Monday, June 20, 2016

How Venezuela Fell Into Crisis, and What Could Happen Next


The cost of foreign goods has soared in Venezuela, which is importing far less as part of Mr. Maduro’s effort to conserve dwindling central bank reserves.

Times of Ahmad | News Watch | US Desk
Source/Credit: The New York Times
By Rick Gladstone | May 26, 2016

Supermarket shelves in Venezuela are chronically bare, and power shortages are so severe that government offices are now open only two days a week. The health care system has collapsed, the crime rate is one of the world’s worst, and inflation is rapidly eroding what remains of the currency’s value.

“The economy has gone from bad to worse to horrific,” said Jason Marczak, director of the Latin America Economic Growth Initiative at the Adrienne Arsht Latin America Center, part of the Atlantic Council, a Washington-based research organization. “The Venezuelan government is doing a good job of leading itself into chaos.”

Here are some basic questions and answers on how Venezuela got to this point under President Nicolás Maduro and what could happen next.

How could this happen in a country that has the largest reserves of oil in the world?

The price of oil, Venezuela’s only significant export, has plummeted, which means revenue could fall by 40 percent this year. The government’s huge borrowing, partly a legacy of the years when oil prices were far higher, has helped bring the crisis to a head because Venezuela now has far less money to repay its foreign debt, forcing Mr. Maduro to slash imports in order to avoid default.

On top of that are the consequences of a drought, which has shriveled the country’s hydropower generation, a critical source of electricity.

Is the situation going to get worse or better in the coming months?

The country owes roughly $120 billion to foreign creditors and must make a payment of nearly $7 billion this year, most of it in the final quarter. Speculation has persisted that Venezuela may default on the payment or have to default next year, especially if oil prices remain low.

Venezuela’s problems have been worsening for years, since well before Mr. Maduro took power. What is different now?

The political opposition in Venezuela is far more unified than it was during the era of Mr. Maduro’s popular predecessor, Hugo Chávez. He died in 2013, but many economists say his policies of state ownership, unfettered spending, subsidies and domestic price controls are at least partly responsible for the crisis today.

With Mr. Chávez gone, Mr. Maduro’s opponents have won a majority of seats in the national legislature and have collected nearly two million signatures on a petition to start a recall of Mr. Maduro.

So why doesn’t Venezuela just default on its foreign debt and force Wall Street creditors to renegotiate more favorable terms?

Venezuela may have a lot to lose in a default, too.

Its foreign debt is partly owed by the state-owned oil company, PDVSA, the country’s principal generator of revenue. Venezuelan officials fear that a default would bring bondholder lawsuits. That could severely disrupt PDVSA’s operations and result in seizures of the company’s overseas assets — perhaps even from its Houston subsidiary, Citgo Petroleum Corporation, which owns three big refineries and has thousands of gas stations.

Citgo is vital for Venezuela because it generates much of the oil revenue that the country is still receiving. Despite the political tensions between the two nations, the United States is Venezuela’s largest customer.

Venezuelan officials are also mindful of Argentina’s default in 2001, which took more than a decade of litigation to resolve.

“If you default on PDVSA, you have Argentina 2, and nobody wants that,” said Pablo Venturino, managing director of White-Bridge Capital Management, a New York investment firm that specializes in Latin American debt securities. PDVSA, he said, “is the main generator of cash flow for your country.”

Why is Venezuela’s inflation rate so high?

The cost of foreign goods has soared in Venezuela, which is importing far less as part of Mr. Maduro’s effort to conserve dwindling central bank reserves.

The government has sought to soften the impact by raising wages and printing more bolívars, the national currency. But that is a recipe for inflation, creating too much money chasing too few goods. By some estimates, the inflation rate could reach nearly 500 percent this year and 1,600 percent in 2017.

While the official exchange rate is about 10 bolívars to the dollar, the black-market rate, which is regarded as more accurate, is about 1,100 bolívars to the dollar, though it shifts around. Many economists say this disparity is unsustainable.

Why doesn’t the government acknowledge that the bolívar is artificially overvalued and make the exchange rate closer to what it should be?

A devaluation would sharply increase prices at state-run stores that many poor Venezuelans rely on to survive, and would make debts denominated in dollars far more expensive to repay. It would also be an admission by Mr. Maduro that an important Chávez-era policy has failed.

How are we seeing this policy reflected in daily life?

Subsidized food and fuel sold by state-run stores are priced far lower than they are really worth. This has created enormous lines of shoppers for goods that quickly sell out. While many Venezuelans spend hours in these lines daily because they cannot afford to buy food at privately run stores, others profit by buying at state prices and reselling at higher prices, which has created a flourishing black market. Datanalisis, a Venezuelan polling company, estimates that more than half of all Venezuelans have purchased from black-market hawkers, known as bachaqueros.

Why are they called bachaqueros?

They are named after large, voracious ants, bachacos, which cut leaves and bring them back to their colonies. While this is a disparaging term, many Venezuelans supplement their income as part-time bachaqueros, and others have quit their jobs to be full-time bachaqueros.

So Venezuelans have developed an inventive way to cope. Isn’t this a good thing?

Not really, many economists say. The amount of time ordinary Venezuelans spend to purchase life’s daily necessities has frustrated and angered them. It has also created a new class of speculator-merchants who profit illicitly from government policy.

“This is the crazy thing about the system,” said Ricardo Hausmann, director of the Center for International Development at Harvard’s Kennedy School of Government, who was Venezuela’s planning minister in the early 1990s and is an outspoken critic of Mr. Maduro. “A lot of people are putting in effort, and none of that increases the supply of anything,” he said. “This is perfectly unproductive labor.”

Can Mr. Maduro really enforce his threat to seize private businesses to make them produce?

Under Mr. Chávez, many companies were expropriated in industries like telecommunications, banking, steel, cement and dairy processing, as was the nation’s largest supermarket chain. Mr. Maduro has sought to make examples of some companies. Last year, managers of a pharmaceutical company were arrested on suspicion of artificially creating shortages. In February, Mr. Maduro called the owner of Empresas Polar S.A., Venezuela’s largest private company, a thief and a traitor.

Still, Mr. Maduro has not seized any businesses yet, which some political analysts attribute to the government’s inability to take over anything more. “It’s part of his rhetoric,” said Risa Grais-Targow, director of Latin America at the Eurasia Group, a political risk consulting firm in Washington. “He’s stayed very true to the message of economic war with the private sector. To what extent do people believe it? Not that much.”

Why doesn’t China, one of Venezuela’s biggest benefactors and creditors, help bail out Mr. Maduro’s government?

China, a large customer of Venezuela’s oil under guaranteed contracts, recently announced eased terms on its existing loans to Venezuela, roughly $50 billion. But, like other foreign powers, China is reluctant to grant new loans to the Venezuelans, possibly because of worries about Mr. Maduro’s political longevity.


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