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Inside, confidential and off the record


A third way?

Venezuela's crisis: is there a third way?


With Venezuela's government apparently hell bent on steering the country down an accelerating course to disaster, many analysts predict one of two catastrophic outcomes.

Either its leaders will be forced into default on what many regard as the country's unpayable debts, tipping it deeper into chaos and civil strife; or they will somehow cling to power, postponing the day of reckoning and storing up even more intractable problems for the future.

Moderates in Caracas believe default can be averted, if only politics will allow

It is an extraordinarily grim choice for the country with the world's biggest proven hydrocarbon reserves and is testimony, many say, to years of economic and political mismanagement.

There may, however, be a third option — one that though unlikely could represent one of Venezuela's last chances to remain solvent.

A delegation of moderate politicians and economists is visiting the UK and the US this month hoping to convince bankers, investors and others that default is neither inevitable nor desirable.

“Default makes no sense,” says Orlando Ochoa, an independent economist and consultant based in Caracas. He is leading the initiative together with Henri Falcón, a state governor and former member of the ruling PSUV party who broke with the late president Hugo Chávez in 2012. He has been mentioned as a compromise successor to Nicolás Maduro, the current president.

Their challenge is immense. The crisis has exacerbated Venezuela's bitter political divisions. Basic goods from milk to medicines cannot be found. Unemployment and violent crime are rampant. Tensions are near breaking point.

“We are at risk of civil war if we cannot find an exit from the crisis,” says Mr Falcón. “There is very little room for manoeuvre.”

Yet despite the possibility, in the words of Russ Dallen of investment bank Latinvest, that Venezuela will become “the first Somalia-like failed state of the 21st century”, the government still has a tight grip on power.

“The chavistas have no place to go and they will hold on for as long as possible,” Mr Dallen says.

The hope for Mr Ochoa and Mr Falcón is that they can secure enough promises of outside support to persuade dissident chavistas , of which there are many, to join the opposition in a government of national unity.

Their plan is to save the country from default by increasing hydrocarbon production, securing the necessary investment from multilateral institutions and trading partners such as China.

Underlying the plan is a conviction that default would be not only catastrophic but unnecessary. Venezuela has the biggest oil reserves in the world: 298.3bn barrels at the end of 2013, according to the BP Statistical Review . At $50 a barrel, just half of that oil could be sold for $7.5tn.

With total debt of about $44bn including $30bn in bonds, PDVSA, Venezuela's national oil company, is much less indebted than, say, Brazil's Petrobras, which has debts of $125bn and reserves about a 20th of the size of Venezuela's.

But while Petrobras is mired in corruption amid a collapsing economy, Brazil's problems pale next to Venezuela's.

Inflation, says Mr Ochoa, was 355 per cent in the year to March — and that is based on official prices, not on what people must pay for goods they cannot find on supermarket shelves.

“This is the beginning of the process of hyperinflation,” he says. By September, the rate of inflation will have doubled, despite government efforts to control it by holding down nominal wages, a method Mr Ochoa describes as “extremely cruel”.

Already, he says, three-quarters of Venezuela's population are living below the poverty line and of those, more than half are in “extreme” poverty, meaning they do not have enough money to buy food to survive. The number living in poverty trebled between 2012 and 2015.

“The speed at which the damage is being done is enormous,” he says.

Time, in other words, is running out.

Yet time is what Venezuela needs. Mr Ochoa says two years will do: enough to increase production at PDVSA from today's level of about 2.7m barrels per day to about 3.1m bpd by September 2018, recovering the amount of production lost over the past four years.

At March 2016 prices, he says, this would deliver an extra $5.8bn a year, enough to service PDVSA's debts.

Mr Ochoa says that by restarting inactive wells and other measures, by 2021 production could be restored to 3.5m bpd, a level last seen in 1998.

This, he says, would require annual investment of $15bn-$20bn, less than the average of more than $30bn a year spent to little effect under PDVSA's investment plan for 2012 to 2015.

He contends that a credible plan and an “organised political transition” could allow a new government to “secure around $37bn from multilateral and bilateral institutions, including the export/import banks of Venezuela's trading partners.”

China's role would be key. Kevin Gallagher and Margaret Myers of the Inter-American Dialogue's China-Latin America Finance Database say Beijing has extended $65bn to Venezuela since 2007 in 17 separate loans. Some are being repaid in oil and are linked to contracts for Chinese oil service companies. Beijing clearly would have an interest in any plan to revive output at PDVSA.

Mr Ochoa insists his plan can work, but only if Venezuela's macroeconomic fundamentals are fixed too.

“If we get the funding, we can fix the foreign exchange regime in six months,” he says. “For that, you need fiscal discipline. But I am confident Venezuela can achieve that.” He notes that from 1924 to 1974, Venezuela had average annual inflation of 1.4 per cent.

Mr Dallen is more cautious. He believes the government will try to resist growing calls for a recall referendum against Mr Maduro until next year, a manoeuvre that would enable the chavistas to remain in power under a new president.

The best chance of success for Mr Ochoa's plan may be that the government simply cannot last that long.

“Things are rapidly spinning out of control,” says Mr Dallen. “That's the wild card.”

Mr Ochoa says continuing to muddle through will soon cease to be an option. He fears the country will be tipped into default, chaos, a $40bn-$50bn rescue package from the International Monetary Fund and other multilaterals and the conditionality that would go with it — which he says would meet with flat rejection in Caracas.

Under Mr Ochoa's proposal, Venezuela would still hope to count on the IMF for about $7bn. But, more important than the IMF's money would be its endorsement of the plan.

The big question remains: how to get Venezuela's warring factions to even discuss such a proposal. The hope is that in the teeth of disaster, Venezuela's politicians will unite. But unity is one thing the escalating crisis has yet to deliver.


Jonathan Wheatley and Lucinda Elliott / FT / April 14, 2016.

ISSUES.... 04/ 18 / 2016 - Send Us Your Issues

ISSUES.... Inside, confidential and off the record
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