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Angola and Venezuela Runaway Inflation and the Oil Curse

Proshare

Friday, January 20, 2016/ 6.55 PM / FDC  

Natural resource curse hypothesis and empirical studies often characterize countries that fall prey to this state of inefficiency with deindustrialisation, bad growth prospects and currency dis-equilibrium. Our focus will rest mainly on the latter as forex mar-ket challenges and currency woes have contributed significantly to the astronomical hike in the price levels of net oil importers, Venezuela and Angola.  

Venezuela and Angola are oil producing countries that pull their weights in their respective continents. Venezuela currently pro-duces 2.02 million barrels per day, 14.85% higher than 1.72 mil-lion barrels per day that Angola produces. Oil revenue contributes about 45% to the GDP of Angola and about 95% to its total ex-ports. The same trend is observed in Venezuela where oil produc-tion and activities contribute 50% and 95% to its GDP and ex-ports respectively.  

The oil booms in the past engineered the significant increase in the revenues of net oil exporting countries, with dramatic changes felt in countries like Nigeria, where oil revenues per capita in Ni-geria increased from $33 in 1965 to $325 in 2000.  

With this oil windfall however came dramatic appreciations in the currencies of net oil exporters leading to the famous Dutch disease studies on the effects of oil bonanzas on currencies of countries especially but not exclusive to countries with under developed institutions.  

What we observe however, is the Dutch disease in reverse as the entry of US shale producers into the oil market essentially intro-duced an oil glut into the market, forcing oil prices down to record lows of $28pb as at January 2016.  

Therefore the fundamentals in these countries that depend on oil earnings have weakened forc-ing a chain of events such as a depreciating currency and rising inflation. As stipulated above, the external balance of the countries of Venezuela and Angola as with many net oil importers, have been adversely affected due to the decline in oil prices in 2016.  

The weight of the depreciation of the Venezuelan Bolívar and Angola Kwanza increased inflationary pressure from imported inflation and as such inflation soared and kept rising in these countries. Angola now currently has an inflation rate of 41.95% from 10.3% in 2015, while Venezuela’s inflation rate is believed to be increasing at a rate of 130% monthly.  

This trend is not uncom-mon in other net oil exporting countries as we know that Nigeria’s inflation rate has soared to 18.6% from the CBN’s comfort level of 6-9% the previous year.

Political structure and tensions in Angola and Venezuela

Venezuela  

President Nicolas Maduro has to contend with domestic rifts, political assassinations and his country’s deteriorating relationship with the West, especially the United States. This is because of the socialist ideologies and policies that Maduro subscribes to, which the US views as a threat to its geopolitical stability.

Maduro sustained the established policies of his predecessor Hugo Chavez in order to maintain his popularity with the population that idolised him, in spite of the country’s current economic woes and political tensions.

Angola  

Angola is a pseudo democracy which implies that on paper it exhibits all the characteristics of a democratic system but in reality the au-thoritarian government of Jose dos Santos does not allow opposition ideologies to sway the direction of his government.  

Under the reign of the dos Santos, multiple parties have emerged to which he con-trols and the constitution has been amended to keep the fate of presidency away from the public and for the party leader with the most seats in its national assembly. Dos Santos has revealed his in-tention to step down in 2018 and has tagged his daughter (Isabella) as his most suitable successor.  

In comparison to these countries, Nigeria is an electoral democracy that is fairly neutral to geopolitical tensions between the West and socialist nations. Therefore the risk of coming to blows with the West and getting lack lustre or ‘bad’ deals so to speak is not an issue for the economy.

Monetary policy response  

Monetary policy in Angola in the last year has strived to address the issue of rising inflation in the country. The Angolan monetary policy committee raised its benchmark interest rates three times in the first quarter of 2016 and has retained its high interest rate of 16% since then.  

The high interest environment is justified by the evolution of consumer prices, the kwanza and other key economic indicators. A high interest rate environment is to pacify investors who have endured large devaluations and a reduction in the value of their kwanza denominated investments due to a high inflation rate.  

Venezuela is dealing with much harsher conditions as its hyperinflation has rendered some denominations of its currency obsolete. Basic goods such as sugar and bread have become inaccessible for most citizens and a handful of the population have fled the country for more conducive environments.  

The government re-cently introduced a new denomination of the Bolivar, 500 bolivars; 1,000, 2,000, 5,000, 10,000 and 20,000 are set to arrive to reduce the bucket loads of money that citizens would have to carry to buy goods for their most pressing needs. Data on the economic situation of the country have not been published since February 2016 and many are calling for a currency substitution rather than the printing of new money that is virtually made worthless due to hyperinflation.

 

Outlook and policy options  

In the case of Angola, the new global oil environment that seeks to rebalance the oil market and restore prices from 2016 lows will help boost the fiscal and forex earnings by the Angolan govern-ment, as Angola has been able to maintain its oil production levels. It has trumped Nigeria to be the highest African oil producing nation.  

However, diversification is more of a long term policy option that needs to be considered in order to hedge the Angolan currency and economy as a whole against external shocks.  

The Venezuelan case is a lot trickier due to the intricacies of the problems that the country is currently facing. The country’s fiscal earnings will receive a boost from a higher price environment and as such the government will refrain from printing new ad hoc money to settle its fiscal requirements.  

However, as the currency has sunk to new lows, an independent central bank is very likely to be a welcomed step in the path to curtailing the enormous pressure on the Bolívar.  

This is because an independent Central Bank might opt for a currency board that ensures seigniorage revenue from exchanging bolivares for the foreign currency to which it enters this contract with at a fixed rate. 

 

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