An Emerging Markets Crisis? (Part 4 of 5: Venezuela)

Of all the commodity-based economies threatened with financial distress in 2016, none is in a more dire position than Venezuela. According to most Venezuela observers, the country is now teetering on the brink of economic collapse. The country’s prospects were rapidly worsening even when dollar was around $100 a barrel, but now it is at $31 a barrel, the day of reckoning is truly at hand. A recent edition of The Economist magazine stated the situation very simply: “The government has run out of dollars.”

This might not seem so important if the country had a well-diversified economy and a reasonable degree of self-sufficiency in what it consumes, but the opposite is the case. Venezuela has allowed itself to become completely dependent on revenue from its oil reserves, and these are now worth only a fraction of their previous valuation. Despite the government’s efforts to reduce imports, Venezuela still imported $32 billion worth of goods in 2015. There is now an acute dollar shortage in the country and Venezuela will soon not be able to pay for the imports it needs. The next few months promise to be extremely messy, both for authorities in Venezuela and international investors who stand to lose billions from their bets on the Venezuelan economy. Harvard Professor Ricardo Hausmann has argued that the coming Venezuelan meltdown will be “the largest and messiest emerging market sovereign default since the Argentine crisis of 2001.”

For the average Venezuelan, the biggest impact of the country’s financial woes has been out-of-control inflation. A recently leaked report from the Central Bank reported that the country’s true inflation rate is 270%, a throwback to the kinds of dysfunctional economic systems which plagued Latin America in the 1970s and 1980s. With imports being severely restricted, there is a massive shortage of basic goods, which has created enormous inflationary pressures within the economy. The policy failures of the Chavez government have also played a large role.

While the land seizures of Robert Mugabe in Zimbabwe have been well-publicized, a similar program in Venezuela is much less known. About a decade ago he expropriated a large amount of land from wealthier landowners, who he described in typically moderate terms as “serving the Devil’s interest.” As a result of these policies agricultural productivity plunged in Venezuela, and it has never recovered. The lower contribution played by the agricultural sector made Venezuela even more dependent on oil, resulting in an even less diversified economy. It also made the nation much more dependent on agricultural imports, and as scarcity spread, people began ‘bidding up’ scarce goods. It is these sorts of misguided policies- including also price controls and a rigid dollar peg- which made the Venezuelan economy wobbly even before the oil price collapsed. It is now quite simply out of money and options, and a massive default appears the likeliest result.

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