Venezuela, South America’s fifth-largest economy, is in chaos. Plummeting oil prices, soaring inflation, political instability, a major shortage of basic goods and currency woes see it teetering on the brink of economic collapse. The International Monetary Fund (IMF) estimates that Venezuela’s economy will contract by 7% in 2015. (For more, see: Are Oil Prices Pushing Venezuela to Economic Collapse?)
In the wake of Venezuela’s crumbling economy, President Nicolás Maduro, elected in 2013 following President Hugo Chávez’s death, is facing an all-time low approval rating and waves of protests. Venezuela has long denounced U.S. capitalism and maintains that its northern neighbor’s impact on South America has led to its economic troubles.
Those not in Venezuela’s camp — including the U.S. — blame years of government mismanagement. This includes alleged mishandling of the country's massive oil supply, like providing subsidized oil to other countries like Cuba in return for political favors and support. (For more, read: Is Venezuela the New Cuba?)
Maduro has followed Chavez’s goal of running a socialist country but appears to be moving toward a more authoritarian regime. The government has been accused of widespread human rights abuse and the harsh persecution of political dissidents, which has led to deaths of protesters. Earlier this year, opposition mayor of Caracas, Antonio Ledezma, was arrested after being charged with conspiracy to overthrow the government. He is one of many political opponents sitting in jail.
The U.S. government has imposed sanctions on Venezuelan government officials in the wake of human rights abuse. These include denying visas and freezing assets of the officials involved and banning Americans from doing business with them. “They can stick the sanctions in their ears or wherever else they’ll fit,” Maduro said during a recent televised speech.
The Price of Oil Dependence
One of the founding members of the Organization of Petroleum Exporting Countries (OPEC), Venezuela has the largest oil reserves in the world and is one of the biggest exporters. It has been hit hard by the plummeting price of oil, which is about half of what it was a year ago. Due in part to weak global demand and booming U.S. oil production, oil’s steep decline began in mid-2014 and recently hit a six-year low of just above $45 per barrel. Not surprisingly, Venezuela’s economy relies heavily on oil exports. Oil accounts for 95% of exports and about 25% of gross domestic product (GDP); the country doesn't have another competitive non-oil sector to fall back on. (For more, see: Why Did Oil Prices Drop so Much in 2014?)
“Indeed, each $10 decline in oil prices worsens Venezuela’s trade balance by 3.5% of GDP, a bigger effect by far than for any other country in the region," wrote an IMF official in the organization's blog, iMGdirect. "The loss in export revenue causes mounting fiscal problems and a sharper economic downturn.” (For more, see: Where NOT to Invest in Latin America.)
According to its central bank, GDP contracted the first three quarters of 2014 — 4.8%, 4.9%, 2.3%, respectively — the most recent numbers made available. (The bank typically updates stats on a monthly basis, but hasn't released any data so far in 2015.)
Venezuela currently has the highest inflation rate in the world. It reached 69% in December 2014 and experts estimate it could more than double in 2015. "We may end up this year with inflation at close to 200%,” said Alberto Ades, co-head of global economics research at Bank of America (BAC), in a recent interview with Bloomberg. “Venezuela is in a dire crisis.” (For more, see: Not All Oil Economies Are Created Equal.)
The country imports most of its basic goods. To combat the dramatic drop in oil prices, the government has reduced imports which has lead to a major shortage of products such as milk, flour and sugar. Venezuelans can be seen waiting in line for hours outside of supermarkets to procure such items, and the government has started to distribute food under military protection and limit how much individuals can buy. (For more, see: How Oil Will React to a Revolution in Venezuela.)
The value of the Venezuelan bolivar versus the U.S. dollar has been tumbling. Venezuela has a confusing exchange rate system that consists of several tiers; two are used by the government to pay for exports and another is the unofficial black market, used by the majority of Venezuelans. The government introduced a new foreign exchange rate earlier this year to compete with the black market that, for the first time in more than a decade, allows Venezuelans to legally buy U.S. dollars. (For more, see: The Impact of Venezuela's Bolivar Exchange Rates.)
Venezuela has amassed billions in debt and its ability to pay it off has come into question, marking the possibility of a default. Ratings agency Moody’s recently downgraded Venezuela’s credit rating; so did Fitch. Venezuela has more than $5 billion in debt payments due in October and November, which includes payments on bonds issued by state-owned oil company Petroleos de Venezuela SA. (For more, read: Countries Near Economic Collapse.)
In early April, the government announced that Venezuelans traveling outside of the country will only have authorization to use their credit cards for up to $700 in purchases, down from $2,500. The aim is to ease a major lack of U.S. currency in the country and help hold off a default on its debt payments. According to Barclays (BCS), this will save the government about $2.8 billion in 2015.
The Bottom Line
Oil-rich Venezuela is on the brink of economic collapse. Inflation is soaring, the value of its currency is plummeting and its GDP is contracting, making its outlook bleak at best until a dramatic shift in the world's oil economy — currently sitting in an oversupply situation — occurs. (For more, see: When Will Oil Finally Hit Bottom?)