Venezuela’s Catastrophic Cash Crunch

Venezuela’s Catastrophic Cash Crunch

Although Venezuela’s protests continue, their intensity has diminished. As Venezuelans shift the attention back to the nation’s limp economy, many are asking themselves why the country is in such bad shape.

Venezuelans suffer high scarcity, rampant inflation (in March of this year alone, prices jumped 4.1 percent), and the IMF is forecasting the economy will shrink by 0.5 percent this year. The economic forecast is so gloomy that even the chavista president of the Central Bank had a difficult time sounding upbeat a few days ago.

But at first brush, this dreary outlook seems strange. After all, the price of oil is near historic levels, and in Venezuela crises usually blow up when the price of oil dips. Even if Venezuela basically produces just one thing, its sole export is treasured by markets and consumers the world over.

The answer is simple: Venezuelans are now paying for years of mismanagement that not even a high oil price can hide.

Before breaking down the numbers, it is worth noting that a sizeable portion of Venezuelan oil sales are not paid in cash. Thanks to a generous subsidy program known as Petrocaribe, Venezuela heavily subsidizes oil imports from several countries in the Caribbean, including (notably) Cuba, Jamaica, Nicaragua, the Dominican Republic, as well as many of the smaller islands in the basin. (In the photo above, state officials visit the late Hugo Chávez’s tomb before the opening of a Petrocaribe Summit in May 2013.)

Another significant caveat is that many of Venezuela’s oil sales to China also generate little in the way of funds. These shipments are part of a cash-for-oil deal signed by the late Hugo Chávez and extended by his hand-picked successor, Nicolás Maduro. The deal means that the money used to pay for these shipments has already been disbursed — and it has for the most part been spent in the form of Chinese-made appliances handed out to voters at bargain-basement prices in order to ensure Chávez’s victory at the polls in 2012.

Venezuela’s government is famously guarded about its economic numbers. Not even the country’s budget deficit is known for a fact, although most people consider it to be extremely high. In the absence of real numbers, a number of private actors have offered up estimates.

One of these is BBO, a local consulting firm. Citing internal government documents, BBO concludes that Venezuela produces roughly 2.8 million barrels of oil per month. When one subtracts the amount earmarked for the internal market (which generates practically no cash, since gasoline and other refined products are heavily subsidized), as well as shipments to Petrocaribe and China, the remaining amount — the only part that actually generates revenues at market prices — is a relatively paltry 1.3 million barrels per day. This amounts to income of some $130 million (assuming a generous price of $100 per barrel), which translates into around $910 million per week. Assuming a cost of production of $10 per barrel, this leaves the country with an optimistic estimate of roughly $800 million in weekly oil export earnings.

That would seem like a generous amount of money for a poor country, but it’s not enough when one compares it to Venezuela’s outlays. Venezuela has to pay a high interest rate for the loans it has taken out to cover its massive budget deficit; the rate Venezuelan loans pay is, in fact, among the highest in the world, as is the budget deficit. And since Chávez crippled local industry, Venezuelans have to import pretty much everything they consume.

According to Bloomberg, debt service for Venezuela this year will reach $13.3 billion, or roughly $255 million per week. This amounts to 32 percent of export earnings. Imports in 2012, the last year for which shortages were not considered severe, amounted to $60 billion. This is roughly $1.1 billion per week, 40 percent more than what the country earns in exports. When one factors in that Venezuela also has to use dollars to pay for capital transactions, firms wishing to repatriate profits, and so forth, it becomes clear that the government cannot afford the path it has chosen.

This is what risk agencies are looking at when they grade Venezuela’s ability to service its obligations. The country faces a scarcity of goods because the government cannot make ends meet. The reported backlog in approving foreign currency for multinationals is yet another symptom of a model that has run its course. The question that remains is what would happen to Venezuela if the price of oil were to dip below, say, $80 per barrel.

The inherent problems in Venezuela’s finances point to an economic model that has run its course. Venezuelans instinctively know this, and that is one of the main reasons why they remain in the streets, against most odds, hoping for a change.

Juan Nagel is the Venezuela blogger for Transitions, editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.