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Harvard CID Speaker Series: "Venezuela: How an oil rich country went bust and a roadmap to get it back on track"

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Venezuela is currently undergoing the worst economic crisis in its history. By the end of 2016, more than 30% of the gross domestic product (GDP) it had three years ago will be lost. Poverty has soared to record levels. Monthly inflation rates are gradually approaching hyperinflation. Shortages of basic food staples and medicines are rampant. A three-tier exchange rate system prevails, with black market rates surpassing the lowest official rate by a factor of one-hundred. After more than a decade of massive expropriations and state control, the small, surviving, private industrial apparatus is nearly paralyzed, trapped in a web of regulations, without access to foreign currency to purchase parts or raw materials, and their operations are technologically obsolete.
In order to promote a better understanding of the causes, magnitudes, and possible remedies of the crisis, the Center for International Development (CID) at Harvard University launched a research initiative on Venezuela at the end of 2015.

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Harvard CID Speaker Series: "Venezuela: How an oil rich country went bust and a roadmap to get it back on track"

  1. 1. 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
  2. 2. How did we get here?
  3. 3. 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 80.0 100.0 120.0 140.0 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) 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
  4. 4. 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)
  5. 5. November, 2016 CID Speaker Series 5 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)
  6. 6. November, 2016 CID Speaker Series 6 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 34,766 116,181 110,533 123,966 103,607 150,279 193,144 347,829 2008 2009 2010 2011 2012 2013 2014 2015 Servicio de deudaa China (barrilespordíaequivalente) 3,200 5,259 11,899 21,829 23,374 23,579 21,887 25,512 1,101 2,413 2,889 4,570 3,914 5,551 6,232 5,675 0 5,000 10,000 15,000 20,000 25,000 30,000 2008 2009 2010 2011 2012 2013 2014 2015 Saldo Deuda Fondo Conjunto China-Venezuela (FCCV (millones de dólares, 2008-2014) Saldo de la deuda Serviciode deuda
  7. 7. November, 2016 CID Speaker Series 7 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%
  8. 8. November, 2016 CID Speaker Series 8 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)
  9. 9. November, 2016 CID Speaker Series 9 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 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 %ofGDP Consolidated Public Sector Primary and Financial balance (% of GDP) Primary balance Financial balance
  10. 10. November, 2016 CID Speaker Series 10 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: Exports and Imports per cápita (constant 2015 US$ ) Exports real per capita Imports real per capita
  11. 11. November, 2016 CID Speaker Series 11 And massive capital flight (in the middle of an exchange control) 7,117 4,997 2,332 1,578 -865 -2,4875,451 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 Capita outflows (constant US$ 2013 million) Capital outflows (constant million US$ 2014)
  12. 12. November, 2016 CID Speaker Series 12 Large consumption boom fueled by imports financed with oil and foreign debt halved poverty levels % of Population under the poverty line 1989-2015
  13. 13. November, 2016 CID Speaker Series 13 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) Cesta Venezolana (dólares corrientes) Venezuelan oil basket (current US dollars)
  14. 14. • Collapse in imports • Collapse in production • Fiscal deficit and monetary financing • Acceleration of inflation • Acceleration of poverty Five symptoms
  15. 15. November, 2016 CID Speaker Series 15 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)
  16. 16. November, 2016 CID Speaker Series 16 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 Exports 47.5 Imports2014 12.5 Services 0.4 Rent(others) 6.2 Interest 5.4 Amort. China 9.8 Fallin Imports 5.0 ChinaFCV4 3.7 DescuentoDeuda Oil 2.0 DeudaCITGO 6.0 Amort. 4.0 ChinaFCV2 6.7 Liquidacióndeotrosactivos Reservas líquidas 3.0 2.7 SDRIMF 3.5 Goldswap 4.0
  17. 17. November, 2016 CID Speaker Series 17 By the end of 2015, Venezuela’s foreign reserves reached an 18- year minimum and the country lacked any stabilization funds International Reserves
  18. 18. November, 2016 CID Speaker Series 18 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 1,322 741 641 894 1,065 905 643 871 683 900 959 801 970 1,068 712 539 832 1,115 1,496 1,988 2,081 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 Importacionesper cápita (dólares reales de2016) Imports per capita (US$, real) Government goal for 2016
  19. 19. • Collapse in imports • Collapse in production • Fiscal deficit and monetary financing • Acceleration of inflation • Acceleration of poverty Five symptoms
  20. 20. November, 2016 CID Speaker Series 20 PDVSA increased it’s debt stock X15 while keeping its investments on exploration and production constant = a significant decrease in oil production Producción de petróleo, deuda financiera e inversiones EyP (2006 - 2015) Oil production, Financial debt and Exploration investments (2006-2015)
  21. 21. November, 2016 CID Speaker Series 21 PDVSA was significantly burdened to finance non-oil activities, social programs and extra-budgetary discretional spending Fiscal burden on PDVSA as a % of GDP (2010-2014)PDVSA transferred US$ $83 billions to the extra budgetary fund “FONDEN”
  22. 22. November, 2016 CID Speaker Series 22 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 Instituciones financieras y seguros Comunicaciones Serv. comunitarios, soc. y personales Produc. servicios del Gobierno General Electricidad y agua Comercio y servicios de reparación Servicios inmobiliarios Construcción Transporte y almacenamiento Agricultura, resturantes y hoteles, otros Manufactura Actividad petrolera Minería Tasa de crecimiento per cápita 2000-2015 TradeablesNon-tradeables Growth rate per capita 2000-2015
  23. 23. November, 2016 CID Speaker Series 23 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)
  24. 24. • Collapse in imports • Collapse in production • Fiscal deficit and monetary financing • Acceleration of inflation • Acceleration of poverty Five symptoms
  25. 25. November, 2016 CID Speaker Series 25 Large fiscal deficits persisted… -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 %ofGDP Consolidated Public Sector Primary and Financil balance (% of GDP) Primary balance Financial balance
  26. 26. November, 2016 CID Speaker Series 26 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* %ofGDP Fiscal deficit and monetary financing (% of GDP) Fiscal deficit (-Financial balance) Central Bank Financing
  27. 27. • Collapse in imports • Collapse in production • Fiscal deficit and monetary financing • Acceleration of inflation • Acceleration of poverty Five symptoms
  28. 28. November, 2016 CID Speaker Series 28 Deficit monetization led to a strong acceleration of inflation (official figures) 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Evolution of National Index of Consumer Prices (YoY price increase)
  29. 29. November, 2016 CID Speaker Series 29 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)
  30. 30. • Collapse in imports • Collapse in production • Fiscal deficit and monetary financing • Acceleration of inflation • Acceleration of poverty Five symptoms
  31. 31. November, 2016 CID Speaker Series 31 High inflation has eroded the purchasing power of households Evolution of Real Wages (Constant 2015 Bs.)
  32. 32. November, 2016 CID Speaker Series 32 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 USDpermonth 2016 Monthly Minimum Wage $9,081 per month!
  33. 33. November, 2016 CID Speaker Series 33 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
  34. 34. November, 2016 CID Speaker Series 34 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
  35. 35. How to get back on track?
  36. 36. November, 2016 CID Speaker Series 36 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)
  37. 37. What are the adaptive challenges?
  38. 38. 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…
  39. 39. 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: GDP per capita 1950-2015 (1950=100)
  40. 40. 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%
  41. 41.  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 November, 2016 CID Speaker Series 41 The adaptive challenges

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