Girish Gupta: Could low oil prices
end Venezuela's revolution?
In early September, the Harvard economist and former Venezuelan planning minister Ricardo Hausmann wrote an essay , published online at Project Syndicate, suggesting that there were sound economic reasons the country might choose to default on a debt payment of more than five billion dollars that was due to investors the following month. The government might thereby spread the challenges of economic recovery among other creditors, he argued. Already, Hausmann said, Venezuela had “chosen to default on thirty million Venezuelans” by failing to pay suppliers and allow importers access to hard currency, and by leaving its citizens short of basic goods and services. Currency controls enacted more than a decade ago have created shortages of basic products, including shampoo, diapers, and insect repellent. Supermarket lines have stretched for hundreds of metres, with thousands of people waiting to shop , and scuffles sometimes break out when products arrive. Annual inflation is at more than sixty per cent, and foreign reserves have fallen more than thirty per cent since January, 2013. Thanks to tight controls and high demand for hard currency, a black market has emerged on which the dollar sells for sixteen times the strongest official exchange rate.
Hausmann's piece, which was co-written with his Harvard colleague Miguel Angel Santos, helped to trigger a steep fall in Venezuelan bond prices, as investor anxiety over a potential default grew. Some international financial-press outlets stoked this anxiety by implying that Hausmann, in his provocative essay, had been predicting that Venezuela would default rather than arguing that it should default. President Nicolás Maduro went on state television to accuse Hausmann of being a “financial hit man” and a “bandit” who, along with other “savage capitalists,” had profited by fomenting rumors of impending doom in Venezuela. Hausmann responded to reporters for Bloomberg that Maduro's words were the “despotic diatribe of a tropical thug.” (Hausmann served as planning minister under former President Carlos Andrés Pérez. He was appointed to the position in 1992, immediately after a failed coup attempt by Maduro's predecessor, Hugo Chávez.)
A few weeks later, Hausmann told me he had not meant that Venezuela would actually default: “I said that the fact that they do pay is a default on everybody else and a sign of moral bankruptcy.” Indeed, Venezuela made its two debt payments in October in full and on time. The first, Maduro exclaimed on state television, was made “twenty-four hours early!” The second was made on Tuesday. In fact, Venezuela's socialist government has never failed to meet the country's foreign-debt obligations. In hindsight, it seems that a jittery market, fed in part by the press, read too much into the essay.
Since Hausmann wrote his piece, though, investors and Venezuelans have a new and very tangible reason to be concerned. In the essay, Hausmann listed many of Venezuela's economic problems, but he noted that they existed “despite a budget windfall from hundred-dollar-a-barrel oil.” Oil prices in recent weeks crashed to their lowest levels in four years, below eighty dollars a barrel; they currently hover just above that figure. This could be disastrous for Venezuela, which holds the world's largest crude reserves and earns ninety-six per cent of its foreign currency from oil. A one-dollar drop in international oil prices translates to around seven hundred million dollars of lost revenue a year. It may also pose a threat to Maduro's governance: his approval ratings are in the low thirties.
The price of oil has dictated Venezuela's politics for decades. In the nineteen-seventies, when prices trembled in response to the Arab–Israeli war, wealthy Venezuelans would make shopping trips to Miami, where they became known for the phrase “ Dame dos .” (“Give me two.”) By the mid-eighties, a major global oil glut had emerged, crippling the country's economy. Authorities imposed austerity measures that sparked major unrest. In 1989, violent protests in Caracas known as the Caracazo led to hundreds of deaths. The austerity measures also pushed a young Chávez to lead a coup attempt three years later. Though he was unsuccessful, it made him a household name and helped to launch him to the Presidency, in a landslide election victory in 1998.
Chávez understood that this revolution would depend heavily on high oil prices. One of his first acts as President was to travel to the member nations of the Organization of the Petroleum Exporting Countries, and to invite the cartel's heads of state to Caracas in 2000 for their second-ever summit. His aim was to have OPEC restrict oil supplies, in order to bring up prices, and he spared no rhetorical flourish to that end. His closing speech was littered with references to Islam, and he compared the gathering to Napoleon Bonaparte's arrival in Egypt in 1798, when Bonaparte reportedly told his soldiers, “From the heights of these pyramids, forty centuries of history look down upon us.”
Chávez's lobbying boosted prices upward by about a third over the following months, a rally that was soon compounded by the 9/11 attacks on the United States. The wars in Afghanistan and Iraq helped to continue the steady rise, save for a blip during the 2008 financial crisis. The increased prices allowed Chávez to take steps to improve poor Venezuelans' access to health, education, and housing. But many questioned the long-term sustainability of his policies, which have been underwritten, in addition to high oil prices, by agreements with China to swap future oil output for loans. “Chávez had the proverbial seven fat years and ate the grain plus some future supply by pre-selling oil to China,” Michael C. Lynch, the president of the Strategic Energy and Economic Research consultancy in Amherst, Massachusetts, and an occasional adviser to OPEC , said. “The coming lean years promise to be very dire indeed.”
Leanness was already setting in toward the end of Chávez's fourteen-year rule, and it has defined Maduro's Presidency since his election in April, 2013. Earlier this year, Maduro faced the biggest anti-government unrest the country has seen for a decade, but, even so, he denies that Venezuela is yoked to global oil prices. “The price of oil can go down to forty dollars a barrel and I guarantee to the people all of their rights: for food, education and life,” he said on state television in mid-October, adding that he expected oil prices to rise again. OPEC , however, does not seem keen to cut output. By maintaining low prices in the short term, it hopes to undercut shale producers, whose extraction method is costly but whose output has grown in the United States and elsewhere. Following in Chávez's footsteps, Maduro has called for an emergency OPEC meeting, but the request has been ignored.
Economists have long recommended that Venezuela cease price controls, unify its multiple exchange rates —the local currency is pegged to the U.S. dollar at three different levels—and end its heavy gas subsidies. Prices at the pump here are the cheapest in the world; it costs just a few cents to fill up an entire tank, at an opportunity cost to the government of some twelve billion dollars per year. But Maduro has so far shied away from pragmatic policies; he has tried instead to play to his base of support. Officials regularly appear on state television in a shop or factory decrying “usury” and “speculation” by owners. And, in September, one of the country's most powerful pragmatic voices, Rafael Ramírez, lost his positions as oil minister, head of the state oil company, and vice-president for the economy (though he is now the foreign minister). Meanwhile, domestic oil production has been falling: it's now at around two and a half million barrels per day, two-thirds what it was when Chávez came to power. Compounding the decline, some of that oil is being sold at below market price, thanks to accords struck by Chávez with Cuba and other Caribbean nations.
Serious concern remains that Venezuela will eventually default on some of the more than seventeen billion dollars it is due to pay in the next three years, or that its economic problems will lead to political crisis. Many industries, from airlines to pharmaceuticals to small retailers, are fighting for a limited supply of hard currency in Venezuela, which means that, so long as the current climate prevails, the country will be presented with decisions about whom to pay. “The problem in Venezuela is that they're playing a game of musical chairs, and there aren't enough chairs for all the players,” Hausmann told me. “My piece clarified to Wall Street the magnitude of the musical chairs.
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