Venezuela: A State of Volatility

A renewal of the State of Economic Emergency Decree for another 60 days was published in Venezuela’s Gaceta Oficial on 16 May 2016. The new decree, characterized by the opposition as violating the Constitution, allows the government to take foreign policy measures to impede foreign intervention, conduct international and domestic negotiations to satisfy goods shortages (which will in turn be distributed by the national guard and the police), intervene when companies stop production, and solicit international aid for restoring the ecosystems affected by climate change (which have impacted Venezuela's energy resources), among other actions.

In defense of his decree and Venezuela’s ability to pay its debts, Maduro continues to claim an economic war is being waged against Venezuela. As one piece of evidence, he pointed out Venezuela has serviced US$35 billion in debt over the last 20 months to its creditors, but is still labeled a credit risk despite lacking a reason for default. Industry and Trade Minister Miguel Pérez Abad noted the import-dependent country spent US$16 billion on exports in 2016 so far, an average of US$3.2 billion per month -- not far off the US$3.1 billion it spent each month for the first nine months of 2015 (US$28 billion for January to September 2015). 

Later confirmed by Chinese External Affairs Ministry Spokesman Hong Lei on 17 May, Pérez Abad announced on 16 May that, due to low oil prices, China and Venezuela renegotiated the conditions of previous financial agreements — over the last decade Venezuela received US$50 billion from China in exchange for oil. Pérez Abad indicated improved conditions will give Venezuela some breathing room, but the country is hoping for continued financial support from China. For 2016, Venezuela has cut the number of its imports by 60 percent and tightened currency controls, which likely has contributed to the increased basic goods scarcity. However, Pérez Abad assured currency controls will allow Venezuela to pay 100 percent of its debt payments due in the fall. 

The decree coincides with, not only the announcement of foreign debt re-negotiation with China, but also fresh protests by university students throughout the country and an increasing number of lootings and riots in response to the dire, unsustainable economic situation.

According to Reuters on 17 May, the Bolivarian National Guard oversees the over 1,000 person long lines at grocery stores, as they become more frustrated. When it was announced that price-fixed foodstuffs were not available on 16 May at a particular store in Caracas, a riot broke out. The Venezuelan Observatory for Social Conflict reports there are now at least 17 outbursts per day, and 107 riots and/or lootings since the beginning of 2016. While Maduro still maintains the support of Chavista loyalists who have bought the economic war argument, many are disillusioned by high inflation, shortages, and high violence rates (4,696 people were murdered during the first quarter of 2016 and more than 17,700 were murdered in 2015).

Furthermore, anti-government student demonstrations broke out at Los Andes University’s Tachira campus, the Central University of Venezuela, the Los Andes University in Merida state to protest budget shortfalls. These countrywide student protests are the first since the 2014. More student protests are planned for 26 May.

Attempting to capitalize on this discontent, the MUD opposition coalition is calling for another protest march against the government on 18 May to display their vexation with a delayed referendum process and the current economic state. However, like the protests on 11 May, turnout will probably not be significant, as many fear repression from the Bolivarian National Guard, and while many dislike Maduro, they are not quite ready to give up on a ‘revolution’ that has provided many benefits to the poor.

Despite all of the turmoil, Pérez Abad is optimistic about the situation, saying Venezuela hopes to receive US$5 billion to finance new mining projects to diversify its income. He is also betting Venezuela will receive loans from multilateral institutions, including US$400 million from the Inter-American Development Bank for various projects. 

Maduro and his government recognize the need to pay its foreign debts, as it is the only access, while limited, they have to the international market for goods and investments. However, efforts to increase liquidity also, at this point, include cutting imports and tight currency controls (which strangle businesses - the key to production and economic growth). These efforts may end up weakening Maduro and sparking social unrest before any debt payments or a recall referendum occur, adding further uncertainty to Venezuela’s future.

Counterpoint: Hold on for a bumpy ride

With headlines including phrases like “bodies piling up” and “eating cats and dogs to survive,” media outlets persistently highlight the tough economic situation in Venezuela. Since 2014, when oil prices fell sharply, business analysts and economic forecasters have been predicting default and the imminent collapse of the Maduro administration in Venezuela. Ahead of a US$1.5 billion payment on its sovereign debt on 23 February 2016, there was rampant speculation that this time, Venezuela would really be unable to pay. Yet, Venezuela did pay, and does not have any other major payments until the last quarter of 2016. Already, Venezuela announced China has agreed to modify terms on what it is owed, possibly reducing or postponing the US$5 billion due in October and November of this year. While the economic struggles are evident on the ground in Caracas, a number of factors are much less clear, including how much Venezuela owes and to whom, as well as what assets are available for it to make payment. 

Back to that February 2016 payment - how did Venezuela come up with that money? It cashed in on a shipment of gold worth more than US$1 billion. In the past few years, even as he average Venezuelan has seen their income shrink, thanks to double-digit inflation, and their consumption shrink, thanks to shortages, a select few have socked away billions of dollars by leveraging their ability to attain dollars allegedly for imports. Those key Chavistas are invested in keeping Maduro in power and keeping their current scheme running for as long as possible. Unlike speculators in New York and London, those members of the Venezuelan power structure can have coffee with the head of the Central Bank to ask if Venezuela will be making its payment, and perhaps even see if it needs any “help.” In turn, they can bet against the default swap and earn even more money. When the entire high-level political and military structure is profiting massively from corrupt business practices, a country has far more resources available than what is “on the books,” and potentially more staying power than those who play by the rules realize.