Going Backwards: The Crisis in Venezuela

Talking with a Venezuelan seeking political asylum in the U.S., we asked her why she was leaving her country. The answer was that “Venezuela does not offer a future anymore”. It once did.

Chavez’s XXI Century Socialist has failed and (sadly) has Venezuela on the brink of one of the major humanitarian crisis in the region. There it goes another lost decade for a Latin American country.

Between 2004 and 2008, Venezuela experienced an economic miracle. Its economy grew 10% on average every year, while GDP per capita expanded by 26%. Now Venezuela is going backwards. By 2018, the country will reach the GDP seen in 2005, but with a population 6 million (20% larger). GDP per capita will fall to 2000 levels by 2018, as if 18 years had never occurred for the economy.

Venezuela’s economic crisis will have unprecedented consequences in terms of poverty. The local survey on life conditions Encovi 2015 shows that in 2015, 76% of Venezuelans lived in poverty, up from 52% in 2014. Extremely poor people increased in 9 million through 2015, or 25% of the population. [i]  The local universities that make the survey warn that this is a conservative estimate, for they are only assuming a 170% inflation.

venezuela

Source: LATAM PM with data from IMF and ENCOVI 2015.

On October 15 of 2014, surrounded by supporters of the PSUV and with a loud round of applause, President Maduro announced a 30% increase in the minimum wage to leave it in VEF$9,648.2 a month—or $9.95 taking the 968.8 USD/VEF exchange rate used in black market by most Venezuelans. The problem is that with the 205% inflation estimated for 2015 by the local think tank Ecoanalítica, the NGO Center for Documentation and Social Analysis (CENDAS) reports that a monthly food basket now costs eight times the minimum wage. The IMF estimates that inflation could reach 720% this year.

Venezuela based its economic model on public expenditure supported by oil exports, which constituted 96% of the total country’s exports in 2014. According to ING Group, Venezuela needs a $125-dollar barrel to balance its budget, but its mix currently trades at around $24. Venezuela has no money; this is problematic in a country that imports pretty much everything. The port of Guaira, one of the main three trade ports in the country, now looks empty. Just look at the pictures below.

La Guaira

Source: LATAM PM with Google Earth images

Tariffs and price controls have also triggered shortages of food and essential products. CENDAS reported at the end of 2015 that 38% of the products that form the basic food basket are not available in the stores anymore. This includes products such as milk, beef, poultry, sugar, wheat flour, pasta, sardines and canned tuna.  Last year, the Venezuelan Pharmaceutical Federation reported that 70% of medicines are short of supply.

The drastic deterioration on life conditions are the reason why Venezuelans voted to end hegemonic control of the PSUV, giving the National Assembly to the opposition. However, in recent days, there has been an increasing confrontation between the two powers. The Assembly wants to pass an amnesty for political prisoners. Maduro threatens to veto it. Following the initiative, Maduro declares a state of economic emergency that the Assembly refuses to pass. The political impasse has done little to provide any sign of relief for Venezuela’s economic implosion.

The most important question in the air is whether the opposition’s supermajority in the Assembly will finally decide to pass later this year a referendum on Maduro’s continuity. The opposition (MUD), formed by a coalition of more than 20 parties, is showing lack of unity on this issue. Without the support of every single MUD’s deputy, the referendum will not pass. In the meantime, Maduro has threatened to take the fight to the streets, if necessary. That is the current state of affairs.


LATAM PM’s View: With or without referendum, the probability of a major social and political crisis will continue on the rise, which could have important implications for the region. Wealthy Venezuelans are already leaving their country in search of opportunities in Colombia and Ecuador. But as life conditions deteriorate fast, the risk of an important exodus increases too. Keep an eye on that.

[i] Extremely poor people are defined as those who do not have the income to eat 2,200 calories every day. Poor are those who cannot acquire that same basic basket plus essential services such as electricity and transport.