Investing & Day Trading Education:  Day Trading Academy

The Economic And Political Collapse Of Venezuela

Marcha_hacia_el_Palacio_de_Justicia_de_Maracaibo_-_Venezuela_16As the economy of Venezuela nears collapse, the leftist government of President Nicolas Maduro resolutely attempts to cling to power. The opposition would like to end the present regime through a referendum, while Maduro is going to court to block this effort. Meanwhile, the country is descending into chaos. The shortage of basic consumer necessities is becoming increasingly widespread and violence is spreading, as the citizenry becomes desperate.

Venezuela has is now one of the world’s most violent countries. Food riots and savage looting have become daily occurrences across the nation, as law and order begins to break down.

Supermarkets have become the symbols of a failed economic and political system. Customers often wait hours in line, only to find the vital cooking oil, flour, and rice, sell out before they are even allowed to enter the store.

Shortages in Venezuela leave store shelves empty.

Shortages in Venezuela leave store shelves empty.

In the cities, armed gangs and the poor wait until nightfall, to break into stores and also commandeer food trucks. As thugs and the hungry masses break into warehouses, the police are increasingly overwhelmed.

Security personnel have no choice, but to fire at the crowds, as rising numbers are taking matters into their own hands to provide for their families. A crime wave has now taken hold of the country, that keeps the citizenry locked behind closed doors at night.

President Maduro is asking the Supreme Court to reject the political opposition’s proposal to hold a referendum, to have him removed from office before his six year term ends in January of 2019. He does not seem to understand, that he has more to fear from the country’s angry streets, which have turned against his government.

The problem for the government is they are out of both answers and money, to provide the resources necessary to maintain a functional economy. The heavily subsidized food, fuel and medicine programs that made the socialists popular with the masses, are no longer serviceable. As consumer goods disappear from the store shelves, former supporters are growing progressively frustrated with the inept Maduro.

Nicolas Maduro, the current president.

Nicolas Maduro, the current president.

As all failed politicians do, Maduro blames the present economic woes on his enemies. He constantly accuses the opposition of hoarding food, in the attempt to provoke even more civil unrest. The President blames foes from a growing list of problems, both inside the country and abroad. Unfortunately for him, fewer citizens believe this rhetoric with each passing day.

Venezuelans are preparing for the worst, but still hoping a repeat of the 1989 Caracazo, known as the Caracas Disaster can yet be averted. At that time, hundreds of people died in riots and looting, caused by a fuel price increase during another economic crisis.

Imports are declining rapidly and local production is plummeting as well. Distortions throughout the economy have resulted in a breakdown with the supply chain. Years of government mismanagement of the financial system, industry and manufacturing, have undermined normal business practices and destroyed individual incentive.

Venezuela's historic inflation rate beside annual oil revenues.

Venezuela’s historic inflation rate beside annual oil revenues.

Venezuela is now facing the most serious economic crisis in all of Latin America. This is despite, the vast oil wealth that lies underground. Revenue from petroleum exports account for more than half of the country’s GDP (Gross Domestic Product) and about 95% of all exports.

The country has been the 5th largest producer of crude in OPEC (Organization of the Petroleum Exporting Countries).

From a historical view from the 1950s to the early 1980s, the economy of Venezuela experienced steady growth that attracted many immigrants and permitted a standard of living that was the highest in Latin America.

A collapse in oil prices followed, later that decade. The economy contracted and the government enacted a series of currency devaluations. Inflation ensued reaching levels of 84% in 1989 and a high of 99% in 1996. This was just three years before Hugo Chavez came into office.

In 2016, Venezuela had the highest annual inflation in the world. Venezuela is the country colored black in northern South America.

In 2016, Venezuela had the highest annual inflation in the world. Venezuela is the country colored black in northern South America.

In contrast, inflation in 2015 exceeded 200% and is expected to surpass 700% this year. It is higher than it has ever been before, and is now expanding at the fastest rate in the world. The projection for next year is a whopping 2,000%, unless the country changes its present course.

It has made the domestic currency known as the bolivar almost worthless, having lost over 99% of its former valuation in just four and a half years.

Under the incumbencies of both Hugo Chavez and his chosen successor Nicolas Maduro, businesses have abandoned Venezuela in droves. Just before their tenure in 1999, there were 13,000 companies operating inside the country. This year only about 4,000 of the total, still remain.

In response to the crisis, President Maduro has reorganized his economic cabinet in 2016. Of course, it is with people that are mostly leftist academics. So as expected, the country is doubling down on the policies that have led the economy to the present disaster. Their advice is to further tighten currency and price controls inside the country, which will only guarantee a further deficit of basic consumer goods.

When official prices are set below production costs, one cannot stay in business. It is no wonder that at the end of last year, the shortage rate of goods topped 70%.

Venezuela private sector nonpetroleum exports in millions of USD from 1997 to 2015. (Orange=Goods, Yellow=Services)

Venezuela private sector non-petroleum exports in millions of USD from 1997 to 2015. (Orange=Goods, Yellow=Services)

A return to economic normalcy, is impossible under the present circumstances. The imposition of a two day work week for government employees aimed at saving electricity and citizens waiting for hours in line for some basic food items, are just two examples of the unsustainable present direction undertaken by the President.

Companies both domestically and internationally are now being forced to close, because they can no longer procure the needed inputs to continue production. This includes, beverages, food, automotive and other sectors across a broad spectrum of manufacturing.

Recently foreign airlines have decided to cease operations with Venezuela, because they are no longer being paid.

In the last two years, Venezuela has experienced an implosion that a middle income country almost never goes through, unless as a result of a war. As one public service after another goes down, the impact on the populace is devastating. Mortality rates are rising fast, with over 70% of the population already in poverty. Children under the age of two are dying at an accelerated rate, because of a lack of basic nutrition, as well as inexpensive medicine and equipment. The same thing is happening to those that are elderly or suffering from chronic diseases.

Hugo Chávez, president from 1999 until his death in 2013.

Hugo Chávez, president from 1999 until his death in 2013.

The GDP contracted by 5.7% in 2015 and is expected to decline by an additional 10% this year. An outside observer may be tempted to blame what is occurring in Venezuela, on the rapid drop in international oil prices.

However, the evidence indicates otherwise. Although the declining income from crude has exasperated a desperate situation, it is important to note that there were already acute shortages of basic consumer items, back in 2014. Oil was still trading in excess of $100 USD at that time.

The real problem is the extreme socialist policies that were enacted by Hugo Chavez, since he first took office in February of 1999. After his death in 2013, these same principles were continued with his chosen successor Nicolas Maduro. His populist approach with the use of oil funds, makes the entire economy of Venezuela dependent on high oil prices.

As his brand of socialism known as chavismo took hold of the economy, an exodus of capital accelerated, as foreign investors began to abandon the country. In 2003, in an attempt to bolster the declining level of international reserves and provide support for the bolivar, the central bank suspended all trading in foreign exchange.

The government then went on to set up a currency control board, that would henceforth manage all transactions in foreign exchange. This made the conduct of business far more difficult inside Venezuela, as it became increasingly difficult to import needed inputs for manufacturing.1998_to_2013_Venezuela_Murder_Rate

The housing market shrank enormously at the same time, as developers watched company property be expropriated by the government. Soon the country had the weakest property rights globally, that equates to confiscation without compensation.

A shortage of housing became significant enough by 2007, that squatters began occupying public property in increasing numbers.

By 2010, the economy of Venezuela was in deep recession and has remained in a troubled state ever since, despite the periodic pronouncements of the government claiming otherwise.

In 2014, GDP declined an additional 3.0% and the economy has been in a downward spiral ever since. The country is now ranked as one of the worst to do business in and is at the top in the global misery index.

Chavismo has continued to be the ruling economic principle, despite evidence that this philosophy is totally destroying the Venezuelan economy. A wholly mismanagement of the economy has now been in play for almost two decades.

Despite the country receiving over $1 trillion USD in oil revenues over the last 17 years, much of the money was squandered through foolish investments and outright corruption. It has been estimated for example, some $200 billion USD has been stolen in food import scams since 2003 alone.

Number of kidnappings in Venezuela 1989–2011. Source: CICPC

Number of kidnappings in Venezuela 1989–2011.
Source: CICPC

The massive social welfare programs along with the increasingly inefficient bureaucracy, has contributed to the hyperinflation because the only way they can be funded, is for the government to print large sums of money. There is an overabundance of cash in supply, with a dwindling amount of goods to purchase.

Yet, the government continues to practically give away gas for free. It has resulted in a lively black market trade with neighboring countries, especially Colombia.

Drug traffickers are now in control over large swaths of the countryside, with the break down in law and order.

The cities including the capital Caracas, have become dangerous places were murders and killings have become commonplace, especially at night. Gang leaders now keep military style weapons on hand so confrontations with authorities, are almost guaranteed to be bloody and violent.

Schools in many communities have been robbed repeatedly, so they can no longer provide students with food throughout the day. Among the poor, students have been withdrawn from school, so they can stand in grocery lines so their parents are freed up to hold down jobs. A generation of underprivileged children, are now being denied education because of hunger.

The infrastructure is in a total state of disrepair in many areas, after years of neglect. As drought grips the nation, all the water and utility companies can do, is to institute strict rationing measures. Neighborhoods can go for days or even weeks without piped water. The Zika virus has made matters worse within the country, that is in no position to combat the disease.

Venezuelan Protest In Caracas.

Venezuelan Protest In Caracas.

Rolling electrical brownouts and now blackouts, effect the entire country including even Caracas now. The equivalent of hundreds of millions USD, have been invested in diesel and natural gas burning power plants since 2009. However, most of this new grid never came on line and the money has simply disappeared. More troubling, no one in Venezuela seems to be investigating the matter.

The IMF (International Monetary Fund) lists the country globally as having the worst economy,worst inflation and the 9th highest unemployment. Venezuela also has the distinction of the 2nd highest murder rate and an infant mortality rate at public hospitals, that is 100% worse than it was just four years ago.

The government of Nicolas Maduro has declared a state of emergency and warns citizens of the potential national and international threats to the country. In reality, these actions are doing little to combat the rising economic and political crisis engrossing the country. Fed by the unrest, the opposition swept into power last December. The government was successful in denying an absolute majority, by invalidating a number of representatives their electoral victories.

National Assembly of Venezuela building.

National Assembly of Venezuela building.

The legislature still moved forward in an attempt to recall Maduro. Such a referendum is permitted through the constitution. Over 1.8 million Venezuelans have signed a petition, to allow this national vote to take place. Knowing he would be forced from office if a referendum is permitted, Maduro is trying to prevent it from happening.

Last week, the National Electoral Council declared more than 600,000 signatures on the petition to be invalid. This has allowed President Maduro to announce, that there will be no referendum to remove him from office this year.

Timing is crucial in this matter. If a recall vote is held by January 10, 2017, there will be a new presidential election. If the referendum takes place after that date and Maduro loses, his vice president will fill out the remainder of his term.

Maduro’s control of the judiciary has so far blocked this constitutional maneuver. As democratic solutions have been bottled up, it merely adds to the frustration and anger of the populace. It is adding more fuel to the fire, in the rising political violence. If there is no way to resolve the impasse through an election, than increasing numbers of people feel, the only alternative would be an uprising to overthrow the government.

The most important question at this point, is what role will the military play in these events? Keep in mind, many of the officers and military leaders were put in place by the former President Hugo Chavez. Will they fire on the crowds of people who are in protest and rebellion in support of the government? Or will they determine that Chavismo has run its course and it is now time for a change? The Maduro government will never legitimately, be able to win another election. Can the military be farsighted enough to realize, that an era is ending regardless and the only question now is, how the final act will play out?

Post a Comment

Your email address will not be published. Required fields are marked *