Investors See Venezuelan Debt Default Likelihood High

Investors considered Venezuela as one of the future powers of the world. Its economy peaked in the late 1970s following an oil-driven gold rush fueled by international investors. What followed were decades of oil gluts, shortages of food and healthcare, continuous political turmoil, and debt defaults.

The failing country’s future tells a frighteningly similar story. Venezuela, once a rising powerhouse, is a country in crisis. And investors have realized that, sending their debt yields to record levels.

How did Venezuela get here?

Venezuela was not always a country in crisis. In fact, it underwent one of the greatest economic booms of any country in the world. This happened when it discovered local oil deposits during World War I.

Under the rule of Juan Vicente Gómez, Venezuela’s economy transformed from a largely agriculturally-centered exporter to a global oil supplier. Venezuelan farmers traded in their coffee and cocoa baskets for machinery capable of drilling into newfound oil reserves. The country showed its immense potential. In 1935, it had the highest GDP per capita of any Latin American country.

Venezuela’s economy rose to stardom in a short time, but it fell back to reality almost as quickly. The next several decades were marred by coup d’etats and inconsistent economic turns. The 1973 Oil Crisis caused oil price hikes. This led to a massive boost in Venezuela’s income. As a result, there was increased public spending along with external debts.

Bring in the 1980s

This set the stage for the beginning of the end for Venezuela. The oil glut of the 1980s forced its economy into a tailspin. Oil prices fell historic amounts causing Venezuela’s growing debt to near default status.

The government continuously printed more money. As a result, this decreased the value of the currency and drastically rose inflation. In 1996 it even surpassed the 100% mark!

To put this in perspective, US inflation currently ranges around 2%. It has never crossed the 20% threshold. This includes during times of economic depression or recession.

By 1998, GDP per capita in Venezuela fell from to pre-1963 amounts.

The 1990s Little Improves

Economic crises and political turmoil in the 1990s eventually lead to the presidential e lection of Hugo Chavez in 1998. Chavez was one of the leaders of the Bolivarian Revolution, a liberal, populist, socialist movement. He aimed to build a country centered around democracy and economic prosperity. He envisioned an the equal distribution of revenues and immediate crackdown on political corruption.

Chavez’s presidency further hurt the economic conditions in Venezuela. Like many of his predecessors, entrusted the economy of a country in crisis around, once again, oil.

Oil as the root of all evil

Venezuela’s history is cluttered with political turmoil and economic unrest. The core of all its problems can be boiled down to one natural resource: oil. Oil is the commodity that rose Venezuela from the trenches of poverty. It is also serves as its golden apple of tragedy. Oil has pushed the country into even darker times than its poverty-ridden cocoa and coffee years. Let’s inspect further as we attempt to expand our financial fluency toolbox.

Venezuela suffers from something called “ Dutch Disease “. Dutch Disease describes a country that invests capital into the growth of an industry based around 1 resource. By pushing one specific sector, the country is in turn causing a decline in its other sectors for investors. While revenues increase in this sector with high exports, the country’s exchange rates for its currency also increases. This hurts

An increased exchange rate causes other export prices to rise and imports to conversely decrease in price. In simple supply and demand terms, this lessens competition between these other sectors. Other countries will not purchase the other goods due to their high prices relative to the world. So Venezuela is stuck relying heavily on imports while only exporting a single good: oil.

Today’s Crisis

Venezuela’s extreme reliance on oil has only gotten worse in the past several years, which has been noticed by several investors. Rather than save excess profits in a fund like Nordic countries, Chavez lavishly spent on social welfare programs. This included funding free healthcare and educational scholarships to the poor. These policies helped in the short-term but proved unsustainable as Venezuela fell deeper into crisis without an effective tax base.

Although Venezuela still holds the largest oil reserves in the world, its production has declined year over year. This past January, Venezuela’s oil output fell to its lowest level in 30 years at 1.6 million barrels per day. This is down more than 20% from last year.

Due to its heavy reliance on oil, crude oil accounts for 95% of Venezuela’s exports. They have no other source of foreign income.

Corruption Eats at GDP

However, the country’s government and top oil-producing companies have been overridden with corruption causing a massive dip in production. Venezuela is overwhelmed with a growing debt problem. In 2007, Venezuela’s fiscal deficit made up 2.8% of its GDP. In 2012, this number ballooned to 16% and continues to grow. To put this in perspective, the world’s worst economies, such as Greece, have a fiscal deficit around 8% of GDP. The nation’s total GDP fell 14% in 2017.

GDP is projected to fall 15% this year. Inflation surpassed 100% in 2015. It’s now projected to pass, yes this is a real number, 13,000% by the end of 2018. Unemployment continues creeping toward 30%.

The country has already increased its minimum wage three times this year to deal with the devaluation of its currency. Global credit rating agencies have declared Venezuelan debt to have defaulted as the world’s growing pessimism towards the country increases.

Without Money, Things Go Even Worse

In addition to an ongoing oil crisis and a historically bad debt problem, Venezuela also has food and hospital shortages. Rather than fund food and medical campaigns, President Maduro decided to pay back massive loans to China and Russia. The country relies almost entirely on food imports, since its massive oil boom caused many domestic farms to shut down.

With a failing economy, there are extreme food shortages. And the government literally does not have enough money to feed its 30 million residents. And besides basic food, its medical shortage is even worse. Infant deaths jumped 30% in 2016 to 11,500 and Malaria cases alone jumped 76% to 240,000 cases.

More than 750 women died during childbirth complications in 2016, a 76% increase from the year before. Shortages extend to medical patients. Patients have been left without sufficient rations or access to devices like X-rays, CT scans. Sometimes this includes even basic electricity.

THE BOTTOM LINE:

Even with continued crises, Venezuela has no signs of turning around. Maduro’s corrupt hold on Venezuela’s economy is only getting stronger; he is preventing any opposition from running against him in the upcoming election.

He has continued to attempt to dissolve the country’s National Assembly, the only form of democracy it still holds. Secretary of State Rex Tillerson publicly considered a ban on all Venezuelan crude oil exports. President Trump has denounced Maduro as a dictator. Protests are becoming increasingly more violent. Meanwhile millions of Venezuelans continue to flee the country.

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Originally published at https://blog.rapunzlinvestments.com on February 16, 2018.