Mohamed A. El-Erian
What Venezuela Needs
International coordination of the nation's debts will be
essential so the humanitarian crisis can be addressed.
The widespread electricity outages that hit Venezuela on Friday were yet another reminder of an already tragic situation that is getting worse by the day, taking the country ever closer to the line that separates a fragile state from a failed and collapsed one. As the terrible human suffering mounts, and as the political situation gets more polarized, the international community is said to be getting ready to support an orderly transition from the current presidency – and for a simple reason: Venezuela's protracted misery is not just intense and widespread, but also is spilling over its borders.
The situation in Venezuela is well captured by the following statement by David Lipton, quoted recently in the Financial Times. The first deputy managing director of the International Monetary Fund correctly noted that “Venezuela is experiencing an extremely complex situation, one of the most complex we have ever seen…. It's a crisis of food and nutrition, of hyperinflation and a destabilized exchange rate, of debilitating human capital and physical productive capacity, and a very complicated debt situation.”
Venezuela is one of the toughest challenges that the international community has confronted when it comes to restoring financial order, economic growth and longer-term debt viability. But, if well handled, it would have the potential of being an example of what international coordination of both public and private initiatives can do, through thoughtful and careful sequencing.
Venezuela's c risis has been many years in the making, and it is one that would require a concentrated set of immediate relief measures, economic and financial, followed by well-structured long-term recovery and rehabilitation steps. Both will need to be underpinned by a level of credible communication and internal socio-political cohesion that has eluded Venezuela in recent years, together with multiple points of coordination and compromises between and among governments, regional bodies, multilateral institutions and private creditors.
Without that, there would be little hope of addressing a long list of cascading failures that includes: the near-complete breakdown of supply chains, gutted infrastructure, widespread shortages of basic goods and services, hyper-inflation, a de-anchored exchange rate regime, a disrupted financial system, serial financial defaults, and a breakdown of institutions that has even threatened the viability of the country's oil industry, once the envy of many.
The recent evolution in the internal political situation could open a window for regime change – one hopes peaceful and orderly in nature, though that is far from assured. This could make it more possible to reverse this enormous human tragedy. The first three economic and financial policy priorities of a pivot should be to:
- Restore as soon as possible and as much as possible ample supplies of basic goods and services, including foodstuffs and medical care.
- Reverse the steep decline in oil production and the catastrophic implosion of related activities that has come with that. (At under 1.5 million barrels a day, production is at dangerously low levels not seen for over half a century, and that can cause significant harm to the oil fields.)
- Activate safety net provisions to assist highly vulnerable and long-suffering segments of the population, a part of which is very close to lacking life-saving nutrition, shelter and health care.
None of these steps would be possible without a major injection of financial support from bilateral and multilateral sources, led and coordinated by the U.S., together with adequate assurances from Venezuela that the new money will not be used to pay other private or public creditors.
Establishing such a payments standstill would be complex and messy, even if the focus were only on private creditors. While some of the country's bonded debt carry CACs (collective action clauses) that would likely help contain the complications associated with holdouts and vulture behavior, others don't. Several legal cases are making their way through the courts, including on account of alleged unlawful expropriations. And some factions will push for the differential treatment of debt, based on when it was issued and also relating to the obligations of the state-owned oil company, Petróleos de Venezuela S.A .
Having said all that: Debt exchanges have a significant potential to alter the size and profile of the country's external debt servicing obligations – by heavily backloading payments, capitalizing interest and, through the use of value recovery clauses and debt sustainability analyses, making cuts in contractual outstanding obligations less difficult for creditors to accept. A high degree of intra-creditor coordination could also make room for special provisions for the resumption of short-term trade finance.
Add debt owed to governments and government-owned entities, and this could well end up the largest and most complicated debt restructuring in the history of an emerging market class that has navigated through the Argentine and Russian defaults, as well as the even more complex Iraqi situation. The immediate design of an orderly payments standstill would also require the cooperation of the Chinese and Russian governments, both of which are understood to have provided cash and in-kind loans in recent years. This will require a degree of transparency and international reporting that has been difficult to secure not only here, but also in other nations. And the hope is for their incorporation in a Paris Club structure that ensures comprehensive treatment.
This combination – of basic goods and services hitting the shelves, incremental increases in oil production, better functioning social safety nets, and a breathing window for debt repayment – would open the way for the even harder task of rehabilitating the country's economic infrastructure, restoring social services, resetting the country's domestic finances and financial system, putting the external accounts and exchange rate regime on a less precarious footing, and creating a path to sustained high and inclusive growth.
Make no mistake, both the immediate and subsequent recovery measures that Venezuela urgently requires are monumental by any measure, both analytical and practical. But there are also reasons to be relatively optimistic.
Venezuela is a well-endowed economy, housing the largest oil reserves in the world. Its population has a relatively high level of education and expertise. The U.S. has already signaled a willingness to help under appropriate political circumstances, and Washington is well placed to lead a broad international effort. There are natural regional and multilateral coalitions to help, some of which have already initiated planning exercises. And most nations in the hemisphere have an interest in the successful recovery of their Venezuelan neighbors and partners.
With all that, Venezuela has the potential of turning the page on an accelerating process of economic and social demise. Such a turnaround can serve as a reminder that internationally coordinated efforts still have an important place in today's more fragmented global economy.
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Editor's Note: This article was originally published by Bloomberg, on Mar.12, 2019. Petroleumworld reprint this article in the interest of our readers. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.
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