Beyond Venezuela’s Default Debate

Venezuela’s deep economic crisis is now drawing greater international attention with the prospect that the Maduro administration might default on Venezuela’s international debt. Approximately $5.2 billion in payments are due to international creditors in October 2014, and Venezuela’s currency reserves and export earnings are under stress. Ricardo Hausmann and Miguel Angel Santos, scholars at Harvard University, raised the possibility in an op-ed on September 5, which prompted a veritable bubble of reactions on the markets and in the press, and even rebuttals. In a very typical reaction from the Venezuelan government, President Maduro ordered the investigation and prosecution of Ricardo Hausmann as a “financial hitman.” This goes to show that an old Latin American saying, originally attributed to former Peruvian President Oscar Benavides (1914, 1933-1939), still applies in Venezuela: “For my friends, anything; for my enemies, the law.”

Continued Economic Decline

Venezuela is really no closer or further from default because Ricardo Hausmann and Miguel Angel Santos wrote their op-ed. Hausmann and Santos were not predicting an imminent Venezuelan default on international obligations, they were making a moral argument that the government should default because its current policies have failed to ensure that Venezuelan citizens have access to basic necessities, such as food and medicine. Venezuela’s economic troubles have been brewing for years, but there has been no fundamentally new news on the economic front. Venezuela depends on oil exports for almost all of its foreign exchange, yet Venezuela’s oil production has been slowly declining. Moreover, over 42 percent of its oil exports are not sold commercially but rather through special arrangements for which Venezuela receives less than market value. Nationalization of domestic consumer goods industries had led to declining productivity and an increase in imports to make up the difference. The government established control over foreign currency exchange rates in 2003, and the current multi-tier system effectively subsidizes access to dollars for those that are politically well-connected. As of September 16, they can buy dollars as low as 6.3 bolívares fuertes for a dollar, and resell them on the black market for 97 bolívares fuertes to the dollar. This has created a surge in demand for dollars and put downward pressure on foreign currency reserves. Additionally, the Venezuelan government appears to have exhausted most of the special funds set up with extraordinary oil rents and Chinese loans during the past decade which acted as a stop-gap measure as foreign exchange reserves dwindled.

Reduced foreign currency earnings, increasing dependence on imports, and subsidized currency exchange rates have produced steady reductions in Venezuela’s foreign currency reserves, which is what prompts fear of a default. The attempt to sell Petróleos de Venezuela, S.A. (PDVSA)’s U.S. subsidiary, CITGO, suggests a need for additional cash. Moreover, the fact that Venezuela’s international debt is the most expensive in the world to insure against default means that markets are well aware of the risks associated with Venezuela’s current economic strategy.

President Maduro’s recent cabinet shake-up indicates that the Venezuelan government is not yet ready to take needed economic reforms. Instead, economics super-minister and president of the state oil company, Rafael Ramirez, was removed from his posts and shifted to the foreign ministry. He had been the only government minister publicly discussing measures that might start to rationalize the economy, such as unification of Venezuela’s multiple foreign currency exchange rates to more closely track market value. Other proposals included reducing the gasoline subsidy (Venezuela has the cheapest gasoline in the world at less than $0.02 per liter), and liberalizing imports, especially those needed by Venezuela’s domestic industries to produce basic necessities. Instead, the Venezuelan government has resorted to fingerprint scans of customers at supermarkets to ration consumer goods and closing the Colombian border to prevent smuggling of subsidized Venezuelan products abroad. Such policies are illustrative of a consistent bias toward increasing government control of the economy, the very policy that has led to the present crisis.

Is there a more active role for the international community as it observes Venezuela’s deterioration? As Hausmann and Santos note, any normal government facing Venezuela’s present crisis would resort to international financial institutions for support and advice, but the Maduro administration has chosen to double down on government control of the economy. There is very little that can be done proactively by outside actors to address Venezuela’s economic situation unless the government asks for help. The present crisis is the responsibility of the regime, and only it can adopt the measures required to rationalize the economy and forestall a default.

Looking Ahead to Political Implications

Venezuela’s economic crisis has led to speculation that the 2015 legislative elections will be the next flashpoint in its ongoing domestic political conflict. Support for the government in Venezuela tracks closely with economic performance and domestic consumption (PPT), both of which have tanked in the past year. In fact, the Venezuelan government was only able to reverse negative public opinion trends before the December 2013 elections through a forced-sale of private inventories of consumer electronics and home appliances. Former planning minister Jorge Giordani admitted that the government had spent vast amounts in 2011 and 2012 to ensure the re-election of Hugo Chavez in 2013. Current economic indicators do not bode well for the regime’s electoral prospects, and the Maduro administration lacks the financial reserves to use public spending to increase domestic consumption next year. Importantly, this is not a regime that has reacted well to losing elections in the past. Both Venezuelans and outside observers should therefore pay particularly close attention to what can be done to support free and fair elections that produce binding results in the coming year. Increasing government responsiveness through democratic means is a necessary step in serving notice to the Maduro administration that its policies are failing to address the economic crisis at the heart of Venezuela’s woes.