It may seem odd to see a hard-socialist, left-wing Latin American country under a notoriously dictatorial regime bend over backward to remain in the good graces of Wall Street bond creditors. Unlike other heavily indebted nations, however, Venezuela has key assets abroad and a default could lead to a seizure of these assets such as rigs, refineries, shipments of oil and, above all, the company’s Houston-based subsidiary Citgo Petroleum. This would shut off the one source of foreign exchange and foreign loans it has. It would surely end the “Bolivarian” regime’s hold on the country. Hence the government’s determination to scratch together the USD 1.5 billion needed for a payment late last month that had to be made to avoid a default.
Handing over the money was not an easy step for a country that has been among the hardest hit by the global plunge of oil prices and has seen once-ample international monetary reserves fall to 13-year lows in the neighborhood of USD 14.5 billion. In January, the amount of dollars officially approved for imports was a mere USD 106 million, down 87% from a year earlier. Thanks to its oil wealth, Venezuela was long able to toy with socialist and populist policies that would have bankrupted other nations much sooner. It has also been able to wield international influence far beyond its weight by providing cheap fuel to Cuba as well as Central American and Caribbean customers. But these days of plenty are now over. Contrary to other petroleum producers, who have accumulated rainy day funds in the billions, the emergency kitty in Caracas is said to be worth only about USD 3 million, and Venezuela is facing the unvarnished consequences of the inane economic course it has been pursuing, first under President Hugo Chávez and then under President Nicolás Maduro.
Pushed into a corner, the latter has begun to fiddle with some of these policies, but for now one would still be premature to expect anything remotely resembling the drastic reforms that are needed. On the currency front, the latest measures leave the cumbersome and graft-ridden multi-tiered exchange rate system in place and the strongest bolivar-dollar rate has been devalued by 37% to 10 to the dollar, while the black market quotes closer to 1,000:1. With regard to domestic prices, official statistics for last year suggest that annual inflation hit 141.5% and that real GDP contracted by 7.1%, but these numbers are suspicious and, above all, they do not reflect the grim living conditions that the population has to put up with.
The economy’s private sector has been all but destroyed. Although recently legislated emergency powers give the president sweeping control over the national budget to finance and take steps to stimulate the economy, it is hard to see how businesses starved of dollars to buy needed imports and overwhelmed by taxes and price regulations can play a significant role in this. Minimum wages of just more than 9,600 bolivars are worth less than USD 10 at the black-market exchange rate, where Venezuelans have to buy many of the daily necessities that are no longer available in the shops, made to disappear by the Byzantine FX regimen and absurd price controls. Gasoline now costs 22 bolivars a gallon, up from 0.4, but this still means it is the one thing in the country that is almost free. The trouble is, you can’t eat it.
Poverty is far more prevalent now than it was when the far-left movement of Hugo Chávez took over almost 17 years ago. Not only are (mostly imported) food and medicines scarce, but the regime has recently even begun to ration electricity and drinking water. In response to the increasing food shortages, Maduro & Co. have been urging people to grow their own vittles at home. They have created a Ministry for Urban Farming, echoing a thoroughly unsuccessful policy attempted by Cuba after the collapse of the Soviet Union. Meanwhile, a surge of crime in the countryside is driving down what production is left there, adding to the problems of the government’s land seizures and price controls. Venezuela used to export rice, coffee and meat. It now imports all three and even has its own banknotes printed abroad and flown in on Boeing 747s
This sorry trend is not about to reverse. The Maduro regime continues to blame the country’s woes on enemies abroad and at home who are waging “economic war” and has repeatedly made it clear that its United Socialist Party of Venezuela will not relinquish power, no matter what happens at the ballot boxes or in the streets. In last December’s elections, the opposition won a veto-proof two-thirds majority in parliament. But it remains far from united, and Maduro has been ramping up his military rhetoric, vowing to “combat” every effort to turn back the Bolivarian revolution.
Meanwhile, the regime recognizes that defaulting on any portion of the country’s USD 110 billion debt would cause its demise. It will try to hang on to assurances that it will pay, no matter what, even if that means squeezing imports further. The time for being able to do this is running out, however. Venezuela is probably close to the limit of what it can borrow from China. The bilateral debt has already been run up to more than USD 50 billion, and weak petroleum prices are making it less and less attractive for Beijing to accept deliveries of oil as payment.
Mathematically, Venezuela should be able to make it at least through 2016 without running out of hard cash. In the second half of this year (October and November), the government is due to pay another USD 6 billion to creditors. But unless global oil prices improve substantially, export revenues will fall to some USD 22 billion this year and leave, after debt payments, enough hard currency for less than one-third of last year’s import bill. This spells worsening conditions in problem areas such as queuing, hoarding and profiteering. It will add to the hardships suffered by people who already need upward of five minimum salaries (as defined by the government) to keep a family of four alive.
Even the cautious International Monetary Fund expects inflation to hit 700% this year, perilously close to the point at which monetary destruction goes into hyper-drive. The anticipated GDP loss is forecast at 7%-10%. The real numbers will undoubtedly be much worse. The regime has no interest in leaving the scene. For now, the power remains in its hands despite the opposition’s election win, as all the major institutions stay under its control, including the Supreme Court and the news media. But people suffering acute hardships eventually get angry enough to rise up and stage a counter-revolution, and this is a scenario to be reckoned with for the longer term.