The semi-bankruptcy of Venezuela’s economy: are there any lessons for Algeria?
Would Venezuela be ‘lesson-learned’ for Algeria? Each country, excessively dependent on the volatile fluctuations in the price of oil, Venezuela’s like Algeria’s economy have each been quite affected by the global economic crisis, resulting from the recent oil price slump.
This is the paradox of a typical annuitant who has not in its recent past benefitted from the financial windfall of oil price highs to establish a competitive based productive economy.
Venezuela is a rich country but with a poor population; the country being in 2016 literally on the verge of bankruptcy. Algeria for want not to renew this unfortunate experience should avoid euphoric speeches and meditate the Venezuelan lesson.
1 – Some socio-economic indicators
With an area of 912,050 km² with about 40 indigenous languages (wayuu, piaroa, Pemón, guahibo, etc.), Venezuela is part of the WTO, World Bank, ECLAC (Economic Commission for Latin America) of ALADI (Association Latin American integration) and the CACM (Central America common market).
It is partner of MERCOSUR, but has retired from the Andean Community, which includes several countries of the southern Latin America’s cone, in 2006. Venezuela has a population of 31.5 million in 2016 of which 93.4% are urban and 6.6% rural citizens with a density of 28.5 people per km², life expectancy is generally over 72 years, and a literacy rate of 95.5%. In Human Development world ranking, the country had 0.762 note in 2015 and was 71st on 187 countries.
With the oil price dropping almost 2 years ago, the Gross Domestic Product (GDP) in current US$ billion was 298.38 in 2012, 218.43 in 2013, 206.25 in 2014, 131.86 in 2015 and forecast to be 133.53 billion in 2016 with a decrease in volume of 3.9% in 2014 and 8% in 2015. The main sectors of activity taken in the GDP are: agriculture: 3.8%, industrial sector: 45.8% with total prevalence of hydrocarbons (96% of exports) and the services sector: 50.4%. Exports of non-oil products are marginal (4 to 5% of the total) and constantly declining in value and in volume due to the growing difficulties encountered by the national productive systems. These are dominated by the chemical and mineral products (60% of the total in 2014).
The official unemployment rate has thus evolved according to the World Economic Outlook Database: 7.8% in 2012, 7.5% in 2013, 8.8% in 2014, 14.0% in 2015 and 2016 is forecast give 18.1%, but in reality much more with a predominance of jobs-annuities. According to the same institution, the inflation rate was 21.1% in 2012, 40.6% in 2013, 62.2% in 2014, 159.1% by 2015 and more than 180% in 2016; some forecast 200% by end of December 2016, possibly one of the highest in the world. This inflationary spiral that lead to shortages of products is causing a deterioration in the purchasing power of the most vulnerable and the dumbing down of the middle classes that constitute the basis and support of the power in charge.
The balance of common transactions had lately a significant deterioration, $11.02 billion in 2012, $5.33 in 2013, $10.89 in 2014, a negative balance of $3.98 billion in 2015 and still a negative balance in 2016, despite restrictions of $1.9 billion. The total public debt (internal and external sovereign + PDVSA) would amount to 80% of GDP by end of 2015 compared to 56% in 2014. Despite the acute financial crisis, Venezuela scrupulously paid at maturity of its external debt in the first four months of 2016 (approximately $3.5 billion) and continues to assert that it will not default. Correlated to the hydrocarbons related semi-annuity with the collapse of foreign exchange reserves, and according to François Faure of Le Figaro, Economist for BNP Paribas in May 2015, the total amount of foreign exchange of the Venezuelan reserves were $22 billion including $7.4 billion in cash and the rest mainly in gold.
According to the Trading Economics, the amount of foreign exchange reserves was $12.7 billion in April 2016. The currency; $1 = 10 Bolivars at the official rate and more than 1,100 Bolivars at the parallel market rate.
Its customers mainly the United States (40%), China (20%) and India (10%), Singapore (5%), Cuba (5%) and its suppliers are the United States (25%); China (16%), Union European (14%), Brazil (9%) and Colombia (5%).
2 – Venezuela, failing rentier economy
The country would have reserves of upto 300 billion oil barrels; one of the largest in the world. But the specification of its oil is of the heavy type, that is expensive to extract and according to some experts, it would be no more interesting to extract it below $100 a barrel. Furthermore, its main market in the past, being the United States of America, whom became lately self-sufficient with their shale gas revolution have drastically reduced their imports. In addition, with the loss of its managers, the lack of investment at the level of the main Venezuelan society between 2013 and 2015, oil production increased from 3.5 million barrels’ day to 2.5 million barrels with a very strong domestic consumption, oil prices being subsidized.
Claiming to be victim of an economic war, the president of Venezuela Nicolas Maduro, given the scale of the economic crisis, has decided to operate a tightening of budgetary policy, decreed in January 2016 “economic emergency” for a renewable term of 2 months, to increase the price of petrol (litre of super gasoline costs now 6 Bolivars against 0.097 Bolivars), a first for nearly 20 years (even if the price remains particularly low). He also allowed a devaluation of 58% and whose objective would be to revive local production, but actually to try to fill the budget deficit at the price of imported inflation. Indeed, according to a recent study by BNP Paribas, the Government has set up a system of rationing. Every citizen should not buy more than its share, and should not go more than once a week in public stores. The Central Bank coordinates provision of Dollars, in large part, by oil rents by applying several Exchange rate, the lower being the products of basic necessities.
The Government of Nicolas Maduro accuses all speculators, private companies and opposition of helping inflation prices and to suffocate economically and thereby destabilize the country. Tackling structural reforms, with short-term actions, he decreed the temporary occupation of large plants and expropriations, short-term solutions that amplify tensions.
Economic laws being however impervious to political slogans, economic activity in Venezuela should further contract in 2016 and in the event of a barrel less than $50 to $60 (operating on the basis of a greater than $120 price of a barrel according to the IMF), are expected to multiply in 2017. Also, the slowdown in private investment should continue despite the probable phase-out of restrictions to imports and currency.
Distrust of local and foreign investors face the uncertainty of the legal framework should further promote capital outflows from the country. Inflation should stay high, driven by the rapid expansion of the money supply and the strong depreciation of the Bolivar against the US Dollar. Thus, according to the International Association of Transport Association https://www.iata.org (IATA), the country not having enough foreign hard currency to pay all its creditors, many companies have not been paid, starting with the airlines to whom the amount would be of approximately of $3.6 billion.
All the above denotes of both political and economic climate deterioration as demonstrated for Economic Freedoms, by Venezuela ranking in 2015 at the second last place, 175th out of 176 countries and was level within the south American continent 28 out of 29 and for Business Climate in the last rows with a score of 3.93 out of 10. Thus, Venezuela does not seem to have got, according to ECLAC http://www.cepal.org/en/datos-y-estadisticas , only 0.2% of the total of net FDI for the region ($230 million from a total of more than $153 billion) and ranks regionally seventeenth within the receptors of FDI overtaking only El Salvador and Paraguay. With an amount of $30 billion in 2014 (compared to 33 in 2013) according to UNCTAD, Venezuela’s FDI is seventh in the region, behind Colombia’s or Argentina’s. According to the Central Bank however, the FDI inflows to Venezuela reached $320 billion in 2014 (a drop of 88% from 2013).
3 – Venezuela has the potential for come out of its crisis
The Venezuelan economic model, based on a redistribution of the oil revenues, was based on two assumptions: domestic consumption and strong public expenditure. Growth, fuelled by high oil prices, has been until 2012, one of the best growth of Latin America, but artificial growth lead by public expenditure. Since that date, the worsening of the macroeconomic imbalances and the fall in the price of oil (oil exports representing over 96% of resources in currency of the country and more than 60% of the taxation) have completely reversed this trend. Yet Venezuela has vast water resources, as well as significant agricultural potential. The main agricultural products of the country are corn, soybeans, sugar cane, rice, cotton, bananas, vegetables, coffee, beef and pork meat, milk, eggs and fish. As highlighted earlier, with the first world oil reserves, before Saudi Arabia, though of heavy oil specification, the fourth world reserve of natural gas, Venezuela is the 5th economic power of Latin America behind Brazil, Mexico, Argentina and Colombia. A founding member of OPEC, it is the 12th largest producer of petroleum and the tenth largest exporter of crude. But with foreign exchange reserves leaning towards nil and a debt increasingly heavy, the Government sees a steady reduction of any room for manoeuvre and as a response threatened of defaulting in its payment of external debt. Very likely event for Venezuela if the price happens to be lower than $70. Venezuela narrowly avoided default in 2015, thanks to loans granted by China and managed to meet the deadline of February 2016 ($1.5 billion. Two other and most important deadlines are coming up shortly, those October and November 2016 whereas Venezuela might be facing difficulty in meeting its commitment.
Yet despite all the above, salary increases, purchasing power being going down, poverty increasing and health system is deteriorating, unemployment rate exploding and the country also facing a certain rise in insecurity for it has within Latin America the highest homicide rate, the country is felt to nevertheless possess plenty to speak of in terms of potentialities. .
In summary, specifying that in the practice of business and politics there are no feelings, having regard to the strategic interests of Beijing in the country, China will come – will it help Venezuela?
Let’s not dream of utopia, any solution must be in essence internal, residing in a clear political will to Venezuelan power to deepen the comprehensive reform. In addition to oil reserves, the country having mineral and agricultural considerable resources. The country has an active civil society and above all a very good standard socio-educational system, good quality tourism and quite a resourceful human foundation for development, however perhaps an advantage in today’s underutilized by the current Government.
Subject to far-reaching structural reforms and an appropriate vision far from sterile populism that has led the country this far, reforms will necessarily move segments of power based on the semi-annuity related hydrocarbons, Venezuela has the potential to become an emerging country.
As for Algeria, it is a matter of not to renew the Venezuelan unfortunate experience of semi-bankruptcy economics. Leadership must avoid euphoric speeches but rather meditate the Venezuela’s ‘lesson-learned’.
Dr. Abderrahmane Mebtoul, University Professor, Expert International, firstname.lastname@example.org
The Guardian of May 20th, 2016 posted this article on the latest on Venezuela; we recommend its reading .
Three years of shortages have left Venezuelans desperate and angry for change, posing the most serious threat yet to President Nicolás Maduro