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Venezuela:
How an oil rich country went bust and
a roadmap to get it back on track
November, 2016
http://growthlab.cid.harvard.edu/venezuela
How did we get here?
3
16.2
26.0
20.2
22.0
25.7 32.6
45.3
56.4
64.6
86.8
56.9
71.6
101.0
103.5
101.2
88.4
44.7
29.2
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
ener
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-99
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(dó
lare
s p
or
bar
ril)
Venezuelan oil basket (current US dollars)
November, 2016 CID Speaker Series
Between 2004-2014, Venezuela enjoyed the longest and largest oil
bonanza in its history
November, 2016 CID Speaker Series 4
In a typical pro-cylical fashion, financial markets were willing to
lend massively over the boom, Venezuela went ahead and
multiplied foreign debt five-fold in 6 years
Venezuelan Foreign Debt (1998-2012, current US dollars, billions)
November, 2016 CID Speaker Series 5
Debt was hired away from the Central government:
PDVSA increased its debt 15X in 8 years
Producción de petróleo, deuda financiera e inversiones EyP (2006 - 2015)
Oil production, Financial debt and Exploration investments (2006-2015)
November, 2016 CID Speaker Series 6
Debt hired away from the Central government: China-Venezuela
Fund (FCCV)
• FCCV loans total US$54.000 (no inventory of projects or reports on use of proceeds)
• Long term projects (in the best case) financed with short-term oil shipments
• FCCV loans come in a mix of US$ and remimbi, forcing Venezuela to import from China
34,766
116,181 110,533123,966
103,607
150,279
193,144
347,829
2008 2009 2010 2011 2012 2013 2014 2015
ServiciodedeudaaChina(barrilespordíaequivalente)
3,200
5,259
11,899
21,829
23,374 23,579
21,887
25,512
1,1012,413 2,889
4,5703,914
5,5516,232
5,675
0
5,000
10,000
15,000
20,000
25,000
30,000
2008 2009 2010 2011 2012 2013 2014 2015
SaldoDeudaFondoConjuntoChina-Venezuela(FCCV(millonesdedólares,2008-2014)
Saldodeladeuda Serviciodedeuda
November, 2016 CID Speaker Series 7
And leveraged these to promote a consumption boom that did not
have a counterpart in production
GDP, private and public consumption (per capita, 1997=100)
Private consumption Public consumption GDP
0.0%
1.9%
2.3%
November, 2016 CID Speaker Series 8
In parallel the State gradually increased its control over the
supply of goods, both through means of production and imports
CAGR::
Public GDP: 3,9%
Private GDP: -0,6%
From 2006 onwards,
the State increased its
role as an importer
going from a 15%
share to 50%
Evolution of Private and Public GDP (Base
2006=100)
Imports of Goods: Public and Private (Quarterly, US$ Millions)
November, 2016 CID Speaker Series 9
In spite of the massive oil bonanza, the public sector
accumulated double-digit fiscal deficits
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
% o
f G
DP
Consolidated Public Sector Primary and Financial balance (% of GDP)
Primary balance Financial balance
November, 2016 CID Speaker Series 10
Massive dollar inflows coming from oil and foreign debt were
used to finance a spectacular increase in imports
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Venezuela:ExportsandImportspercápita(constant2015US$)
Exportsrealpercapita Importsrealpercapita
November, 2016 CID Speaker Series 11
And massive capital flight (in the middle of an exchange control)
7,117
4,997
2,332
1,578
-865
-2,487
5,451
5,631
4,393
1,743
-1,533
5,425
5,426
3,840
8,764
9,137
5,958 8,
635
13,068
13,359
5,041
11,352 14
,647
8,961
20,984
23,491
26,132
22,187
20,491
12,515
8,872
9,807
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Capitaoutflows(constantUS$2013million)Capital outflows
(constant million US$ 2014)
November, 2016 CID Speaker Series 12
Large consumption boom fueled by imports financed
with oil and foreign debt halved poverty levels
% of Population under the poverty line 1989-2015
November, 2016 CID Speaker Series 13
However, the end of the oil boom exposed the economic model’s
shortcomings whilst accelerating the economy’s deterioration
16.2
26.0
20.2
22.0
25.7
32.6
45.3
56.4
64.6
86.8
56.9
71.6
101.0
103.5
101.2
88.4
44.7
31.2
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Enero-99
Julio-99
Enero-00
Julio-00
Enero-01
Julio-01
Enero-02
Julio-02
Enero-03
Julio-03
Enero-04
Julio-04
Enero-05
Julio-05
Enero-06
Julio-06
Enero-07
Julio-07
Enero-08
Julio-08
Enero-09
Julio-09
Enero-10
Julio-10
Enero-11
Julio-11
Enero-12
Julio-12
Enero-13
Julio-13
Enero-14
Julio-14
Enero-15
Julio-15
Enero-16
(dólaresporbarril)
CestaVenezolana(dólarescorrientes)
Venezuelan oil basket (current US dollars)
• Collapse in imports
• Collapse in production
• Fiscal deficit and monetary financing
• Acceleration of inflation
• Acceleration of poverty
Five symptoms
November, 2016 CID Speaker Series 15
Venezuela spread had been significantly higher than LATAM since
the financial crises, but once oil prices started to fall it
skyrocketed
Venezuelan and Latin American risk spreads (basic points)
November, 2016 CID Speaker Series 16
In 2015, amidst a 50% drop in oil prices, Venezuela chose to cut
its imports by 21% and extinguished a large portion of its foreign
assets
2015 External Accounts (US$ billions)
37.1
Exp
ort
s
47.5
Imp
ort
s 2
01
4
12.5
Serv
ices
0.4
Ren
t (o
ther
s)
6.2
Inte
rest
5.4
Am
ort
. C
hin
a
9.8
Fall
in
Imp
ort
s
5.0
Ch
ina
FCV
4
3.7
Des
cue
nto
Deu
da
Oil
2.0
Deu
da
CIT
GO
6.0
Am
ort
.
4.0
Ch
ina
FCV
2
6.7
Liq
uid
ació
n d
e o
tro
s ac
tivo
s
Res
erva
s líq
uid
as
3.0
2.7
SDR
IMF
3.5
Go
ld s
wap
4.0
November, 2016 CID Speaker Series 17
By the end of 2015, Venezuela’s foreign reserves reached an 18-
year minimum and the country lacked any stabilization funds
International Reserves
November, 2016 CID Speaker Series 18
During 2016 the main adjustment mechanism carried out by the
government to tackle foreign currency deficit was massive import
cuts
• The estimated imports level for
2016 laid out by the government
is US$ 21 billions
• If such figure is achieved, real
imports per capita would drop
46% with respect to 2015 and
71% with respect to peak year
2012
• The drop in imports has been
more pronounced in intermediate
goods and raw supplies, which
have de facto halted production in
the national economy
• Oil imports are far more inelastic,
dropping “only” 25%, which
translates into an even larger drop
in private imports (50%)
914
988
977
979
1,036
1,322
741641
894
1,065
905
643
871
683
900959
801
9701,068
712
539
832
1,115
1,496
1,9882,081
1,595
1,566
1,886
2,291
1,927
1,563
1,211
654
250
750
1,250
1,750
2,250
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Importacionespercápita(dólaresrealesde2016)Imports per capita
(US$, real)
Government goal for 2016
• Collapse in imports
• Collapse in production
• Fiscal deficit and monetary financing
• Acceleration of inflation
• Acceleration of poverty
Five symptoms
November, 2016 CID Speaker Series 20
PDVSA increased it’s debt stock X15 while keeping its investments on
exploration and production constant = a significant decrease in oil
production
Producción de petróleo, deuda financiera e inversiones EyP (2006 - 2015)
Oil production, Financial debt and Exploration investments (2006-2015)
November, 2016 CID Speaker Series 21
PDVSA was significantly burdened to finance non-oil activities,
social programs and extra-budgetary discretional spending
Fiscal burden on PDVSA as a % of GDP (2010-2014) PDVSA transferred US$
$83 billions to the extra
budgetary fund “FONDEN”
November, 2016 CID Speaker Series 22
During the years of oil boom the economy underwent a massive
switch from tradables to non-tradables: No alternative sources of
foreign exchange
297.7%
233.6%
56.0%
43.5%
21.4%
14.6%
13.9%
8.2%
2.5%
-9.0%
-14.4%
-35.0%
-47.2%
-1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5
Institucionesfinancierasyseguros
Comunicaciones
Serv.comunitarios,soc.ypersonales
Produc.serviciosdelGobiernoGeneral
Electricidadyagua
Comercioyserviciosdereparación
Serviciosinmobiliarios
Construcción
Transporteyalmacenamiento
Agricultura,resturantesyhoteles,otros
Manufactura
Actividadpetrolera
Minería
Tasadecrecimientopercápita2000-2015Trad
eables
No
n-trad
eables
Growth rate per capita 2000-2015
November, 2016 CID Speaker Series 23
Even the most incipient productive capabilities, alternative to oil,
have disappeared
1998 Product Space Venezuela (RCA>0.2)
2014 Product Space Venezuela (RCA>0.2)
• Collapse in imports
• Collapse in production
• Fiscal deficit and monetary financing
• Acceleration of inflation
• Acceleration of poverty
Five symptoms
November, 2016 CID Speaker Series 25
Large fiscal deficits persisted…
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
% o
f G
DP
Consolidated Public Sector Primary and Financil balance (% of GDP)
Primary balance Financial balance
November, 2016 CID Speaker Series 26
The worsening deficits gradually dried most financing sources
and increased dependence on deficit monetization
0
5
10
15
20
25
2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015*
% o
f G
DP
Fiscal deficit and monetary financing (% of GDP)
Fiscal deficit (-Financial balance) Central Bank Financing
• Collapse in imports
• Collapse in production
• Fiscal deficit and monetary financing
• Acceleration of inflation
• Acceleration of poverty
Five symptoms
November, 2016 CID Speaker Series 28
Deficit monetization led to a strong acceleration of inflation
(official figures)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
De
c-0
8
Mar
-09
Jun
-09
Sep
-09
De
c-0
9
Mar
-10
Jun
-10
Sep
-10
De
c-1
0
Mar
-11
Jun
-11
Sep
-11
De
c-1
1
Mar
-12
Jun
-12
Sep
-12
De
c-1
2
Mar
-13
Jun
-13
Sep
-13
De
c-1
3
Mar
-14
Jun
-14
Sep
-14
De
c-1
4
Mar
-15
Jun
-15
Sep
-15
De
c-1
5
Evolution of National Index of Consumer Prices (YoY price increase)
November, 2016 CID Speaker Series 29
During 2016, the price of staple goods has been increasing at a
monthly rate of 24%, which is equivalent to 1237% annually
Monthly inflation for basket of staple goods (January 1st to September 30th 2016)
• Collapse in imports
• Collapse in production
• Fiscal deficit and monetary financing
• Acceleration of inflation
• Acceleration of poverty
Five symptoms
November, 2016 CID Speaker Series 31
High inflation has eroded the purchasing power of households
Evolution of Real Wages (Constant 2015 Bs.)
November, 2016 CID Speaker Series 32
Where does the Venezuelan average monthly wage in US$ stand
within the LATAM context? You choose
359 347
217 215 203
140 120
55
0
100
200
300
400
500
600
700
800
900
1000
Guatemala Chile Peru Brazil Colombia Vzla @650 Mexico Vzla @1650 Vzla @10
USD
pe
r m
on
th
2016 Monthly Minimum Wage
$9,081 per month!
November, 2016 CID Speaker Series 33
According to independent surveys, between 2014 and 2015, all the
advancements in the reduction of poverty have reversed
% of Population under the poverty line 1989-2015
November, 2016 CID Speaker Series 34
The crisis has its origin in the imposition of model of social
domination, where the State substitutes the market as a
mechanism of social organization
Examples
• Oil and derivatives • Agroindustry • Processed foodstuffs • Gold, iron ore, aluminum
The State produces
• Exchange rate • Differential interest rates • Public credit
The State assigns
resources
• Price controls • Import controls • Mobilization guides • Strict labor laws
The State controls
State substitutes the market as mechanism of social organization
How to get back on track?
November, 2016 CID Speaker Series 36
The technical solution: Main elements of a new policy
framework
Reestablish market mechanisms
Substitute indirect subsidies for direct
subsidies
Reestablish sustainable international finance Curb deterioration of oil industry
• Unify exchange rate
• Liberalize price and interest rate controls
• Privatize small and medium SOEs in the short
term & regulate larger ones
• Secure international financial assistance (IMF
exceptional access, WB for structural reforms
and budget support, IDB and CAF for projects)
• Reprofile debt and address arrears (CACs for
CG, Bankruptcy protection for PDVSA, China
renegotiation, Tax credit for commercial debt)
• Reestablish credit lines (EximBanks, Bilateral)
• Launch new oil policy with corresponding
regulatory changes
• Revamp relationships with JV partners and
service providers
• Audit finances, optimize expenditures and
review cooperation agreements
• Reform regressive indirect subsidies
(Gasoline, electricity, water, gas, telecom, food
and medicine)
• Improve provision of public goods
• Supplement income through direct subsidy
systems (i.e.: electronic transfers)
What are the adaptive challenges?
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Venezuela oil production (1965-2015)
OIl production (MBD) Oil production per capita (MBY)
Oil is not what it used to be…
Venezuela has been stagnant since 1977: One of the most
spectacular growth failures turn itself into a growth
nightmare
50
70
90
110
130
150
170
190
210
230
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Venezuela:GDPpercapita1950-2015(1950=100)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1975 1982 1988 1990 1992 1995 1997 1999 2000 2001
Años
Population segmented by income
High income Middle class
Poverty Extreme poverty
As income per capita collapsed from 1977 onwards,
poverty levels rose from low 30% to 70%
Venezuela is not going to export its way out of this crisis
Too many claims on too little resources:
– Foreign financial debt – Commercial debt – ICSID demands – Social debt!
Need of a new social contract:
What does the State does for its citizens…
and what the citizens do for the State and for themselves
Reform will take place within the context of:
– large institutional destruction and State fragmentation – significant social unrest and chaos – some characteristics of failed state
November, 2016 CID Speaker Series 41
The adaptive challenges
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