Discussion of the Venezuela’s Economy – What Lies Ahead? | AS/COA
This discussion on the Venezuelan economic crisis and its political impact is well worth 80 minutes of your time. Francisco Rodriguez argues that the fundamental problem with the Venezuelan economy is not its income, but how much of its resources it gives away. If you add together what it costs to maintain an inflated currency (i.e. give away cheap dollars), gasoline at pennies a gallon, and electricity also far below cost, Venezuela gives away over $48 of its resources per year. If the economy were reasonably managed, it would have no problem paying its debts.
Rodriguez estimates that in 2015 there will be a deficit of approximately $40 billion to maintain the same level of imports they did in 2014. If they cut imports by $15-20 billion, they need to come up another $15-20 billion by liquidating assets. They have already raised $5 billion in January, so they should be able to get through 2015. However, the political costs of the reduction in consumption will be high and it will be hard for them to survive electoral challenges of the next two years.
Rodriguez suggests it is not clear that they will actually let the new exchange rate float at market prices. From his conversations he suggests they clearly want to. But there are many political incentives and pressures that prevent that from happening. This is why SICAD I & II were eventually fixed despite promises they would be free-floating. But he says economic reforms often come through such processes, with failed attempts preceding successful attempts. If they do float this legal parallel market it will make the 6.3 preferential rate even more unsustainable as it will provide a legal mechanism for importers to take their preferential dollars and sell them on the parallel market for huge profits.
Historian Alejandro Velasco suggested (skip to 38:00) that it is unlikely this will lead to any uprising of the popular classes in the short term. People tend to think about their economic well-being by looking at the recent past and from a class position. There might be discontent but they don’t doubt the government has their interests in mind and think that their conditions of life have improved over the past decade. The “economic war” discourse galvanizes hardcore Chavistas but seems a little thin among everyday, soft supporters. Velasco pointed out that the opposition still has a “trust deficit” which has prevented them from really benefitting from Maduro’s decline in popularity.
Venezuela’s economic woes have less to do with socialism than with its being a petrostate, emphasize Velasco. Currently, there are no alternatives on the table being discussed which can only make us assume that a new government would not necessarily change the situation. Both Jaime Reusche and Francisco Rodriguez argued that the next two years could lead to significant gridlock which could have harmful economic consequences.
Rodriguez said it is unlikely that Venezuela will default because it is fundamentally different from other countries in which this could be a solution. Venezuela’s economic livelihood comes from exports, which means at any given time it has a lot of capital, quite literally floating outside of its territory in the form of oil shipments. These could in theory be embargoed by debtors. And the risk would lead to a discounting of Venezuelan oil. This would undermine any potential savings coming from default
