Checking in on Venezuela: Past, Present, & Future Woes
While Maduro’s power yet remains intact, sanctions imposed by the U.S. and countries around the world prohibit investment, further exacerbating Venezuela’s ability to undergo a successful restructuring in light of such conditions.
Venezuela’s path towards economic recovery is riddled with plenty of obstacles which continue to multiply. Venezuela’s struggle to recover is deeply encumbered by its political strife. Nicolas Maduro, remains in power despite Juan Guido’s – Speaker of the Opposition Party – attempt to rise to power after proclaiming himself rightful President in 2019. Guido is recognized as the sitting President by over 50 countries including the U.S. However, China and Russia recognize Nicolas Maduro, inviting further uncertainty as larger, established powers vie for power and influence through Venezuela as a proxy. Corruption, rigged elections, heavy money-printing, and deficit spending have lent themselves to a sovereign debt crisis whereby sovereign bonds are worth pennies on the dollar, a consequence of resultant hyperinflation.
While Maduro’s power yet remains intact, sanctions imposed by the U.S. and countries around the world prohibit investment, further exacerbating Venezuela’s ability to undergo a successful restructuring in light of such conditions. To complicate matters, an obscure clause has recently been identified in all sovereign bonds issued from 2005 onward, and this unforeseen caveat could cost unwitting creditors billions. The ‘Prescription Clause,’ as it is referred to, forfeits Venezuela’s responsibility to repay accrued interest following three years of default should creditors neglect to pursue legal action within that period. While this applies to accrued interest exclusively, as opposed to repayment of principle, this clause could still result in billions in losses for creditors, the majority, if not entirety of whom were previously unaware of this clause.
In the first month of 2020, Maduro issued another increase to the minimum wage, an inconsequential step towards ameliorating the nation’s economic plight. Situated within Venezuela’s borders are enormous supplies of oil, yet the country is experiencing a challenging bout with hyperinflation, which has soared to 4,900% over the past year as measured by the Bloomberg ‘Cafe Con Leche’ Index. Despite increasing minimum wage by a magnitude of 67% in January – the eleventh increase in the past two years – the standard of living for those who remain in the country has fallen further.
In simpler terms, as inflation continues to rise, the gains made from such increases are quickly thereafter trumped by increasing consumer prices. The last raise to minimum wage occurred in October of 2019, when a month’s work could buy 9 pounds of beef. Fast-forward to the present, and a month’s work can buy just over 2 pounds. Many Venezuelans lack faith in the ability of their government to deliver development and growth, underpinning a mass exodus of 4.5M people as of late 2019: a figure that is projected by the Organization of American States (OAS) to reach between 8 and 9 million this year. With numbers approaching those from Syria, mass migration from Venezuela has sewn the seeds for a new migration crisis as neighboring countries such as Colombia struggle to support the influx of people.
The central question must be whether Venezuela can recover from hyperinflation or if a new, stable regime will be required. According to Rodrigo Zeidan, Associate Professor of Practice of Business & Finance at NYU Shanghai, “the authority that destroyed an economy to the point of hyperinflation can rarely oversee a return to normalcy.” He continues, “Hyperinflation can only happen when trust in public authorities is gone.” Central governments frequently borrow from their constituents and foreign investors by issuing bonds. While government bonds are widely considered the safest fixed-income security, they lose their value if trust in the issuing government is lost. Should a government lose its ability to issue debt, the central bank will turn to printing currency, which produces hyperinflation when coupled with loss of trust and public deficits.
For this simple reason, a country can only recover from hyperinflation if it can regain public trust. In January, news broke that President Maduro was considering selling shares of the state-owned oil company, Petróleos de Venezuela SA, as a means to aid recovery. This would be an unprecedented course of action for Venezuela, whose Socialist political structure has long favored state-owned enterprise. Partial privatization of PVSA, however, could not be considered a solution to Venezuela’s political instability, humanitarian issues, or insurmountable debt. Instead, this represents an effort on behalf of the Maduro government to restore trust in the regime. In light of its aforementioned plethora of crises, it remains unlikely that such a demonstration will restore any level of trust in the Maduro regime. While past governments have successfully demonstrated that recovery is possible, these examples are few and far between. If the Maduro government has any hope of restoring trust, it must pursue more dramatic gestures.
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