Venezuela Remains On Path To Collapse - Emerging Market Views

Venezuela Remains On Path To Collapse

In August, Venezuelan president Nicolás Maduro announced new measures to improve the economy of his country. Venezuela, by many accounts has all but failed economically.

The announcement came after weeks of talk of a “crypto” currency-type scheme, which many saw as a gateway to even more organized crime (money laundering) in the country. The measures, according to Maduro would give the economy the boost it needs and reaffirm its sovereignty. They include ddevaluing the already very weak currency and increasing both the minimum wage and a discretionary VAT increase of around 4%. It is important to note that Venezuela’s “crypto” product is formally banned in the United States.

On the surface, market analysts say, these adjustments by Maduro have some orthodox features, but the lack of details suggests that the plan is incomplete.

First, oil production in Venezuela has fallen drastically due to years of neglect. Second, the government does not have a hard currency with which to make essential imports and Maduro’s plan does not include any sort of external financing. And, the rise in wages will hit production costs hard in what is left of the formal economy. Lastly, three months of promised subsidies to small and medium-sized enterprises (SMEs) are running into red tape coupled with a severe lack of much-needed resources.

“Maduro’s announcement was greeted with alarm among businesses and the population, and we expect further inflationary pressures amid shortages as firms close and unemployment rises,” Pedro Tuesta, senior economist covering Latin America with Continuum Economics write in a note to clients on August 20th.

Buying Time

Despite continued economic implosion, Venezuela’s government has bought time politically as the country’s opposition party remains somewhat in tatters. “The sanctions regime is likely to make an already difficult debt restructuring that much more so,” Tuesta writes.

And oil production, a key lifeline at times for the country, continues its downward trend and consistently impacts revenues despite the rallying trend in global oil prices.

It is expected PDVSA, Venezuela’s embattled state-owned oil company, will continue to meet payment obligations this year, though current sanctions may make it difficult for some recipients to receive the payments.

Venezuela’s willingness to is starting to fall and it has announced plans to restructure its debt burden. “The terms of such a deal which would no doubt be selective and remain unclear.”

Photo Credit: Marco Bello / Reuters