Opinion and Analysis: Economy
How Bad is Venezuela's Economic Situation?
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 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's unclear how well impoverished (as opposed to extremely impoverished) 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's 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 summarise: 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.
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: the MUD doesn't look like it's setting the groundwork for serious negotiations with Maduro.
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.
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.
- 21/01/2016: Chavismo and Its Discontents: International Left Intellectuals Respond to Venezuelan Government’s Legislative Election Setback
- 19/01/2016: Venezuelan Central Bank Releases Inflation Data after Year-Long Gap
- 03/08/2015: How Deep Does the Crisis Cut?
- 18/01/2016: Venezuela Unveils Emergency Economic Decree to Confront Deepening Crisis
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