harvard cid speaker series: "venezuela: how an oil rich country went bust and a roadmap to get...

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

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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)


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)


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


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%


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)


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


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


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)


Large consumption boom fueled by imports financed

with oil and foreign debt halved poverty levels

% of Population under the poverty line 1989-2015


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


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)


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

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ices

0.4

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t (o

ther

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rest

5.4

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hin

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9.8

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in

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ort

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ina

FCV

4

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cue

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da

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ina

FCV

2

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s

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erva

s líq

uid

as

3.0

2.7

SDR

IMF

3.5

Go

ld s

wap

4.0


By the end of 2015, Venezuela’s foreign reserves reached an 18-

year minimum and the country lacked any stabilization funds

International Reserves


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






Five symptoms


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)


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”


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


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)






Five symptoms


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


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






Five symptoms


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

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c-1

1

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-12

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-12

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-12

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-13

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-14

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-15

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-15

De

c-1

5

Evolution of National Index of Consumer Prices (YoY price increase)


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)






Five symptoms


High inflation has eroded the purchasing power of households

Evolution of Real Wages (Constant 2015 Bs.)


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!


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


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?


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


The adaptive challenges

harvard cid speaker series: "venezuela: how an oil rich country went bust and a roadmap to get...

Economy & Finance