Venezuela used to be considered one of the future powers of the world when its economy peaked in the late 1970s following an oil-driven gold rush. But following decades of oil gluts, shortages of food and healthcare, and continuous political turmoil, the failing country’s future tells a frighteningly different story. Venezuela, once a rising powerhouse, can now simply be described as a country in crisis. Let’s use our financial fluency tools to take a closer look.
How did Venezuela get here?
Venezuela was not always a country in crisis. In fact, it underwent one of the greatest economic booms of any country in the world when it discovered local oil deposits during World War I. Under the rule of Juan Vicente Gómez, Venezuela’s economy skyrocketed as the country turned from a largely agriculturally-centered exporter to one of the world’s greatest oil suppliers. Venezuelan farmers traded in their coffee and cocoa baskets for machinery capable of drilling into the newfound oil reserves. The country showed its immense potential when in 1935, it had the highest GDP per capita of any Latin American country.
Although Venezuela’s economy rose to stardom in a short time, it fell back to reality almost as quickly. The next several decades were marred by coup d’etats and inconsistent economic turns. The 1973 Oil Crisis and its ensuing oil price hikes lead to a massive boost in Venezuela’s income which in turn increased public spending along with external debts.
This set the stage for the beginning of the end for Venezuela as the oil glut of the 1980s forced its economy into a tailspin. Oil prices fell historic amounts causing Venezuela’s growing debt to near default status. The government continuously printed more money which in turn decreased the value of the currency and drastically rose inflation, which even surpassed the 100% mark in 1996! To put this in perspective, US inflation currently ranges around 2% while virtually never crossing the 20% threshold even during historic times of economic depression. By 1998, GDP per capita fell from its perch as number one of all the Latin American countries all the way down to pre-1963 amounts.
Continuous economic crises and political turmoil in the 1990s eventually lead to the election of Hugo Chavez as the Venezuelan president in 1998. As one of the leaders of the Bolivarian Revolution, a liberal, populist, socialist movement, Chavez aimed to build a country centered around democracy and economic prosperity through the equal distribution of revenues and immediate crackdown on political corruption. Chavez’s presidency further hurt the economic conditions in Venezuela as he, like many of his predecessors, entrusted the economy of a country in crisis around its most valuable asset yet eventual downfall: oil.
Oil as the root of all evil
Although Venezuela’s history is cluttered with political turmoil and economic unrest, the core of all its problems can be boiled down to one natural resource: oil. Oil is the commodity that rose Venezuela from the trenches of poverty, but it is also serves as its golden apple of tragedy that has pushed the country into even darker times than its poverty-ridden cocoa and coffee years. Let’s inspect further as we attempt to expand our financial fluency toolbox.
Venezuela suffers from something called “Dutch Disease” which is a term coined to a country that relies almost solely on the growth of one resource. By pushing one specific sector, like Venezuela with oil, the country is in turn causing a decline in its other sectors. Therefore, while revenues increase in this sector due to its high exportation and demand, the country’s exchange rates for its currency also increases. However, this increase in exchange rate due to the sheer production of one single resource, like oil, causes other exports to rise in price and imports to conversely decrease in price. In simple supply and demand terms, this lessens competition between these other sectors. Other countries will not purchase the other goods due to their high prices relative to the world, and Venezuela is stuck relying heavily on imports while only exporting a single good: oil.
The impact that Venezuela’s extreme reliance on oil has had on its economy has only gotten worse in the past several years. Rather than save some of the profits that its booming oil industry was taking in, Chavez spent countless dollars on social welfare programs such as funding free healthcare and educational scholarships to the poor. Although these policies helped in the short-term, they quickly proved unsustainable as Venezuela fell deeper into an economic crisis.
Although Venezuela still holds the largest oil reserves in the world, its production has declined year over year. This past January, Venezuela’s oil output fell to its lowest level in 30 years at 1.6 million barrels per day. This is down more than 20% from last year.
Due to its heavy reliance on oil, crude oil accounts for 95% of Venezuela’s exports with no other source of foreign income.
However, the country’s government and top oil-producing companies have been overridden with corruption causing a massive dip in production.
Along with its oil crisis, Venezuela is being overwhelmed a growing debt problem. In 2007, Venezuela’s fiscal deficit made up 2.8% of its GDP. In 2012, this number ballooned to 16% and continues to grow. To put this in perspective, the world’s worst economies, such as Greece, have a fiscal deficit around 8% of GDP. The nation’s total GDP fell 14% in 2017 and is projected to fall another 15% this year. Inflation surpassed 100% in 2015 and is now projected to pass, yes this is a real number, 13,000% by the end of 2018, with unemployment nearing 30%. The country has already increased its minimum wage three times this year to deal with the devaluation of its currency. Global credit rating agencies have declared Venezuelan debt to have defaulted as the world’s growing pessimism towards the country increases.
In addition to an ongoing oil crisis and a historically bad debt problem, Venezuela also has food and hospital shortages. Rather than fund food and medical campaigns in the country, President Nicolás Maduro decided to pay back massive loans to China and Russia first. The country relies almost entirely on its food imports since its massive oil boom caused many domestic farms to shut down. But with a failing economy, there are extreme food shortages since the government literally does not have enough money to feed its 30 million residents. And besides basic food, its medical shortage is even worse. Infant deaths jumped 30% in 2016 to 11,500 and Malaria cases alone jumped 76% to 240,000 cases. More than 750 women died during childbirth complications in 2016, a 76% increase from the year before. The food shortages extend to the patients who are left without sufficient rations, nor access to basic medical devices like X-rays, CT scans and sometimes even basic electricity.
Even with continued crises, Venezuela has no signs of turning around. Maduro’s corrupt hold on Venezuela’s economy is only getting stronger as he is preventing any opposition from running against him in the upcoming election. He has continued to attempt to dissolve the country’s National Assembly, the only form of democracy it still holds. Secretary of State Rex Tillerson has publicly said that it is currently considering a ban on all Venezuelan crude oil exports while President Trump has denounced Maduro as a dictator. Protests are become increasingly more violent by the day as millions of Venezuelans continue to flee the country. For a country that once sat atop the Latin American rankings as one of the most oil-rich countries in the world, Venezuela has seen a historical fall from grace. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.