Download Hanging by a Thread: A Look Into the Venezuelan Crisis

Policy Briefing
August 4th, 2016
Hanging by a Thread: A Look Into the
Venezuelan Crisis
Marta Luzes- Research Assistant
I.
Introduction
Three years after the death of the
revolutionary president Hugo Chaves,
Venezuela finds itself in the worst economic
and political crisis that the country has
experienced. Hunger, crime and a shortage of
medicines are just a few of the problems that
Venezuelans face daily as the country goes
bankrupt and political unrest keeps
increasing. Being one of the countries with
the highest oil reserves in the world,
Venezuela was severely hit by the oil crisis
that has been felt throughout the world. With
prices plummeting for some months now,
they are a third of what they were in 2014,
the country has seen its most important
export, which accounts for 96% of export
revenues, diminish severely (approximately a
decrease of 40% this year)i. The economic
situation of the country is further worsened
by the levels of foreign debt that the country
has accumulated throughout the years and
that is now incapable of paying (the country
has $120 billion of foreign debt and in the
final quarter of this year must make a
payment of almost $7 billion). This economic
crisis is reflected by the lack of security that
is felt throughout the country and has led the
current president, Nicolas Maduro, to declare
a state of emergencyii.
Nicolás Maduro, the successor of the late
Hugo Chavez, has been ruling the country for
the past three years and is now facing the
threat of being overthrown by the main
opposing party. The opposition declared a
humanitarian emergency back in January but
these claims were dismissed by the President,
which is now trying to undermine the petition
for a referendum for the recall of votes. As
the Venezuela’s National Electoral Council,
controlled by the government, keeps on
raising problems trying to delay the
referendum until next year so that by this
time if Maduro is forced to step down, the
next in line would be the party’s vicepresident and there would not be a change in
regimeiii. Meanwhile, high inflation keeps
soaring, the black market keeps increasing
and there is no visible change in the
economic or political policies that the
government pursues.
Unfortunately, the consequences of the crisis
go well beyond the country’s economy and
worrying humanitarian situation. As
Venezuela’s situation continues to worsen the
impacts on the international community are
sure to be felt. The risk of default will have
significant repercussions on Wall Street and
international markets, whilst simultaneously
posing a great threat to the stability of the
whole Latin American region.
Policy Briefing
August 4th, 2016
II.
Country Analysis
With no money, no food and no electricity
the country is entering into complete chaos,
with healthcare one of the most prominent
casualties. The rate of child mortality
increased by more than 100 percent, from
0.02 percent in 2012 to over 2 percent in
2015, according to a report provided by
lawmakersiv. Maternal health also increased
by almost five times during the same period
of time. Hospitals are operating with very
basic facilities, there are no medicines, there
is no power to enable medical instruments to
work, there are no doctors and in some
hospitals there is not even water to clean
surgeon’s tables, as infrastructure’s
malfunctions are very commonv. However,
the president continues to deny claims of a
public health emergency. “I doubt that
anywhere in the world, except in Cuba, there
exists a better health system than this one”,
declared Mr. Maduro when asked about the
situation of the healthcare system in
Venezuela.
Other basic services hit by this crisis are
energy supply and food stocks. As the
country goes bankrupt energy cuts have
become an everyday reality. This has not
only influenced hospitals, schools and
households but it has also contributed to the
reduction of days that government offices are
open, having decreased to two days a week.
Meanwhile, the queues at food stores are
endless. The food shortage is the worst that
Venezuelans have ever seen, largely caused
by the reckless economic policies pursued by
the government and the lack of money the
country has to import goods. More than 80%
of goods have disappeared from
supermarkets shelvesvi and malnutrition is
rampant not only in children but also in
adults. On the 17th of July the borders with
Colombia, which had been closed since last
year, were temporarily reopened and
Venezuelans were allowed to cross into
Colombia in order to buy food and basic
toiletries. It is estimated that as much as
100,000 hungry and desperate people crossed
the border to go and buy foodvii.
This shortage of food and basic items is
reflected by the growth of the black market
and the increase in robberies and crime.
According to several news agencies,
Venezuela is now considered one of the most
dangerous countries in the world, with crime
rates soaring as the food shortages
increasing. Additionally, the increase of drug
gangs and street groups across the capital
Caracas make it very difficult for security
forces to maintain control that on the other
hand do plenty of killing themselvesviii.
Violence just keeps escalating and it seems
more and more difficult to stop and is sure to
influence the countries around Venezuela, as
gangs and narcotraffic increase in the region.
However, the humanitarian crisis should
not be the only concern for the international
community. The country is entering into a
deep economic crisis, one of the worst the
country has ever seen, and this is sure to have
ripple effects for the world economy. The
former policies implemented by Hugo
Chavez and the continuation of the same
economic model by the current president,
have led the IMF to declare that the
Venezuelan economy is expected to shrink by
10% this year and the inflation rate that is
now at 500% may increase up to 700%. As
money runs out the subsidies that were
created during the Chavez regime are now
impossible to maintain as the country has
considerably reduced its state revenues.
Nationalized companies (over 1,200) do not
have funds to continue working either, as it is
the case with the energy sector; poorly
managed and kept oil infrastructures are also
failing; unemployment rates are now at 17%
but are expected to increase up to 30% until
Policy Briefing
August 4th, 2016
next yearix, all of which has left a huge hole
in the country’s public finances and has
turned Venezuela into an high-risk debtor. As
we approach October, when a payment of 1$
million to international bond holders is
neededx, the country’s default risk increases
as it becomes clearer that Venezuela will not
be able to pay its debts to creditors such as
countries like China that now owns a large
percentage of the country’s debt. In the case
that Venezuela fails the payment and defaults
an immediate impact will be seen across the
global markets and regional neighbours.
Colombia has already felt these effects when
its borders with Venezuela were closed last
year and Colombian exporters were left with
billions of dollars with unpaid billsxi. China
faces the same risk, having lent Venezuela
billions of dollars that is now trying to
renegotiate with the oppositionxii.
Despite all of the difficulties the country is
experiencing, there is no sign that the
government is ready or willing to restructure
the economy and implement economic
policies that, more than beneficial, are
necessary.
III.
A resources trap
Venezuela’s commitment to a socialist
“populism” has been hurting the country for
decades and it is now one of the political
explanations for the lack of action by the
government. The country has a long standing
tradition of spending state revenues on
generous social welfare benefits in order to
keep the population happy, failing to save for
more tumultuous times, like the one they are
experiencing today. The severe decrease in
oil prices in the last months has had a strong
impact on the nation’s finances. On the
meantime, the government keeps hoping that
the oil price will go up and that their
economic problems will be quickly solved:
the country will have liquidity again so it can
pay off the debts and normal life can be
restored to its population. However, the price
of oil is not expected to increase in the near
futurexiii and, despite having the means (large
reserves of oil) to be a wealthy country,
Venezuela is runs the risk of becoming
insolvent.
Instead of focusing in solutions such as
investing and developing other industries or
finding effective ways to start fight
corruption and enforce tax payments the
government in charge has been unable and
unwilling to implement necessary reforms
and is now on the verge of collapse. This
unwillingness to change policies, such as
eliminate the exchange rate controls (the
country currently has at least four exchange
rates), increase the domestic price of
gasoline, that is currently the lowest in the
world, has forced the government to take up
other measures such as shutting off imports
and energy consumption, in order to avoid
becoming insolventxiv. Venezuela has run out
of money, its foreign reserves are now 11.9$
compared to 20$ just two years ago, imports
of food (which account for almost all food
consumption) are barely close to nothing.
Policy Briefing
August 4th, 2016
However, as it has been previously
unmasked, these measures are extremely
hurtful for the population and completely
unsustainable. Experts say that this could be
“the largest and messiest emerging market
sovereign default since the Argentine crisis of
2001”xv.
The problem with inflation and exchange
rates is one of the biggest economic
challenges that Venezuela needs to fix.
Currently the Government has an official
fixed exchange rate of 10 bolivares Fuertes
(bs) per dollarxvi. However the exchange rate
in the black market is much higher than the
official one, so one can get more than 10
bolivars for 1 dollar. This difference in
exchange rates is the cause for the
hyperinflation the country is experiencing.
The black market inflation raises the prices
of imports for basic goods, which leads the
government to implement rationing and price
controls, which leads more people to buy in
the black market, which of course creates
more inflation as the black market exchange
rate keeps increasingxvii. Moreover, the
government has been raising wages and
printing more bolivares as an attempt to
soften the low import of foreign goods and
their price rise, which naturally increases
inflation even morexviii. These situations
create a big fiscal deficit for the government
and rocket high levels of inflation.
Another important result of these policies is
the effect that this crisis can potentially have
on China. China is one of the biggest lenders
to Venezuela, however it is in the form of
short-term financing that is payable via oil
shipments. Hence, as the price of oil
collapses, Venezuela needs to ship more oil
in order to pay the same debt. On one hand
this leaves the country with fewer barrels to
sell on the international market diminishing
the amount of revenues (roughly a little more
than a million barrels per day), which again
is not very positive for the country and
creates an even larger budget deficitxix with a
lot of money owned and no revenues getting
in. On the other hand, China has a large
exposure to Venezuela’s debt and risks
having to deal with a potential national
default. Beijing has already sent unofficial
envoys to hold talks with Maduro’s
opposition in order to secure the payment of
the debt and to maintain a relationship
between both countries in case of a change of
regime. A default on the part of Venezuela
would have a negative impact on the Chinese
balance of payments, which is already
growing at its slowest rate in 7 years, 6,7%
on the first quarter of 2016xx.
The situation is further aggravated by the
inexistence of economic surveillance that is
now the reality in Venezuela. As a member
state of the International Monetary Fund
(IMF), countries are obligated to accept
economic monitoring in order to assure to
others that its policies are not a risk to other
countries. However, Venezuela has not let the
IMF in since 2004, not allowing for any
economic monitoringxxi. This withdraw and
the consequent closing of the national office
was a Chavez attempt to create an alternative
Latin American lending bank and, at the
same time, show its disagreement with the
IMF policies and measures towards the
developing nationsxxii. Albeit the attempt, no
bank was created and the IMF did not change
its policies, being the only result a lack of
monitoring of the country’s economic
activities for years and a growing liability of
the international community
The Organization of American States should
also have an important role to play in the
current circumstances. Despite some
alliances with other Latin American countries
(such as Bolivia) it lies on the regional
neighbors to denounce and condemn
Maduro’s actions. On the past 23rd of June
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August 4th, 2016
the head of the OAS regional block
addressed the permanent council of 34nations and denounced the poverty,
corruption and violence that the Venezuelan
people face everydayxxiii. Nevertheless,
Venezuela stills play an important role in
Latin America: it has allies in the region that
will not allow a suspension from the OAS
and Mercosur and it also provides oil to at
least 10 countries in the Caribbean Seaxxiv.
All this can explain the seeming low and late
response by the region’s superpowers to the
economic and humanitarian situation in
Venezuela. However if countries persist in
not implementing safeguarding policies the
results can be even more disastrous.
IV.
Policy recommendations
The international community can do little
on its own, as it cannot interfere in
Venezuela’s internal politics. However it is
important to stress out the severe
consequences the situation can have on the
political and economic stability of the region
and on the national population. Therefore, if
or when the Government of President
Maduro decides to ask for foreign assistance,
solving the humanitarian situation should be
the first thing on the agenda of the
international community. If it does so, policy
makers should immediately focus on
establishing a system of aid for the National
population. This can happen through cashtransfer programs to Venezuelan families, so
that they can afford basic staples, or
government food stamps. It is critical that the
international community restores the full
functioning of basic services, which can be
done by agencies such as the UN (UNICEF,
WFP) and Médecin sans Frontières.
Surrounding regional countries such as
Brazil, Chile, Colombia and Peru, should
promote and endorse the Organization of
American States (OAS) secretary’s general
call for a government dialogue between Mr.
Maduro and the opposition, and remind
Venezuela of its humanitarian obligations
declared under the Inter-American
Democratic Charter, instead of suspending
the country from the organizationxxv. There is
a need for the regional countries to come
together and pressure the Venezuela to
undergo some economic restructuring and
reinstall basic democratic principles. On the
same note, the international community
needs to pressure Caracas to have IMF
surveillance immediately not only to restore
their right to know the economic situation of
the country but also to protect themselves for
the future negative impact that countries are
Policy Briefing
August 4th, 2016
bound to feel. Venezuela should start to
invest in the long term on other forms of
exportations so it is not totally dependent on
oil and on its price fluctuations. It is also
important that the country understands the
significance of infrastructures and starts
investing in improving the ones existent and
building new ones, so that the current energy
situation do not happen again. Additionally,
they should invest on the necessary
infrastructures and agriculture know-how so
that they can start producing their own food,
instead on being completely dependent on
food imports, as it has been seen can cause
several shortagesxxvi.
The referendum that the opposition is
trying to put forward would be the more
democratic and maybe successful way of
dealing with the circumstances Venezuela
finds itself in. The US has been working
with the new governments of Argentina
and Peru to create a framework for
multiparty talks. These aim to press the
Venezuelan Government to open up some
political space for the opposition to make
sure democratic values are respected.
Whatever the decision of the Government
or the international community is, it must
be decided quickly as day by day the
humanitarian situation deteriorates and
the economic damages seem more and
more irreversible.
Author is a Research Assistant with the HSC.
Contactable at:
[email protected]
Cite this article as: Luzes, Marta (2016) ‘Hanging
by a Thread: A Look Into the Venezuelan Crisis’
Human Security Centre Policy Brief. August 4th,
2016
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