fix. Currently the Government has an official fixed exchange rate of 10 bolivares Fuertes (bs) per dollar[xvi]. However the exchange rate in the black market is much higher than the official one, so one can get more than 10 bolivars for 1 dollar. This difference in exchange rates is the cause for the hyperinflation the country is experiencing. The black market inflation raises the prices of imports for basic goods, which leads the government to implement rationing and price controls, which leads more people to buy in the black market, which of course creates more inflation as the black market exchange rate keeps increasing[xvii].  Moreover, the government has been raising wages and printing more bolivares as an attempt to soften the low import of foreign goods and their price rise, which naturally increases inflation even more[xviii]. These situations create a big fiscal deficit for the government and rocket high levels of inflation.

Another important result of these policies is the effect that this crisis can potentially have on China.  China is one of the biggest lenders to Venezuela, however it is in the form of short-term financing that is payable via oil shipments. Hence, as the price of oil collapses, Venezuela needs to ship more oil in order to pay the same debt. On one hand this leaves the country with fewer barrels to sell on the international market diminishing the amount of revenues (roughly a little more than a million barrels per day), which again is not very positive for the country and creates an even larger budget deficit[xix] with a lot of money owned and no revenues getting in. On the other hand, China has a large exposure to Venezuela’s debt and risks having to deal with a potential national default. Beijing has already sent unofficial envoys to hold talks with Maduro’s opposition in order to secure the payment of the debt and to maintain a relationship between both countries in case of a change of regime. A default on the part of Venezuela would have a negative impact on the Chinese balance of payments, which is already growing at its slowest rate in 7 years, 6,7% on the first quarter of 2016[xx].

The situation is further aggravated by the inexistence of economic surveillance that is now the reality in Venezuela. As a member state of the International Monetary Fund (IMF), countries are obligated to accept economic monitoring in order to assure to others that its policies are not a risk to other countries. However, Venezuela has not let the IMF in since 2004, not allowing for any economic monitoring[xxi]. This withdraw and the consequent closing of the national office was a Chavez attempt to create an alternative Latin American lending bank and, at the same time, show its disagreement with the IMF policies and measures towards the developing nations[xxii]. Albeit the attempt, no bank was created and the IMF did not change its policies, being the only result a lack of monitoring of the country’s economic activities for years and a growing liability of the international community

The Organization of American States should also have an important role to play in the current circumstances. Despite some alliances with other Latin American countries (such as Bolivia) it lies on the regional neighbors to denounce and condemn Maduro’s actions. On the past 23^rd of June the head of the OAS regional block addressed the permanent council of 34-nations and denounced the poverty, corruption and violence that the Venezuelan people face everyday[xxiii]. Nevertheless, Venezuela stills play an important role in Latin America: it has allies in the region that will not allow a suspension from the OAS and Mercosur and it also provides oil to at least 10 countries in the Caribbean Sea[xxiv]. All this can explain the seeming low and late response by the region’s superpowers to the economic and humanitarian situation in Venezuela. However if countries persist in not implementing safeguarding policies the results can be even more disastrous.

Policy recommendations

The international community can do little on its own, as it cannot interfere in Venezuela’s internal politics. However it is important to stress out the severe consequences the situation can have on the political and economic stability of the region and on the national population. Therefore, if or when the Government of President Maduro decides to ask for foreign assistance, solving the humanitarian situation should be the first thing on the agenda of the international community. If it does so, policy makers should immediately focus on establishing a system of aid for the National population. This can happen through cash-transfer programs to Venezuelan families, so that they can afford basic staples, or government food stamps. It is critical that the international community restores the full functioning of basic services, which can be done by agencies such as the UN (UNICEF, WFP) and Médecin sans Frontières.

Surrounding regional countries such as Brazil, Chile, Colombia and Peru, should promote and endorse the Organization of American States (OAS) secretary’s general call for a government dialogue between Mr. Maduro and the opposition, and remind Venezuela of its humanitarian obligations declared under the Inter-American Democratic Charter, instead of suspending the country from the organization[xxv]. There is a need for the regional countries to come together and pressure the Venezuela to undergo some economic restructuring and reinstall basic democratic principles. On the same note, the international community needs to pressure Caracas to have IMF surveillance immediately not only to restore their right to know the economic situation of the country but also to protect themselves for the future negative impact that countries are bound to feel.  Venezuela should start to invest in the long term on other forms of exportations so it is not totally dependent on oil and on its price fluctuations. It is also important that the country understands the significance of infrastructures and starts investing in improving the ones existent and building new ones, so that the current energy situation do not happen again. Additionally, they should invest on the necessary infrastructures and agriculture know-how so that they can start producing their own food, instead on being completely dependent on food imports, as it has been seen can cause several shortages[xxvi].

The referendum that the opposition is trying to put forward would be the more democratic and maybe successful way of dealing with the circumstances Venezuela finds itself in. The US has been working with the new governments of Argentina and Peru to create a framework for multiparty talks. These aim to press the Venezuelan Government to open up some political space for the opposition to make sure democratic values are respected.

Whatever the decision of the Government or the international community is, it must be decided quickly as day by day the humanitarian situation deteriorates and the economic damages seem more and more irreversible.

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[i] The New York Times, 27^th of May 2016 (LINK)

[ii] The New York Time, 15^th of May 2016 (LINK)

[iii] The Guardian, 22^nd of June 2016 (LINK)

[iv] The New York Times, 15^th of May 2016 (LINK)

[v] The New York Times, 15^th of May 2016 (LINK)

[vi] El Nacional, 8^th of April 2016  (LINK)

[vii] CNN, 20^th of July (LINK)

[viii] TIME, 20^th of May 2016 (LINK)

[ix] The Guardian, 22^nd of June 2016 (LINK)

[x] Venezuela Analysis, 1^st of March 2016 (LINK)

[xi] Financial Times, 3rd of February (LINK)

[xii] Financial Times, 19th of June 2016 (LINK)

[xiii] CNBC, 29th of February 2016 (LINK)

[xiv]Foreign Policy, 5th of February 2016 (LINK)

[xv] Financial Times, 3rd of February 2016 (LINK)

[xvi] The Hill, 4th of May 2016 (LINK)

[xvii] The Week, 17^th of May 2016 (LINK)

[xviii] The New York Times, 27^th of May 2016 (LINK)

[xix] Financial Times, 19^th of June 2016 (LINK)

[xx] The Hindu, 18^th of April 2016 (LINK)

[xxi] Financial Times, 3^rd of February 2016 (LINK)

[xxii] Center for Economic and Policy Research, 10^th of May 2007 (LINK)

[xxiii] Reuters, 23^rd of June 2016 (LINK)

[xxiv] Quarterly Americas, 31^st of May 2016 (LINK)

[xxv] Council on Foreign Relations, March 2015 (LINK)

[xxvi] The Week, 17^th of May 2016 (LINK)