Tuesday, May 24, 2016 10:04 PM / CFI.co
Venezuelan social media is a curious thing. There are few pictures of parents proudly showing off their kids, or of people buzzing with their hazy pictures of a boozy Friday night out littered with endless LMAOs and LOLs. Instead, the social web in this corner of South America is largely punctuated with desperate requests for life-saving meds, unavailable at hospitals or pharmacies.
Amidst all the obvious signs of a nation on the verge of collapse, Venezuela is awash with little barometers like social media which offer up of clues of the impending implosion.
Seasoned observers of the inner workings of South America may think they’ve seen all this before, and indeed there have been similar breakdowns across a continent which has so often been the main stage for political systems that promise much and deliver next to nothing. However, Venezuela is different. It pushes the envelope of mismanagement.
Public services are faltering with state offices open only twice weekly for limited hours. Inflation has eroded the livelihoods of three quarters of the population with close to 80% of Venezuelans now subsisting below the poverty line. Crime has soared to the point where it can neither be fought nor recorded. Caracas now trumps Tegucigalpa in Honduras as the world’s most dangerous city with 124 homicides per 100,000 inhabitants in 2015.
Price controls have led to shortages of food and consumer products. Most grocery stores feature but empty shelves and racks. The scarce delivery vans that manage to arrive do so under heavy armed guard and with throngs of desperate would-be shoppers in their wake.
Promptly and predictably, a black market filled the void. Here, everything is available, albeit at a price – one quoted in US dollars only available to Venezuelans at the vastly inflated black market rate – over a hundred times higher than the official one of 6.3 bolivares (Bs) for essential goods.
Venezuela operates a tiered exchange rate system split into three categories – Bs 6.3 (essential imports and the most widely used one), Bs 12 (for slightly less essential imports), and Bs 172 (for overseas travel and everything else). Since the central bank has virtually no hard currency left to sell, the entire exercise is one of pure semantics. On the black market dollars may be bought for Bs 1,150.
Depending how it is calculated, the national minimum wage of Bs 7,500 per month represents either a respectable $1,190 or a rather miserable $6.82. Since food, medicine, and many other of life’s necessities are unavailable at official prices, Venezuelans are forced to do their shopping on the black market where most prices are quoted in US dollars or tied to the greenback.
The official price for a kilogramme of coffee is Bs 700. However, no coffee is available for sale at that price. On the black market, coffee may be readily bought, but at Bs 4,000 per kilogramme – $634 per the official exchange rate (that determines the now completely eroded purchasing power of the minimum wage) or a much more reasonable $3.64 which even so represents over 53% of the minimum wage. Whichever way, most Venezuelans can no longer afford to drink coffee.
Venezuela is on the brink. On the brink of what, exactly, is anyone’s guess. Social unrest is the order of the day. Political life, too, has become unhinged with President Nicolás Maduro – a bus driver – refusing to give in to demands for a recall referendum.
When Mr Maduro was ushered into power in 2013 upon the death of Hugo Chávez, the nation expected the Bolivarian populist revolution, unleashed by the paratrooper-turned-president in 1999, to come of age – and leave behind its rage.
Despite the optimism, there was a certain inevitability about the continued demise of the nation. What few could have predicted though, was the depth into which the Maduro Administration would blindly stumble.
Before declaring a state of emergency in mid-May, President Maduro was faced with a country suffering the effects of a prolonged drought. Water shortages hit the entire nation. Dried-up reservoirs shut down most hydropower stations, plunging vast swaths of the country in darkness.
The president’s solution was to impose a two-day work week for civil servants and urge Venezuelan women to refrain from using hairdryers. In Caracas, trucks delivering potable water to shantytowns are now regularly hijacked at gunpoint, their cargoes sold at a premium in more upscale districts.
In fairness to President Maduro, the sinkhole into which the economy is disappearing is not entirely of his own making. Venezuela sits atop the world’s largest proven oil reserves, estimated at anywhere between 300 to 1,200 billion barrels, although most of it in the form of extra-heavy crude from the Orinoco tar sands which is difficult and costly to process.
Since the 1920s, the country is one of the world’s leading oil exporters. It has long suffered from the Dutch Disease – a malady that strikes and paralyses resource-rich nations, and causes economic lethargy. While the Dutch quickly managed to overcome their economy’s sluggishness, Venezuela has not – the country’s manufacturing base is depressingly slim and oil remains the only pillar of note supporting the nation, responsible for 52% of GDP and close to 95% of export revenue.
As the price of oil fluctuates, often wildly, so does Venezuela’s economic fortune. The government’s 2015 budget presumed an average oil price of $100 per barrel. However, state-owned oil company Petróleos de Venezuela (PDVSA) managed to obtain barely half of that for its crude. Worse, deficient maintenance and a dearth of investment conspired to reduce the country’s output to under 2.5 million barrels per day.
Notoriously inefficient and plagued by nepotism, PDVSA currently spends more than $20 to extract, process, and transport a single barrel of (light crude) oil. By early 2016, the country was earning a profit of slightly under $4 for each barrel of oil exported. Though profitability has since increased marginally, Venezuela is lightyears away from the oil bonanza it lived before.
With its public finances in disarray and economy floored, Venezuela has run out of cash to pay for essential imports and the settlement of bills. The country owes over $150m to Indian pharmaceutical companies, some of which were bankrupted because of unpaid invoices. Airlines have cut back the number of flights to Caracas after the central bank refused to allot hard currency for the transfer of the receipts from ticket sales. Toilet paper has run out as well. President Maduro ascribed its disappearance to industrial sabotage and ordered the army to seize the few paper mills of the country. However, the generals also proved unable to supply the goods.
Meanwhile, the government has effectively given up on tabulating the economic decline. Inflation figures are no longer compiled. The exact size of the budget deficit is also unknown. The central bank just prints whatever cash the government wants to spend. Though the bolívar (Bs) exchange rate has been fixed at ten to the dollar, no greenbacks are to be had at that price. The black market rate for the dollar hovers around the Bs 1,100 mark. Inflation is now guesstimated to run at an annual clip of 500% and is expected to reach 1,700% next year – provided the present government remains in power and sticks to its failing ways.
Price and currency controls are, however, a boon those select few with the right connections. The central bank suspects up to $2.5 billion from its already dwindling currency reserves may have been siphoned off illegally. Importers of goods deemed essential, such as food and medicines, may buy hard currency at lower exchange rates. By submitting fake invoices for non-existing orders, importers have managed to buy dollars on the cheap, only to immediately sell them on the black market at an astronomical profit.
The country’s economy is in the process of imploding on itself. GDP is expected to contract by 8% this year with further shrinkage expected in 2017.
Curiously enough, China is likely to be the big loser of Venezuela’s meltdown. Beijing has invested massively in the country. Construction of a high speed rail network – set to be a lavish symbol of solidarity between two nominally socialist giants – has shuddered to halt. Thousands of Chinese workers have simply upped and left, deserting the sites and route through the heart of Venezuela for the safety of their homeland. The abandoned buildings, tools, and equipment have long-since been raided.
As matters reach a head, mass protests, looting, and rioting are now the accepted norm around Caracas, prompting calls for outside intervention. Sadly, and this is the reason behind much of the world being reduced the role of idle bystander, politics may have already created a barrier to external help.
Venezuela has few friends left willing or able to help. The United States is keeping a safe distance from this potential quagmire. Brazil is too absorbed by its own home-grown crises – political, economic, and social – to take note. Way out left field, in the space normally claimed by harmless ideological loonies, Venezuela’s only remaining friend is Cuba – not a country from which to expect any financial solace.
Former Uruguayan president José Mujica, a guerrilla fighter who went mainstream and headed one of Latin America’s most successful and widely respected governments, summed it up nicely when he recently called Venezuelan president Nicolás Maduro “mad as a goat.” Mr Mujica urged the Venezuelan people to “stop fighting each other” but held out little hope of that happening: “They’re all crazy over there.”
1. CBN adopts a Flexible Exchange Rate Policy; Market awaits Modalities
2. CBN Communiqué No. 107 of the MPC Meeting – May 23-24, 2016
3. Strategic or Tactical: Which hat will the MPC wear?