Taking stock of Venezuela's economic crisis

By the IMF's calculations, Venezuela's annual rate of inflation for 2019 will be 10m per cent. The county's opposition-controlled National Assembly reckons inflation topped 1.6m per cent as recently as December. On the other hand, Professor Steve Hanke of Johns Hopkins University, using his own measurement tools, puts Venezuela's inflation rate much lower, at some 132,000 per cent.

The inconsistencies between these figures are unsurprising considering the lack of economic data flowing out of Venezuela. Since Nicolás Maduro's government took power in 2013, the central bank has slowly stopped releasing new figures, making inflation predictions a difficult task. Amid today's total economic collapse, any internal insights into the financial situation are hard to come by. And, unless some kind of regime change takes place, the IMF will probably remain shut out of any opportunity to scrutinise the country's finances.

To fill the void, Venezuela-watchers have come up with their own estimates. The latest figures come from economists at the Institute for International Finance (IIF). The disintegration they map is nearly unprecedented.

In an earlier research note, as covered by the FT's Steve Johnson here, Sergi Lanau and his colleagues at the IIF find that Venezuela's GDP meltdown since 2013 rivals the fall of the Soviet Union. As their chart below shows, it took ex-Soviet states roughly 12 years to return to their pre-crisis GDP levels, indicating that Venezuela is likely staring down years of malaise:

In a new report, Lanau looks into how this GDP contraction and the parallel hyperinflation surge have impacted Venezuela's external position. In the face of the crisis, foreign funding has all but evaporated, and imports have collapsed as citizens have been unable to afford even the most basic necessities. Venezuela's current account has since fallen into balance. Here's a chart from the IIF showing the drying up of foreign funding:

And another on the sharp slide in Venezuela's imports and exports:

Venezuelans have one hope to hold on to, though: oil, which accounts for roughly 95 per cent of its export earnings and a sizeable portion of its GDP. The country, whose economy David Carruthers at Credit Benchmark says “barely exists as a functioning entity,” is blessed with the world's largest oil reserves, topping not only Saudi Arabia (SAR) and Iran (IRR), but also Iraq (IQD), Kuwait (KWD) and Russia (RUB), as Lanau's chart indicates:

So far, that immense source of value has gone to waste. Mismanagement and looting have led most of the country's refineries to cease operations, halving oil production in just two years to roughly 1.1m barrels per day. Recent US sanctions on the state-run oil company PDVSA have dealt an even larger blow to Venezuela's oil operations.

Those sanctions are unlikely to be lifted until their sole purpose — to oust Maduro — is realised. Should that happen, the opposition government led by Juan Guaidó is already readying for Venezuela's eventual revival. On the heels of Guaidó clearing out Maduro's cronies on the PDVSA board of directors and replacing them with his own appointees, he declared: “The rescue of our energy has begun.”

For Venezuela's sake, let's hope that's true.

Related Links:
A “nuclear option” to resolve Venezuela's debt woes
— FT Alphaville
Venezuelan bondholders face an uphill battle for repayment
— FT Alphaville
Struggle for Venezuela: will the opposition's bold gamble pay off? — FT

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