Is Venezuela on the Verge of Collapse?

Falling oil prices and incompetent governance mean Venezuela might default on its debts, leaving major trading partners like Brazil holding the bag.

CARACAS, Venezuela — “God will provide,”said Venezuelan President Nicolás Maduro in his State of the Union speech last Wednesday. Praying is one of the few options left for Maduro, after an unsuccessful international tour of the Middle East, where he lobbied the Saudis to cut oil production and raise the tumbling price of crude.

During a 13-day tour he also visited Russia (twice), China and Portugal, all in a bid to drum up investments and credit. The president did not disclose how much he might have received; instead he spent much of his time framing his trip as an effort to form a bulwark with China, Russia and others against what he considers an American plan to dominate the world.

Before oil prices started to fall this past summer, the country’s inflation was already the highest in the world, at 63.6 percent, and the scarcity index for food and other basic goods remained between 20 to 30 percent. The Central Bank declared the country in recession before 2014 ended.

Maduro, ever since he came to power in April 2013, after president Hugo Chávez died of cancer, has used these grim numbers to portray himself as a victim of an “economic war,” waged both abroad and at home, against his government. He has not taken responsibility for Venezuela’s economic decline.With oil prices down 60 percent since June, fears have escalated in Venezuela, highly dependent on imports, and where everything from medicine, to car parts, to basic foods are becoming harder to find. “The saddest thing is that this is only the beginning,” said Mayra Bravo, after queuing for two hours outside a supermarket in eastern Caracas to buy diapers for her son. “We’re not seeing any type of changes or improvements, and what’s worse is that we’re getting used to this.”

Locals are not the only ones worried. The Venezuelan government has never missed a payment to foreign creditors, but Wall Street is concerned that a default is on the horizon if oil prices continue to fall. The country earns 96 percent of its export revenue from oil, but state owned Petróleos de Venezuela, or PDVSA, is not only bringing in far less money, but also producing less oil. More than 100,000 barrels a day are exported to Cuba and other Caribbean countries under government to government agreements, and 700,000 barrels, worth $12 billion annually, are used for internal consumption, practically at no cost for Venezuelans. Additionally, the country’s foreign reserves, totaling $21 billion, would only cover two years of bond payments, according to a recent Bloomberg report.

“Venezuela spends more than it earns and this year we’re only going to get half as much,” said Asdrúbal Oliveros, an economist who is director of the Caracas consulting firm Econanalítica. “The fiscal deficit amounts up to 20 percent of the GDP.” The International Monetary Fund predicts the economy will shrink 7 percent this year. Several economists believe inflation will reach triple digits and that shortages will worsen dramatically.

“The drop in oil prices is just a very heavy cherry on top of an already difficult situation,” said Orlando Ochoa, one of Venezuela’s leading economists and a professor at the Catholic University in Caracas. Ochoa and 47 other economists sent a letter to president Maduro last year. They urged the government to cut public spending, pressed for a significant devaluation, called for the price of gasoline to be raised and for the government to loosen the tight currency exchange system, which is used to control access to dollars. None of these has happened.

Maduro, instead, has been erratic and seems nervous about what policies to purse. During his speech on Wednesday, he did say the time had come to discuss the price of domestic gas prices, the cheapest in the world, and announced vaguely that the government would reform the three-tiered exchange system, designed to halt capital flight and tightly control the economy and companies. The system is arbitrary and insufficient to satisfy the demand for dollars, so Venezuelan companies and individuals have turned to a flourishing black market.

The country’s fiscal woes, however, didn’t stop Maduro from promising a 15 percent increase in salaries, and additional funds for some of the social aid government programs. He also said they would inject more money to complete Caracas’ newest subway line, currently under construction, amongst other long-delayed infrastructure projects.

These measures are aimed at securing the support of disenchanted Chavistas, as government supporters are known, for December’s parliamentary elections.

“The Chavista government is an expert in two things,” said Caracas-based political analyst, Dimitris Pantoulas. “Making improvised, urgent economic decisions and winning elections. They have been doing it consistently for the past 15 years.”

But this year is different, not only because they are running out of money but because the Bolivarian Socialist Revolution’s popularity has reached an all time low, with only 20 percent supporting Maduro, according to the Datanalisis polling firm.

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As part of fighting the “economic war,” the government ordered the use of fingerprint machines to control how much individual shoppers can buy in certain stores. It has also prosecuted shopkeepers and suppliers accused of hoarding and price manipulation within Venezuela’s Byzantine currency control and exchange regime.

In the past months, National Guard troops were deployed in anti-contraband controls and operations. The government said 25 percent of Venezuela’s imports and oil is being smuggled across the border, mostly to neighboring Colombia, and has arbitrarily closed the border on several occasions.

Looking for scapegoats, the Venezuelan government insistently blames Colombians of being behind contraband mafias. Immigration authorities have raided supermarkets and, two weeks ago, captured and deported 106 undocumented Colombians for not having proper visas. Some of them arrived in Venezuela years ago, looking for a better life.

Now, thousands of Venezuelans have crossed over to Colombia. Many of them are middle class trained professionals with enough capital to open up businesses in Bogotá or Medellín. Cúcuta, Colombia’s biggest border city, has the highest unemployment rate in the country and has seen an influx of unskilled immigrants from Venezuela, said Carlos Luna, until recently the director of the city’s Chamber of Commerce. Imports from Colombia, once Venezuela’s main trade partner, dropped by 19 percent last year, according to the Venezuelan-Colombian Chamber of Commerce. Venezuelans owe close to $800 million to Colombian trading partners.

Neighboring Brazil is also feeling the impact of Venezuela’s economic crisis, but in a different scale. Although former presidents Hugo Chávez and Luis Inacio Lula da Silva had a close relationship and both countries are ideologically close, Venezuelans owe Brazilians more than $5 billion, mostly in manufactured goods and food. “The only reason why Brazilian businesses haven’t pulled out yet is because they don’t want to lose the market,” said a Brazilian government official. José Augusto de Castro, president of Brazil’s Foreign Commerce Association, said in a recent article to BBC Brazil that if Venezuela’s economic crisis deepens, its membership in the Mercosur community would have to be called into question.

While oil countries the world over, from Iran to Russia to Norway, are hurting, none has seen such a rapid descent as Venezuela. After the president’s speech, the joke in Caracas, these days, is that God already provided, blessing the country with the largest oil reserves in the world but punishing it with one of the most incompetent governments. In a letter from God to the president, Venezuelan comedian, Laureano Márquez, quoted God saying: “Look, out of all my projects, I really had hopes for Venezuela. It’ll be very hard for you to explain how you ruined one of my best works. I’m sorry, son, I have to tell you, the financial heavens have also denied your petition for help.”