Low Oil Has “Devastated” Venezuela

The economic crisis in Venezuela is deepening. Data shows real GDP contracted 5.7% in 2015 and annual inflation hovering above 200%. Food shortages are becoming widespread and medicine scarcities have worsened throughout the country. Many analysts and market observers are expecting a double-digit plunge, at the very least, in GDP for 2016. The Institute for International Finance (IIF) has forecast Venezuela’s economy to contract 10-12% this year, due largely in part to low oil prices, the continued policy gridlock in Caracas and the increasing likelihood of even more severe power shortages. The government of President Nicolás Maduro, IIF states, is “unwilling to adopt pro-market policies and work with the opposition-controlled congress.”

Absent a real and dramatic change in the current political environment, a change in government is needed and a green light from the United States, before officials from the International Monetary Fund (IMF) would board a plane to Caracas to begin negotiations on a rescue program, according to Robert Kahn, senior fellow for international economics at the Council on Foreign Relations wrote in his monthly note in May. By then, Kahn states, “the chaos could be severe.”

Last week, Venezuela’s vice president for the economy Miguel Perez Abad, stated that in order to continue paying the country’s foreign debt, the country would be cutting imports even further from $37 billion in 2015 to $20 billion this year. This issue with this, Russ Dallen, managing partner of Miami-based Caracas Capital says, is that “Venezuela doesn’t even have the money for that level of imports. Our latest figures show that last month Venezuela even went so far as to borrow money from the IMF, continued to sell its gold and burn through the country’s foreign reserves.” This, let alone the widespread and devastating humanitarian impact this would unleash in the country.

While the situation continues to deteriorate, the currency is not being spared. Venezuela’s foreign reserves hit a new decade low of $12.10 billion last week, less than half of what they were just last March, according to IMF data.

According to April 2016 IMF statistics, Venezuela borrowed US$374 million (266 million SDR) from its Special Drawing Rights (SDR) account at the IMF. While that is the first SDR borrowing by Venezuela this year, Caracas has now quietly borrowed US$2.734 billion in total since if first drew SDR from the IMF in April of last year.

“The wave of political and economic news out of Venezuela does not change our baseline scenario for the sovereign, Jaime Reusche, a senior sovereign analyst at Moody’s, stated this month. “There are indications that the government remains committed to servicing its debt, as evidenced by additional pledges to cut imports from already low levels to meet debt payments. Nevertheless, we still think the likelihood of a credit event remains elevated and consistent with Venezuela’s Caa3 rating.”

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