Venezuela Is About to Go Bust
BY FEBRUARY 5, 2016Venezuela’s economy is facing a tsunami of bad news. The country is suffering from the world’s deepest recession, highest inflation rate, and highest credit risk — all problems aggravated by plunging oil prices. Despite all its troubles, though, until now Venezuela has kept making payments on its $100-billion-plus foreign debt.
That is about to end. In recent days a consensus has emerged among market analysts: Venezuela will have to default. The only question is when.
A Venezuela meltdown could rock financial markets, and people around the world will lose a lot of money. But we should all save our collective sympathy — both the government in Caracas and the investors who enabled it had it coming.
In the last few years, the Venezuelan government has been steadfast about staying in good graces with its lenders. It has paid arrears on its debt religiously, and has constantly asserted that it will continue paying.
But it has neglected to implement the reforms Venezuela would need to improve the fundamentals of its economy. Its commitment to socialist “populism” and the complicated internal dynamics within the governing coalition have paralyzed the government. It has repeatedly postponed important reforms like eliminating its absurd exchange rate controls (the country has at least four exchange rates) or raising the domestic price of gasoline (the cheapest in the world by far). Instead, the government has “adjusted” by shutting off imports, leaving store shelves all over the country barren.
This strategy now seems unsustainable. According to various estimates, in 2015 Venezuela imported about $32 billion worth of goods. This was a marked drop from the previous year. This year, given current oil prices and dwindling foreign reserves, if Venezuela were to pay off its obligations — at least $10 billion — and maintain government spending, it would have to import close to nothing. In a country that imports most of what it consumes, this would ensure mayhem. That is why all analysts predict default in the coming months.
The Economist has joined the chorus, saying that “the government has run out of dollars.” In the words of Harvard professor Ricardo Hausmann, this will be “the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”
One of the reasons the coming default will be so messy is the many instruments involved, all issued under widely varying conditions. Part of the stock of debt was issued by PDVSA, Venezuela’s state-owned oil company, which owns significant assets overseas (For example, Citgo is 100 percent owned by the Venezuelan government). Another part of the debt was issued by the national government directly, while another big chunk is owed to China, under secretive terms.
