Crisis in Venezuela

IMG-20171115-WA0007.jpg(belated post) I talked to Deutsche Welle and Bloomberg Turkey recently about the economic crisis in Venezuela. The interviews followed a “selective default” on part of the country’s debt obligations. Since then, there has been another round of purges and politically motivated crackdown, followed by military takeover of management, of key Venezuelan agencies and state-owned enterprises. This time, the target is CITGO, the Venezuela-owned (albeit heavily mortgaged) oil refining and gas distributing company that is familiar to many in the United States. The purge is highly unlikely to arrest the country’s falling oil production (one of the stated goals) after two decades of neglect and under-investment. Meanwhile, Venezuela is running out of liquid reserves and has fewer overseas assets to offer as collateral. It has already promised away much of its reduced oil production in exchange for earlier loans, which eats into the cash that it can generate. Its non-oil exports are negligible, and despite the import crisis, domestic production of basic goods has been hollowed out.

Earlier comment below the jump:

“Even as its domestic economic crisis intensified, Venezuela continued to meet its obligations on international loans. In that context, yesterday’s technical default is a major warning sign.

“Venezuelan President Nicolas Maduro has consistently chosen painful domestic austerity over default, but even dramatic cuts to imports and the fire sale of overseas assets no longer appears to be enough to meet mounting payments.

“The root of the fiscal problem lies in decades of mismanagement of the country’s state oil company, PDVSA, and in a wasteful system of controlled exchange rates. Despite having massive oil reserves, PDVSA’s production has fallen, stripping the state of its key revenue source. Meanwhile, currency reserves have been depleted in a Byzantine system of multiple exchange rates that benefits insiders and creates massive opportunities for graft.

“This default does not necessarily spell Maduro’s downfall, however. Investors have incentives to make arrangements with the oil-rich country rather than risking a total break. Many of Maduro’s key supporters remain entrenched and have few other options, given international sanctions and prosecution. Because government and military insiders face a bleak future under an opposition-led government, they may be willing to suffer the consequences of default and restructuring rather than taking a chance on the alternative.”

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