How bad is Venezuela's Economic Situation?

1. Venezuela’s Unprecedented Collapse

Ricardo Hausmann. Cambridge, July 31, 2017. With per capita GDP down by 40% since
2013, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western
Europe, or the rest of Latin America. And yet headline GDP numbers actually understate the
magnitude of the economy's decline.
In a hastily organized plebiscite on July 16, held under the auspices of the opposition-
controlled National Assembly to reject President Nicolás Maduro’s call for a National
Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013
presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants
took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22,
when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow
bridge between the two countries to buy food and medicines.
Venezuelans clearly want out – and it’s not hard to see why. Media worldwide have been
reporting on Venezuela, documenting truly horrible situations, with images
of starvation, hopelessness, and rage. The cover of The Economist’s July 29 issue summed
it up: “Venezuela in chaos.”
But is this just another bad run-of-the-mill recession or something more serious?

2. 35% GDP collapse: Venezuela's unprecedented economic slide

Will Martin. London, August 3, 2017. The South American state of Venezuela is in deep
trouble. The country, which was once hailed by many on the Western left as a shining
example of socialism in action, is crumbling, both economically and politically. The scale of
the country's fall can be seen in cold, hard data, some of which is truly shocking.
In 2017, Venezuela's economy is 35% smaller than it was in 2013 in terms of gross domestic
product and 40% lower in GDP per capita terms, as noted by Harvard economist Ricardo
Haussmann, who was the country's minister of planning in the early 1990s, in a piece for
Project Syndicate.
Haussmann reflected on the scale of the contraction in a recent article for Project Syndicate,
writing that the shrinking was "a significantly sharper contraction than during the 1929-
1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%".
He continued: "It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993),
and Albania (1989-1993)". Beyond the headline numbers, things are even starker. Here is
Haussmann once again:
"Clearly, a 40% decline in per capita GDP is a very rare event. But several factors make the
situation in Venezuela even bleaker. For starters, while Venezuela's GDP contraction (in
constant prices) from 2013 to 2017 includes a 17% decline in oil production, it excludes the
55% plunge in oil prices during that period. Oil exports fell by $2,200 per capita from 2012
to 2016, of which $1,500 was due to the decline in oil prices."
Economically speaking, Venezuela's main problem is that it relies far too heavily on oil
exports as a means of generating economic prosperity.
When times were good in the oil markets and oil was worth more than $100 a barrel the
country was able to grow rapidly and offer its citizens a great quality of life.
But three years on from the crash in oil prices, the country simply cannot do that anymore,
and its citizens are suffering. Venezuela certainly had problems before the oil-price crash,
but the downturn accelerated and exacerbated those issues.
Fresh trouble has been sparked in the country this week by an election decried by critics as
illegitimate and designed to give the unpopular government of President Nicolas Maduro
powers to rewrite the country's constitution and sideline its opposition-led congress.
The US labelled Maduro a dictator and accused him of "seizing absolute power," and it
imposed sanctions on the country, potentially compounding the state's economic woes.
At the same time, inflation in the country is still growing uncontrollably, while the country's
currency, the bolivar, devalues at an almost unbelievable rate.
While the official rate of exchange between the US dollar and the bolivar is roughly 10
bolivars to the dollar, in reality it is more like 10,000.
A recent analysis by CNN Money showed that at the end of July a dollar was worth 10,389
bolivars, up from about 3,000 at the start of the year and 8,000 just a week before.
Inflation could exceed 1,600% by the end of 2017, according to some estimates, and many
restaurants have stopped publishing prices because costs are rocketing so fast.
Restaurants, however, are but a dream for the vast majority of Venezuelans. Associated
Press correspondent Hannah Dreier recalled on Wednesday how food shortages were so
bad that a bakery near where she lived in Venezuela's capital, Caracas, allowed people to
line up outside not to buy bread but to rummage through its bins for scraps.
"People waited for their turn to hunt through black bags of bakery garbage," Dreier wrote.
"A young woman found a box of muffin crumbs. A teenage boy focused on finding juice
containers and drinking whatever remained."
As The Economist, which ran a special report on the country last week, writes: "Over the
past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg per
person, because of a scarcity of food."

3. Hidden numbers reveal scale of Venezuela’s economic crisis

The Financial Times Limited 2018. Reliable data from Caracas scarce, but the statistics from
elsewhere paint a grim picture. Maduro, Venezuela’s president, sounded optimistic about
his country’s economic prospects when he spoke at the launch of an agricultural plan last
month. “This year will be the new post-oil economy,” he said. “From 2017 onwards we will
have to talk about the new era. We are building the new economy with a solid base in the
countryside.” But his upbeat remarks stand in stark contrast to the massive anti-
government protests sweeping the country as its economic crisis continues to unfold, with
Venezuelans facing queues for food and basic consumer goods and hospitals reported to
lack even basic medicines. The outlook seems unlikely to brighten soon. Focus Economics
said in a recent note that it expected Venezuela “to remain deep in recession since the
structural problems afflicting the country are unlikely to be addressed”. Most statistics
tracking Venezuela’s economy are either unreliable or have been discontinued, after
national account data were suspended in 2015. Even the IMF has only partial information,
as its latest interaction with Venezuela’s authority’s dates back to 2004. But figures relating
to Venezuela’s relations with the rest of the world offer clear insights into the scale of its
problems. Thug Nation: Venezuela’s broken revolution Venezuelans are leaving the
country, heading mostly for Spain and the US The number of asylum applications — made
by people fleeing persecution for factors such as race, religion or political beliefs — from
Venezuelans received by Spain hit a record in January. The figure exceeded the all-time high
from Syria reached in the middle of Europe’s refugee crisis.
With nearly 4,000 applications,
Venezuelans were the main source of
first time asylum claims in Spain last
year, accounting for about a quarter
of the total. The figure represents only
a fraction of those emigrating from
Venezuela to Spain. In the first three
months of 2016 more than 6,500
Venezuelans moved to Spain,
compared with about 4,700 in the
whole of 2013. Data from the US
present a similar picture. Venezuela is now the main source of asylum applications in the
US, accounting for about 23 per cent of the total. The number more than doubled in the
year to December 2016.
Foreign investment has dried up foreign companies have largely stopped investing in
Venezuela — and some have halted existing operations, as in the case of General Motors
after one of its plants was seized by local authorities. US data show that in 2016 US net
foreign direct investment in Venezuela turned negative for the first time since the series
began in the early 1990s. Last year, Venezuela was the only country with which the US had
negative net income flow among the 58 countries for which data are available.
 The trend is not confined to the US.
Overall foreign investment and
acquisitions have stalled, and there
have been no deals so far this year.
This compares with the three
foreign acquisitions and 20 green
field projects that brought $6.8bn
into the country in 2010. But Mr.
Maduro’s remarks about a post-oil
era hold some truth, given that
Venezuela’s oil exports — which
account for about 90 per cent of its
total exports in value terms — have
collapsed, not just because of the drop in prices but also in volume terms as
production has folded. Four years ago global economies were importing nearly three times
as much in terms of value from Venezuela.
“The country is facing an unprecedented
economic collapse, caused by political
mismanagement exacerbated by low oil
prices,” Jean-Philippe Pourcelot, Venezuela
economist at Focus Economics, told the FT.
The country is running out of cash to fund
bond repayments Venezuela has been
raiding its foreign reserves, which have
dropped to about $10bn, from $30bn
before Mr. Maduro was elected in
2013. “Without structural reforms such as price control removal, exchange rate unification
and an improvement in the investment climate, the economy will remain in an abysmal
state,” Mr. Pourcelot said. Economic contraction is coupled with hyperinflation
Venezuelans are seeing the value of their money shrink at the fastest pace in the world. The
IMF estimates an inflation rate of 720 per cent for this year, skyrocketing even further in
the coming years. Economists disagree on Venezuela’s actual inflation rate, with their
estimates ranging from 350 per cent to
2,200 per cent.
“Price controls, limitations on access to
foreign currency and the collapse of the
private sector in the provision of basic
goods, have cumulatively led to one of the
world’s highest inflation rates,” the World
Bank wrote in a recent report. This means
that Venezuelans see the value of their
money and the ability to buy goods and
services massively shrink day by day.
 Economists’ growth estimates for this
year also vary, from an expansion of 1.1
per cent to a contraction of more than 7
per cent.
According to IMF data, Venezuela’s GDP
will contract by 7.4 per cent in 2017,
meaning the economy will have shrunk
about 30 per cent since 2013 — one of the
largest peacetime economic contractions
since the Second World War. In
comparison, Brazil’s economic crisis looks like a mere blip. A country that in 1980 had the
highest GDP per capita in Latin America is no longer in the top 10 and its economy is smaller
than those of Colombia, Chile and Peru, the IMF data show.

4. How bad is Venezuela's Economic Situation?

Ryan Mallett-Outtrim. Jan 25th 2016. Venezuela's central bank just did something totally
unexpected: it released updated economic figures showing the country has sunk into its
worst economic crisis in decades. Data this detailed hasn't been published by the BCV in
over a year, and it makes for grim reading. The author runs readers through an in-depth
breakdown of the current economic situation in Venezuela. He argues that despite the dire
outlook, not all is lost.
The Bad News. Few Venezuelans would be surprised to hear the economy isn't doing well,
but the new figures released by the Central Bank of Venezuela (BCV) on January 15 still felt
like a punch in the gut. Annual inflation hit 141.5 percent in 2015 – double the 2014 rate,
and easily the worst in the world. High inflation is nothing unusual in Venezuela. Yet since
1999, Chavismo has done a relatively reasonable job of keeping inflation well below crisis
levels. However, the new figures also show Gross Domestic Product (GDP) has nosedived,
sinking 7.1 percent by third quarter 2015. Growth isn't everything, especially in an economy
aiming to transition away from capitalism. Yet these numbers are extreme. Moreover, the
devil is in the details. In its breakdown by sector, the Central Bank of Venezuela's (BCV)
report indicated food costs are among the biggest drivers of inflation. Venezuelan
consumers saw the cost of food lurch upwards by 55.7 percent in the third quarter. Overall,
food costs rose a whopping 254.3 percent in 2015 – a figure that easily surpasses wage
increases by any measure. Increases of basic food costs disproportionately impact the poor,
who typically spend a larger chunk of their income on necessities like staple foods. However,
the BCV's numbers also show the state apparatus as a whole is also bearing a heavy load.
One of the most telling figures was to be found in the bank's current account data, which
showed a US$782 million trade deficit for the 2015 third quarter. This is particularly
concerning, as those numbers are from a time in 2015 when Venezuelan oil was fetching an
average price of more than US$40 a barrel. Today, Venezuelan oil is selling for something
closer to an average of US$25. In other words, the trade deficit figures are likely already
worse, with no signs of a quick recovery.
Not the Whole Story? It's important to note this isn't the whole picture. Firstly, while the
economy as a whole is witnessing a serious downturn, the poverty figures we have available
don't look too bad. On the contrary, the latest official statistics (released in mid-January)
suggest extreme poverty has continued to remain relatively low. The figures indicate 4.78
percent of Venezuelans now live in extreme poverty – down from 4.9 percent in November
2015, and less than half the rate in 1998. This figure indicates the poorest Venezuelans
aren't bearing the brunt of the downturn, as soaring food prices would suggest. However,
the picture remains incomplete, as we don't have fresh data on purchasing power. This
means it is unclear how well impoverished (as opposed to extremely impoverish) and
working class (colloquially speaking) Venezuelans are faring. For over a decade, most
Venezuelans have enjoyed a steady rise in purchasing power for basic goods. However, if
inflation continues to soar while wages struggle to keep up, purchasing power could go
down the drain, and we may eventually see poverty figures rise. For now though, it at least
appears Chavista social missions are not only keeping the country from slipping into
extreme poverty, but actually modestly decreasing extreme poverty. In times like these, this
in itself is a notable achievement.
Another point worth making regards the condition of the state. Venezuela's government
still has a myriad of rainy day funds, which were put aside for exactly the kind of situation
the country is facing now. The BCV's report also suggested the country has around US$35
billion in foreign currency assets, as of third quarter 2015. It is unclear how much more the
government may have stashed away in various funds, meaning it's possible the government
could have enough savings to hold out for quite some time. It's also worth noting this view
isn't shared by many financial analysts. Where the risk of default once seemed remote, a
report from Barclays in January concluded a default by the end of the year is now likely. The
report suggested as much as 90 percent of Venezuela's 2016 oil revenue could be consumed
by debt obligations. This eyebrow raising figure would suggest the government would
basically be exclusively relying on its savings to get it through the year. Bloomberg has also
reported credit default swap traders have settled on an estimate of a 79 percent chance of
a missed payment by the end of the year. To summarize: the vultures are already circling.
For anyone concerned about default, a key date to watch will be October 16, when PDVSA
2016 bonds mature. These bonds represent among the largest chunk of Venezuela's roughly
US$10.5 billion in international repayments due this year.
A Badly-Timed Political Crisis. Now for more bad news: a political resolution to the
economic downturn any time soon seems remote. The National Assembly is firmly in the
hands of the right-wing coalition, the Democratic Unity Roundtable (MUD). Meanwhile,
President Nicolas Maduro has retained control over the ministries, while the Supreme Court
is still aligned with Chavismo. Most major public enterprises also remain on the Chavista
side of the political divide.
The good news is the MUD may have a serious battle on their hands if they try to impose
serious neoliberal reform in the coming months. The MUD probably can't succeed in
removing President Nicolas Maduro until late in the year, and until then the Supreme Court
might block many of the new MUD-dominated National Assembly's most egregious
demands.
The bad news is Venezuela could now be staring down the barrel of a lengthy political
stalemate. Since the right-wing took control of the National Assembly in January, neither
Maduro nor the MUD have shown much interest in dialogue, let alone present a cohesive
roadmap to economic recovery. The danger here is that the political crisis could exacerbate
the economic crisis.
Sabre-ratting Abound. Indeed, there are already signs the political stalemate could be hard
to break. The MUD sent a clear message they will fight tooth and nail against Chavismo on
the second day of the new National Assembly, when they swore in a group of legislators
temporary barred from office over allegations of electoral irregularities. The MUD has since
backed down, only to enrage Chavistas by removing a portrait of 19th Century liberation
leader Simon Bolivar from the assembly. The MUD's National Assembly head Henry Ramos
Allup justified the removal by arguing the portrait made Bolivar look too dark-skinned, and
not sufficiently Caucasian.
In short: MUD doesn't look like it's setting the groundwork for serious negotiations. In fact,
the MUD itself is yet to present a cohesive economic strategy of its own, with no clear
answers on how to ease inflation or boost productivity. This means it remains an open
question whether the MUD will opt for the gradual imposition of Greek-style austerity or
Russian-style shock therapy.
Unfortunately, Maduro has likewise failed to present a clear path out of the crisis. In his
state of the union address on Friday, January 15, the president effectively declared he
wanted new decree powers to fix the economy. Unsurprisingly, the MUD has already voted
down the decree in the National Assembly. Even if the measure had somehow been
approved by legislators, there's no reason to believe it would have done much to improve
the economic situation.
The proposal would have granted additional funds to social missions, along with suggesting
some bureaucratic tinkering such as reinforcing tax evasion measures and shoring up
currency controls. While there's nothing wrong with improving the popular social missions,
this doesn't constitute a broad-spectrum plan for economic recovery. Cracking down on tax
evasion is likewise a great proposal, but not exactly a silver bullet. However, reinforcing
existing currency controls can't possibly help. After all, the currency control system is part
of the problem.
Currency Controls and the Forex System. If we momentarily turn back to the BCV report,
we find even the bank has conceded current economic policies aren't working. The report
stated the bank's “preliminary estimates find … close to 60 percent of inflation registered
in 2015 is the result of foreign exchange incidents, associated with the exaggerated
depreciation of the Bolivar (currency).”
This means the BCV believes the lion's share of inflation is being caused by currency
manipulation. The bank described this as part of an “economic war,” and this is likely true.
Venezuela's private sector has long attacked the socialist government. So much so, that for
years Venezuelans have acknowledged that scarcity of basic consumer goods spikes around
important elections, as businesses seek to pressure voters into turning against Chavismo.
In order to combat currency manipulation, Maduro has announced reforms to the exchange
system every few months since coming to office in 2013. In a period of two years, none of
his reforms have had any measurable impact on the currency manipulation crisis. We can
debate why the reforms haven't succeeded, but we can't debate the simple fact that they
haven't provided the desired results.
Currency controls aren't an essential feature of socialism, and there are alternatives for
Venezuela. Progressive-leaning economists including Mark Weisbrot from the Center for
Economic and Policy Research have repeatedly called for Venezuela to adopt a managed
floating exchange rate, and for years it's been hard to disagree. If both Maduro and the
MUD sought to negotiate economic reform, a managed float could imaginably be on the
table.
However, today the crisis has become so serious, the chances of a clean, quick recovery
seem remote, no matter what policy choices are adopted. For Venezuela, the hard times
could be just beginning.
What Next? In this situation, the economic status quo isn't viable. Inability to act puts
Venezuela at risk of falling to neoliberalism. Yet the Maduro administration appears
committed to a strategy of digging in and hoping it can somehow ride out the storm. While
the government may have enough savings stashed away to keep things running for some
time, the status quo has already proven politically problematic. This strategy has already
led to Chavismo losing the National Assembly, and created a political stalemate.
The Role of Solidarity. Amid this new reality, there is still one source of hope: the Bolivarian
grassroots. Progressive social movements must pressure the new mixed government to
adopt positive reform. Whether this means re-radicalizing the revolution, or simply fixing
broken policies like the exchange system, the grassroots are the only ones who can demand
solutions; movements like the emergent #LATE, a social media campaign that has sought to
re-orient the Bolivarian revolution away from the state bureaucracy and back to the streets.
As international leftists, it's our obligation to support the progressive, grassroots
movements. All the victories of the past 16 years have been the result of popular power
making popular demands. We are now seeing the toughest moment in the revolution since
the 2002 coup, and we should again do everything we can to support the revolution.
Venezuela remains possibly the best chance for socialism in the world today, and it's worth
our time, effort and love. Of course, the new economic data confirms the challenges facing
Venezuela's revolutionaries are immense, and possibly overwhelming. Hope is slim, but
there is hope.