Economic Sense: Venezuela in the Running for the First Default of 2015
The year could have started better for the Bolivarian Republic of Venezuela, otherwise known as a socialist worker’s paradise where workers have to do without toilet paper and other necessities.
The recent official economic data from the central bank is absolutely devastating. The economy shrank 4 percent in the first nine months of 2014 compared to the same period in 2013.
Inflation in November ran at an annualized 73.5 percent. Again these are official figures, so the reality is bound to be worse.
As a result, bond prices have tumbled by half and credit markets are pricing in a 90 percent probability of default within a year, as Venezuela has to pay back $30 billion worth of foreign denominated debt in 2015. It’s currency reserves—recently propped up by a $4 billion loan from China—are down to $22 billion, most of them held in gold, which is not for sale. Its total foreign debt is worth $112 billion.
While inflation and economic statistics paint a somewhat accurate picture, authorities refuse to accept reality in the currency markets. The official exchange rate of the Venezuelan bolivar to the dollar is still fixed at 6.3. The black market trades it at 173, more than double the 75 from early 2014.
At least stocks are doing well. The Caracas stock exchange was up 45 percent in 2014, after a nose bleed 475 advance in 2013. Of course, this rosy picture doesn’t reflect the reality of the daily lives of millions of Venezuelans who experience goods shortages of all kinds on a daily basis.
Most of them do not own stocks, but even those who do lost almost 20 percent in real terms as inflation rose faster than market prices this year.
For years, Venezuela’s inefficient economy has been propped up by a relatively high oil price. After last year’s shocking price decline—Venezuela is now selling oil at $48 per barrel—all the wounds are laid bare.
Venezuela’s budget depends on oil more than any other country—a full 96 percent originates from oil revenue. And the state budget matters in a country where most industries are nationalized and everybody depends on the redistribution of scarce resources by the government.
However, because of price controls, foreign exchange controls, as well as nationalization, most productive business people left the country a long time ago. This is why Venezuela now has to import almost anything apart from energy, something it could do as long as foreign money kept flowing in because of oil revenues.
This is no longer the case and Venezuela cannot cover it up. In order to pay for imports you need foreign cash and this you only get if you export something of value. That doesn’t mean you cannot try, of course.
The preferred way of trying to cover up an abysmal economic policy for any banana republic is by way of the printing press. From November 2013 to November 2014, the period where data is available, the central bank of Venezuela boosted its balance sheet by 35 percent, which means it printed 437 billion bolivares to fund government expenditure.
This is all fine and dandy if there is something the government can buy with the bolivares. Since Venezuela doesn’t produce much domestically, this doesn’t work. Now more bolivares are chasing the same amount of goods denominated in dollars and euros, the consequence of which can be seen in the plummeting exchange rate.
All this puts Venezuela very high up in the running for the first default in 2015—even ahead of Greece.