Podcast | Digging Deeper - Venezuela: A tale of two Presidents and an economic crisis

Moneycontrol Contributors

Venezuela - the picture that name paints is of many beauty pageant winners, lots of oil and Hugo Chavez. Well, yes, Chavez died six years ago but he casts a long shadow, like Castro does over Cuba.  But Venezuela has been in the news of late for all the wrong reasons - food shortages, a pissed off citizenry and a dictator who won’t let go. Venezuela also has that quintessential marker of a basket case - hyperinflation. The inflation in Venezuela is so bad, they now have two presidents instead of one. Hey, what’s a Monday without a bad joke? We definitely need some humor today, don’t we?

What’s up in Venezuela?

Well, everything. The nation might as well be up in flames, except for the fact that Venezuelans are, as a country, pretty laid back. Unfortunately, what was once the most affluent country in Latin America has now gone belly up. And, as The New York Times explained, there are three immediate reasons for this downfall, all of them related to a political crisis that has been building in the country for years. First, the nationwide protests against the government. Second, an upstart by the name of Juan Guaidó, and third, the support Guaidó has received from many countries who want Maduro to quit.

However, let’s start with a timeline of how Venezuela went south. Venezuela’s charismatic leader Hugo Chavez, the man who famously called Barack Obama ‘a clown and an embarrassment’, died in March 2013 after 14 years in office. After his death, his preferred successor, Vice President Nicolas Maduro, took office. This is the guy who would become an internet meme for not-so-secretly eating food during a government broadcast of his own speech as news stories showed empty aisles in shops and supermarkets all over Venezuela. In April 2013, elections were held for a six-year term and Maduro’s Socialist Party defeated opposition candidate Henrique Capriles by the narrowest of margins, 1.6 percentage points. Capriles had lost to Chavez by a wider margin the year before. Unsurprisingly, Capriles and his allies claimed the vote was marred by fraud and called on supporters to take to the streets. That was the first sign of the trouble Maduro would face. South America has had its share of political upheavals, so governmental overthrows are not utterly shocking anymore.

Anyway, ten months later, in February 2014, Venezuelan authorities arrested opposition leader Leopoldo Lopez on charges of fomenting unrest, after a wave of protests known as ‘The Exit,’ that sought to oust Maduro. And matters came to a head in December 2015, when the opposition Democratic Unity coalition won control of Venezuela’s National Assembly for the first time in 16 years. By this time, the country’s economy had tanked. It remains a thing of wonder how an oil-rich land went so broke. They rode a wave of popular discontent with a prolonged recession and rising inflation after oil prices collapsed. We’ll talk the economic collapse in a bit.

Three months later, in March 2016, Venezuela’s Supreme Court, which tended to side with the ruling Socialist Party, announced it was taking over the functions of the National Assembly. Creeping kritarchy, anyone? The court quickly walks back that decision following international censure. But the decision sparks off months of anti-government protests that ultimately leave more than 100 people dead.

In July 2017, the government calls for a referendum to approve the creation of an ‘all-powerful legislative body’ called the Constituent Assembly. The opposition boycotts the referendum. The new body is nominally tasked with rewriting the constitution but quickly takes over crucial legislative functions, leading to accusations that Maduro is undermining democracy. Later, in February 2018, talks between the government and the opposition collapse due to disagreement over the timing of the next presidential election. The administration announces the election will be held in the first half of the year, and the main opposition parties pledged to boycott the vote. True to his word, Maduro conducted the election in May last year, and wins over a lesser-known opposition candidate even as low turnout and allegations of vote-buying by the government do the rounds. The domestic opposition, the United States and Lima Group of mostly right-leaning Latin American governments say they do not recognize the results. The BBC reported that many opposition candidates had been barred from running while others had been jailed or had fled the country for fear of being imprisoned and opposition parties argued that the poll was neither free nor fair. Predictably, Maduro's re-election was not recognised by Venezuela's opposition-controlled National Assembly.  Maduro then announced that he would serve out the remainder of his previous term and only then would be sworn in for a second term on 10 January.

After his second swearing-in ceremony, which took place despite the advice of several Latin American governments to the contrary, the opposition to his government was given a fresh lease of life. The National Assembly argued that the election was not fair and labeled Nicolas Maduro an "usurper" and declared that the presidency was vacant. Chief among these critical voices was Juan Guaido, a virtually unknown opposition lawmaker who assumed leadership of the largely toothless National Assembly. And since nature abhors a vacancy (okay, the axiom says it abhors a vacuum, but, you know…), Guaido swears himself in as interim president at the opposition’s largest rally since 2017. In a brazen move (that could qualify as a coup, I suppose), the legislature, citing articles 233 and 333 of Venezuela's constitution, claims that in such cases, the head of the National Assembly takes over as acting president. Guaido is almost instantly recognized as the country’s legitimate president by the US and many of Venezuela’s neighbors.

And in keeping with Latin American tradition, a good coup was had by all. Well, almost. Maduro is still clinging to power, claiming to be the legitimate El Presidente. The Venezuelan public responded with “No mas.” In response, Maduro broke off relations with the US and gave US diplomats 72 hours to leave Venezuela.

And so we have quite the situation in this fascinating country: two presidents of the nation. That's never happened before, if you discount the American Civil War. Here's an idea:  How about a joust? Both presidents duke it out, and the winner takes all. At least the common people who've suffered can get a giggle out of it. Seriously though, Venezuela needs to decide quickly because Donald Trump has been talking about sending 5000 US troops to that country. And we all have an idea what ensues once USA interferes in a country's politics.

Venezuela, the riches to rags story

And now, the reason Venezuela is nudging Zimbabwe off the top spot in the points table for basket case economies.

I will not lie, it ain’t pretty. The IMF predicts Venezuela’s inflation could touch 10 million percent this year. Let me simplify that, if such a thing is possible: inflation in Venezuela will probably touch one crore percent. And that’s a sad development. For years now, Venezuela has been on the brink – of economic collapse, starvation and total chaos. Once the most affluent country in Latin America, it is now a nation in freefall.

That’s a strange turn of events because Venezuela’s economy was once the envy of South America. According to Forbes, the country is blessed with the largest oil reserves in the world and had a steady stream of USD revenue and immense per-capita wealth. Then Hugo Chavez happened in 1998. The decade-long rise in oil prices that followed improved government finances and allowed Chavez’s socialist regime to increase both spending and borrowing. Their agenda was interrupted by a 2003 labor strike at PDVSA, the state-owned oil company. That strike severely impacted oil production and crippled the economy, with GDP falling an unbelievable 27% during the first four months of 2003. For perspective, when we in India were glued to the 2003 Cricket World Cup, Venezuela’s oil-based GDP tanked 27%. After the strike, Chavez instituted a series of measures to stop the slide in the Bolivar, the Venezuelan currency, and sought revenge on those responsible. The introduction of a currency peg, installation of import controls, the nationalization of other industries, and the establishment of subsidies for food and consumer goods all followed the strike. The Forbes report claims that these actions sowed the seeds for the inflation crisis we see today. The socialist policies purported to help the poor backfired. Take price controls, for example. They were introduced by Chávez to make basic goods more affordable for the poor by capping the price of flour, cooking oil and toiletries. However, that meant the few Venezuelan businesses producing these items no longer found it profitable to make them.

Oil accounts for over 95% of Venezuela’s exports, so when the price of crude collapsed in 2014, the economy took yet another hit.  The country produces 1.1 million barrels per day, as of January of this year, down more than 30 percent from the same month a year prior. Analysts expect the downward trend to continue and say production could dip below 700,000 barrels per day in 2020 in a worst-case scenario. Another 200,000 barrels are at risk if Venezuela is unable to import crucial diluents it needs for refining when its supply is expected to run out sometime in February or March. In 1998—its most productive year—Venezuela produced more than 3.1 million barrels per day. According to the IMF, the Venezuelan economy shrank by 30% between 2013 and 2017. Obviously, government revenues plummeted along with oil prices, and with fewer US dollars to spend on imports, there began a scarcity of many products. But compared to 2003, the impact is more profound this time around. Reliance on food and consumer goods imports increased during the oil price boom. Crucially, domestic production decreased after years of added regulations (like the price controls we talked about, for example) and inefficient operations of nationalized businesses. With less money in hand, Maduro simply printed more money. Worse, there is now greater reliance on the government for the distribution of goods and services. Store shelves are bare and the black market prices for many basic items have rocketed skywards.

What in the world is hyperinflation?

An episode of hyperinflation occurs when the monthly inflation rate exceeds 50%/mo. for 30 consecutive days. How bad is it in Venezuela? Picture this: daily life with an annual inflation rate of 1,000,000% means that the price of a cup of coffee doubles between weekly paychecks. That is what the citizens of Venezuela faced, according to a 2018 report by the IMF.

A cup of coffee in Venezuela, measured using Bloomberg’s Café Con Leche Index, cost more than 2,000,000 bolivars in August last year. That is an increase from the earlier up 1,400,000 bolivars one week prior and 190,000 in April. By the end of 2018, prices were doubling every 19 days on average. This has left many Venezuelans struggling to afford basic items such as food and toiletries. The 3-month annualized inflation rate was over 1,200,000%. That is hyperinflation not seen in the world since Germany in the 1920s or Zimbabwe in 2008. And, as we said earlier, inflation is set to touch 10 million percent in 2019. As of this month, it takes 1,600 Venezuelan bolivars to buy one US dollar. The IMF said in its report titled Regional Economic Outlook for Latin America and the Caribbean, “Real GDP is projected to decline further in 2019, bringing the cumulative decline since 2013 to over 50 percent.”

One Forbes analyst, Steve Hanke - a professor of applied economics at The Johns Hopkins University - said Venezuela has been engulfed in a hyperinflation episode since November 13, 2016, with another flare up of the same episode occurring during the November-December 2017 period, and claimed inflation was closer to 80,000 percent than the unbelievable numbers stated by the IMF.

The situation on the ground is so precarious, a Euronews report claimed that hospitals are unable to provide the care to common people. On the streets, people are being picked off by armed gangs vying for money and power.

Many blame the so-called Bolivarian revolution, and the man who embodies what is left of it for bringing Venezuela to its knees. Take for instance, Kisbell Vargas, a 27-year-old protestor who told The Guardian, “While the people are going hungry, they have all the food and the medicine they need. I have a seven-year-old daughter and I want her to grow up in the Venezuela I was born into. A Venezuela where you don’t live under any kind of regime.” Another protestor, Stefani Fonseca, said, “How are things in my community? We have no water, no cleaning, no food.”

Critics also blame the foreign currency controls brought in by President Chávez in 2003 for a flourishing black market in dollars. According to the BBC, Venezuelans who wanted to exchange bolivars for dollars had to apply to a government-run currency agency. Only those deemed to have valid reasons to buy dollars, say to import goods, were allowed to change their bolivars at a fixed rate set by the government. With many Venezuelans unable to freely buy dollars, they turned to the black market.

Then, in August, the government lopped five zeros off the old "strong bolivar" currency and christened it the "sovereign bolivar". This meant people no longer had to carry huge wads of cash. It also began circulating eight new banknotes. But that has mitigated almost nothing. People are just leaving. According to United Nations figures, three million Venezuelans left the country since 2014 when the economic crisis started to bite. Most are said to cross into neighbouring Colombia, from where some move on to Ecuador, Peru and Chile. Others head south to Brazil.

What next?

Hanke says Venezuela must officially dump the bolivar and adopt the US dollar. He wrote, “Countries that are officially dollarized produce lower, less variable inflation rates and higher, more stable economic growth rates than comparable countries with central banks that issue domestic currencies. There is a tried and true way to stabilize the economy, which is a necessary condition required before the massive task of life-giving reforms can begin. It is dollarization. Stability might not be everything, but everything is nothing without stability.”

Venezuelan economist Ricardo Hausmann, who advises Juan Guaidó and the Lima Group, says his country will require $60 billion from the International Monetary Fund in order to rebuild in an eventual transition. $60 billion is also the amount of privately held bonds the Maduro government at one point hoped to renegotiate with bondholders and now is defaulting on.

In terms of politics, with the situation spiraling out of control, it feels impossible that the status quo could continue much longer. On the other hand, the same could have been said one, two or even three years ago, and yet Venezuela continues its steady decline. While Guaidó counts for something, given American backing as well as that of a number of Latin American countries and other international leaders, he does not have much power in practical terms. In truth, even if he is the president of the National Assembly, that legislative body was rendered effectively powerless by the creation of the National Constituent Assembly, which is comprised of government-loyalists almost exclusively. With things at such an impasse, the security forces are viewed as a key player in this crisis. So far, they have been loyal to Maduro, who has rewarded them with frequent pay raises. He has placed high-ranking military men in key posts and industries. And even that support seems to be tenuous. Top military commanders have tweeted their support for Maduro but videos posted on social media showed National Guard members stepping aside at one opposition protest to let those marching through.

Maduro told Euronews, “It is not possible to have two presidents in a country. In Venezuela there is only one president under the constitution elected by popular vote, according to Venezuela’s political institutions. And this president, is this humble worker sitting here, Nicolas Maduro Moros. There is a coup currently taking place; it has failed; we have neutralized it. This was instigated by the US government inside Venezuela. The United States used all its political, diplomatic and economic power to try to install a puppet government in Venezuela, something which is unprecedented in our history.”

The latest is that Maduro claims, according to Washington Post, officials from his administration met with US president Donald Trump’s envoy to Venezuela, Elliott Abrams, and extended an invitation for him to visit Venezuela. The Guardian reported yesterday that Guiado rejected the comments by the administration that his efforts to unseat Nicolás Maduro had failed but admitted that the “trickle” of military defections to his side had so far been insufficient to force change. Meanwhile, US national security advisor John Bolton announced on Thursday that twenty-five countries pledged $100 million in aid to Venezuela, following an Organization of American States conference on assisting the crisis-hit country.