World Economy

Venezuela Economy Shrinking

Venezuela Economy ShrinkingVenezuela Economy Shrinking

Venezuela’s economy is set to shrink by 7 percent in 2015, according to the International Monetary Fund’s (IMF) latest figures from last month. The country, which used to be hailed as a ‘socialist paradise’, will see its economy crumble further as oil prices continue to slide.

To understand just how quickly the economy is deteriorating, the IMF predicted only last October that Venezuela’s GDP would contract by one percent. The world economy is set to grow by 3.5 percent, Business Insider reported.

The country’s inflation rate is no better, with official figures putting the number at 64 percent. However, according to Robert Bottome, publisher of VenEconomy Weekly, it is 100 percent and Russ Dallen of Caracas Capital Market says it is 120 percent. To put that into context, Argentina’s inflation rate in December was 10.9 percent, Brazil’s was 6.4 percent and Mexico was 4.08 percent.

One of the reasons for the rise in inflation was a large increase in money supply as Venezuela’s central bank continued to print money to finance a budget deficit.

  No Sign of Improvement

The IMF cannot see any improvement this year. Venezuela stopped publishing its GDP figures in 2013 but the problems are clear in the long queues for food and regular electricity blackouts.

Why is the Venezuelan economy doing so badly?

Oil exports account for 95 percent of Venezuela’s exports. But oil prices have fallen from $112.36 a barrel in June 2014 to $52.99 a barrel in January 2015.

At the higher price, Venezuela’s daily output of two million barrels of crude oil, according to Opec, would have been worth $82 billion a year. Now it is worth $38.6 billion.

  Cash Shortage

According to VenEconomy Weekly, it is “no wonder [the] cash is short” since the country spent $60.5 billion importing goods and services yet the state owned oil company, PDVSA, “received some $39 billion for its [oil] exports”. In an attempt to bolster its oil revenues, Venezuela frantically tried to get Opec to cut oil production last November but failed.

The decision by Hugo Chavez, Venezuela’s former leader, to impose controls on foreign exchange, with a fixed rate for buying dollars, has created a black market for American currency, which currently trades at 183 bolivars to the dollar.

Dallen explains some of the reasons:

Venezuela’s limited domestic production of consumer goods has been destroyed by 15 years of expropriations, price controls and communism.”

Oil revenues contracted in the last three years. Looking at VenEconomy data based on their estimates as well as the country’s Central Bank, the share of GDP made up by oil shrank 3.3 percent, compared to a 1.4 percent fall in 2012.

And the future is not brighter. According to World Bank data, the current account balance as a share of GDP will continue to slide. There are fears of a default; as Dallen points out, maturity and interest payments on the country’s foreign debt of around $11b are due this year.

  Economic Situation

For months Venezuelan shoppers have been enduring long lines in order to buy basic necessities like flour and diapers, but given the country’s increasingly dire economic situation, these may soon qualify as the good-old days.

Years of fiscal mismanagement of the country’s vast oil resources by Venezuela’s government, combined with a 60 percent-plus inflation rate, put the country on economic footing that is tenuous at best. But it may get worse, if more companies decide doing business in Venezuela just isn’t worth it.

The worsening exchange rate of the country’s currency against the dollar means that many companies are seeing less and less incentive to do business in Venezuela. The official exchange rate is 6.3 bolivars to the dollar, but the country also recognizes two other exchange rates — 12 and 50 bolivars per dollar — and the black market rate for dollars is roughly 190 bolivars. A number of S&P 500 companies are seeing the real value of their assets in Venezuela erode substantially as the country’s currency loses value. And businesses are having trouble making those exchanges.