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Venezuela: The Anatomy of a collapse and a roadmap for reconstruction

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For three years Harvard CID has been working on a plan to rescue Venezuela and get the country on a path of sustainable, inclusive growth, and development. We have teamed with Venezuelan experts at home and abroad, worked with international institutions, and have started the process of building consensus around the plan among the opposition parties that control the Venezuelan National Assembly. The Venezuelan Caucus at the Kennedy School will be hosting a series of talks on Venezuela: The morning after, by different members of our team and on different topics. You can follow on their Facebook webpage. More coming soon, stay tuned!

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Venezuela: The Anatomy of a collapse and a roadmap for reconstruction

  1. 1. Venezuela: The morning after – @miguelsantos12 Harvard Center for International Development VENEZUELA: THE MORNING AFTER VENEZUELAN CAUCUS SPEAKER SERIES VENEZUELA: THE ANATOMY OF A COLLAPSE AND A ROADMAP FOR RECONSTRUCTION
  2. 2. Between 2002-2014 Venezuela experienced the most prolonged oil bonanza in history… 2 Sources: Venezuelan Ministry of Energy 16.0 25.9 20.2 22.1 25.8 32.9 46.0 55.2 64.7 85.4 57.0 72.2 100.1 103.4 101.3 88.6 44.8 35.2 46.7 65.1 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 julio-16 enero-17 julio-17 enero-18 julio-18 Oil Price: Venezuelan (US dollars per barrel) 101.3
  3. 3. Oil boom was a price phenomena, as oil sector production fell by 12.6% between 1998-2012 3 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 2015 2017 Barrelspercapitaperyear Production(oilbarrels-day) Venezuela Oil Production: Total and per capita (1965-2018) Sources: PDVSA, MEMPET, OPEC, own calculations.
  4. 4. 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Venezuela: Gross domestic product and consumption per capita (1998-2018, 1998=100) Private consumption Government consumption Gross domestic product Baseline The government used the bonanza to spur a consumption boom, that did not have a counterpart in domestic production… 4 Venezuela: Producto interno bruto, consumo público y privado (per cápita, 1998-2017, 1998=100) Sources: Venezuelan Central Bank (1950-2015), International Monetary Fund (2016-2018), own calculations.
  5. 5. Consumption boom fueled by imported goods 5 Sources: Venezuelan Central Bank (1950-2015), UNCOMTRADE (2016-2018), International Monetary Fund (2016-2018), own calculations. 71,967 2,403 586 382 0 500 1,000 1,500 2,000 2,500 3,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 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 2016 2017 2018 Constant2018dollarspercapita Constant2018dollars Venezuela: Real Imports (Total and per capita, dollars 2018, 1983-2018)
  6. 6. New regulation for banking Supreme Court Packing 2013201220112010200920082007200620052004 In parallel, the government promoted a number of laws that would dismantle the market mechanism and would give them total discretion 6 2003 Exchange Control FONDEN Law FCCV Gran Volumen Law of Extraordinary and Exorbitant Oil Prices Fondo Comun China-Venezuela First Wave of Price Controls SADA Traffic Guides First wave of land expropiations Central Bank Law CANTV – AES Nationalization Regulatory expropiations INDEPABIS Law of food sovereignty Law of unlawful FX operations First Socialist Plan Second wave of price controls: Fair price law New Labor Law Constitutional Reform Attempt
  7. 7. 7 The legal structure created in 2005 allowed the government to administer massive amount of resources out of public sight 0 20,000 40,000 60,000 80,000 100,000 120,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Contributions to the Fondo de Desarrollo Nacional (million dollars) Central Bank PDVSA Others Contributions to the Fondo de Desarrollo Nacional (FONDEN) (million dollars) 110.831
  8. 8. 8 During the boom years, Venezuela multiplied its foreign debt 6X, mostly through extra-budgetary vehicles… Fuentes: Ecoanalítica. 0 20 40 60 80 100 120 140 160 180 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Gobierno Central PDVSA - Bonos-Otros PDVSA Atrasos Fondo Chino Rusia-Rosneft Nacionalizaciones-ICSID Deuda comercial Venezuela: Foreign Public Debt (million dollars)
  9. 9. 9 Total debt with China skyrocketed between 2008-2016, out of the oversight and accountability of Congress Venezuela: Foreign Public Debt (million dollars) 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 Foreign Public via Fondo Conjunto China-Venezuela (FCCV (million dollars, 2008-2015) Total debt balance Debt service
  10. 10. 10 The proceeds from the oil boom coupled with massive foreign debt issuance ended up financing massive capital flight Fuentes: Reinhart-Santos (2016) -5000 0 5000 10000 15000 20000 25000 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 Venezuela: Capital Flight (million dollars)
  11. 11. Venezuela was ill-prepared to cope with the collapse in oil prices that occurred between 2014-2016 11 Sources: Venezuelan Ministry of Energy 16.0 25.9 20.2 22.1 25.8 32.9 46.0 55.2 64.7 85.4 57.0 72.2 100.1 103.4 101.3 88.6 44.8 35.2 46.7 65.1 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 julio-16 enero-17 julio-17 enero-18 julio-18 Oil Price: Venezuelan (US dollars per barrel) 101.3
  12. 12. Financial markets shut down for Venezuela 12 01000200030004000500060007000 1999m 1 2001m 1 2003m 1 2005m 1 2007m 1 2009m 1 2011m 1 2013m 1 2015m 1 2017m 1 2019m 1 PER ARG BRA CHL COL ECU MEX VEN LATAM EM
  13. 13. Imports collapsed… 13 Sources: Venezuelan Central Bank (1950-2015), UNCOMTRADE (2016-2018), International Monetary Fund (2016-2018), own calculations. 71,967 2,403 586 382 0 500 1,000 1,500 2,000 2,500 3,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 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 2016 2017 2018 Constant2018dollarspercapita Constant2018dollars Venezuela: Real Imports (Total and per capita, dollars 2018, 1983-2018)
  14. 14. Oil production collapsed… 14 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 2015 2017 Barrelspercapitaperyear Production(oilbarrels-day) Venezuela Oil Production: Total and per capita (1965-2018) Sources: PDVSA, MEMPET, OPEC, own calculations.
  15. 15. GDP collapsed… 15 80 100 120 140 160 180 200 220 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 2016 2018 Gorss domestic product per capita (1950-2018) (1950=100) 2013 - 2018 - 48.4% Sources: Banco Central de Venezuela (1950-2015), Fondo Monetario Internacional (2016-2018), cálculos propios.
  16. 16. The simultaneous collapse in GDP and imports is unprecedented 16 Sources: World Development Indicators, World Bank. Largest GDP per capita losses for all five-year periods 1960-2018 Largest imports per capita losses for all five-year periods 1960-2018
  17. 17. Food imports plummeted 70% in two years (2014-2016), in sharp contrast to other economies in Latin America 17 Imports of food, selected countries, países seleccionados (2005-2016, 2012=100) Sources: UN COMTRADE, con ajuste Bustos-Yildirim.
  18. 18. There have been very significant falls in the imports of subsectors for foods that were most imported in 2012 18 Imports of food, eight most important products in 2012 (thousands of dollars) Product 2012 2016 Change (%) Milk and cream, preserved, concentrated or sweetened 817 218 -73.3 Maize, unmilled 805 363 -54.9 Animals of the bovine species (including buffaloes), live 793 8 -98.9 Bovine meat, fresh, chilled or frozen 681 138 -79.8 Oilcake and other residues (except dregs) 485 295 -39.3 Soybean oil 482 180 -62.8 Wheat and meslin, unmilled 426 168 -60.5 Poultry, dead and edible offal, fresh, chilled or frozen 400 129 -67.7 Sources: UN COMTRADE, con ajuste Bustos-Yildirim,
  19. 19. Food imports collapse coincided with a 40%-60% contraction in production and area harvested for the cereals sector (rice and corn) 19 22.533.54 Production 40060080010001200 AreaHarvested 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Area Harvested (thousand ha.) Production (millon tonnes) Evolution of the Cereals Sector
  20. 20. Drops in imports of medicine and medical equipment have also been very pronounced (70%, 2012-2016), 20 Imports of medicine, selected countries(2012=100) Fuentes: UN COMTRADE, con ajuste Bustos-Yildirim,
  21. 21. 21 Imports of medicine and medical equipment, Eight most important products in 2012 (millions of dollars) Medicinas – Equipos médicos 2012 2016 Variación (%) Medicaments (including veterinary medicaments) 2,225 729 -67.2 Glycosides, glands, antisera, vaccines and similar products 412 202 -51.1 Medical instruments and appliances, nes 328 63 -80.7 Orthopaedic appliances, hearing aids, artificial body parts 269 25 -90.8 Provitamins and vitamins 224 11 -95.1 Other furniture and parts thereof, nes 203 40 -80.4 Electro-medical equipment 130 17 -87.2 X-ray apparatus and equipment; accessories; parts 104 50 -51.7 Fuentes: UN COMTRADE, con ajuste Bustos-Yildirim, Significant falls in the imports of subsectors for medicine and medical equipment that were most imported in 2012
  22. 22. Largest contractions in imports of medicine, for all five year periods (1962-2016) The five-year contraction in imports of medicine and medical equipment is amongst the largest in the world since 1962 22 Sources: UN COMTRADE, con ajuste Bustos-Yildirim,
  23. 23. 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Venezuela: Gross domestic product and consumption per capita (1998-2018, 1998=100) Private consumption Government consumption Gross domestic product Baseline In the absence of imports, private consumption was forced to align with domestic production… 23 Venezuela: Producto interno bruto, consumo público y privado (per cápita, 1998-2017, 1998=100) Sources: Venezuelan Central Bank (1950-2015), International Monetary Fund (2016-2018), own calculations. 2013 - 2017 - 47.0%
  24. 24. 24 Foreign debt reached its plateau in 2016… Fuentes: Ecoanalítica. 0 20 40 60 80 100 120 140 160 180 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Gobierno Central PDVSA - Bonos-Otros PDVSA Atrasos Fondo Chino Rusia-Rosneft Nacionalizaciones-ICSID Deuda comercial Venezuela: Foreign Public Debt (million dollars)
  25. 25. 25 At 5.0 times exports, Venezuela displays the largest levels of public debt in the world… Sources: Ecoanalítica, Venezuelan Central Bank, own calculations. 1.49 0.87 1.16 1.15 1.17 0.79 0.62 0.46 0.62 0.49 1.39 1.35 1.22 1.26 1.68 2.02 4.14 6.42 5.81 5.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Venezuela: Foreign Public Debt to Exports País Deuda/ Exports Venezuela 5.0 Sudan 4.4 Ethiopia 2.9 Jamaica 2.8 Bhutan 2.3 Mozambique 2.1 Sao Tome Principe 2.0 Burundi 1.9 Cabo Verde 1.8 Pakistan 1.8 World Development Indicators
  26. 26. With the collapse in production came a collapse in the collection of fiscal funds, which were substituted by monetary financing 0 1 2 3 4 5 6 7 8 9 10 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/15 11/1/15 1/1/16 3/1/16 5/1/16 7/1/16 9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 Non-oil tax collections and monetary financing (billions of dollars) Tax Collections (USD) - rolling 12 month sum Monetary Financing (USD) - rolling 12 month sum Non-oil collection (last 12 months) Monetary financing (last 12 months) 26
  27. 27. Monetary aggregates, prices, and the parallel exchange rates have skyrocketed… 27 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000 1,000,000,000 2013 2014 2015 2017 2018 Venezuela: Base Money, M2, CPI and FX rate (Jan2013=100) Base Money M2 CPI Exchange Rate
  28. 28. Inflation reached 833,997% in October 2018, the highest inflation ever recorded in twelve consecutive months since 1950 28 MAX Rolling 12 Month Date DR Congo 91.290% Sep-94 Bolivia 23.447% Sep-85 Armenia 22.887% Jun-94 Peru 12.378% Aug-90 Angola 12.035% Jul-96 Ukraine 10.155% Dec-93 Brazil 6.818% Apr-90 Kazakhstan 3.121% Jul-94 Belarus 2.796% Aug-94 Bulgaria 2.019% Mar-97 Azerbaijan 1.897% Nov-94 Poland 1.173% Feb-90 Russia 1.067% Sep-93
  29. 29. The hyperinflation has also pulverized the financial system 29 Fuentes: BCV, cálculos propios, - 1 2 3 4 5 6 7 8 0 10 20 30 40 50 60 70 80 feb-03 sep-03 abr-04 nov-04 jun-05 ene-06 ago-06 mar-07 oct-07 may-08 dic-08 jul-09 feb-10 sep-10 abr-11 nov-11 jun-12 ene-13 ago-13 mar-14 oct-14 may-15 dic-15 jul-16 feb-17 sep-17 abr-18 Total assets and equity of the Venezuelan banking system (billion dollars at parallel market rates) July 2018 1251,488
  30. 30. El salario mínimo integral pasó de cubrir 60.000 de las calorías más baratas (octubre 2012) a 6.000 (diciembre, 2017) a 200 (agosto, 2018) 30 Sources: CENDAS FVM, ENCOVI, own calculations. - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 12/1/2009 3/1/2010 6/1/2010 9/1/2010 12/1/2010 3/1/2011 6/1/2011 9/1/2011 12/1/2011 3/1/2012 6/1/2012 9/1/2012 12/1/2012 3/1/2013 6/1/2013 9/1/2013 12/1/2013 3/1/2014 6/1/2014 9/1/2014 12/1/2014 3/1/2015 6/1/2015 9/1/2015 12/1/2015 3/1/2016 6/1/2016 9/1/2016 12/1/2016 3/1/2017 6/1/2017 9/1/2017 12/1/2017 3/1/2018 6/1/2018 Maximum number of calories a mínimum salary can purchase
  31. 31. Hours of work at minimum salary required to buy 14 hours 21 hours 47 hours 2 hours 1 hour 8 hours August 2017 31 Purchasing power of salary has collapsed… Sources: CENDAS FVM, own calculations.
  32. 32. Hours of work at minimum salary required to buy 14 hours 21 hours 47 hours 2 hours 1 hour 8 hours August 2017 32 Purchasing power of salary has collapsed… August 2018 309 hours 419 hours 930 hours August 2018 309 hours 419 hours 930 hours Sources: CENDAS FVM, own calculations.
  33. 33. 33 Poverty rates have skyrocketed… Fuente: Encuesta Condiciones de Vida (ENCOVI) 2015. UCAB-USB-UCV. 2014 a 2017 51.6 27.0 18.2 8.6 24.8 23.1 30.3 25.523.6 49.9 51.5 65.8 48.4 73.0 81.8 91.3 2014 2015 2016 2017 Pobreza por Nivel de Ingreso Línea de Pobreza No Pobre Pobreza Pobreza Extrema Total Pobreza
  34. 34. 0.24 0.82 1.43 1.14 0.83 0.52 0.27 0.09 1.30 0.63 0.29 0.12 0.09 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 13 - 17 18 - 24 25 - 34 35 - 44 45 - 54 55 - 64 > 65 (million) Age Venezuela: Distribution of Facebook Users Venezuelan expats and estimate of total expat population (2018) Expats estimated Expat Facebook Users 34 The Venezuelan crisis has produced the largest rfeugee crisis in Latin American history, approaching the Syrian refugee number Sources: Facebook, own calculations. Estimated: 5.2 millones Observed: 3.3 millones
  35. 35. 35 Summary of the Venezuelan crisis Oil price boom High imports Dismantling market mechanisms Massive foreign debt Massive capital flight Loss of market access Low oil prices Import collapse Non-tradable GDP collapse Tradables collapse GDP collapse Collapse of tax collections Monetary financing - hiperinflation Collapse of the banking system
  36. 36. 36 A roadmap for recovery International financing (IFI) Restore market mechanisms Higher GDP High imports Budget support Increase in fiscal resources Open oil to private capital End of deficit monetization Stabilization Remonetization of the banking system Debt restructuring
  37. 37. Policy priorities: Some political consensus reached 37 • Seek international assistance (IFIs, bilateral, grants) • Debt restructuring • Expand deficit to address emergency and restore public goods provision • Restore market mechanisms • Restore the unity of the national treasury • Substitute indirect for direct subsidies, gradually adjust tariffs • Restore Central Bank independence • Eliminate the exchange control and restore economic right of buy and sell foreign exchange • Pre-announced exchange rate as an anchor, under the supervision of an autonomous Central Bank Macroeconomic Policy
  38. 38. Policy priorities: Some political consensus reached 38 • Delink the prospects of the oil industry from state-owned PDVSA • Recover oil production through a new Hydrocarbons Law that recognizes private investment and reorganizes the oil industry • Create the Hydrocarbons Regulatory Agency • Promote a gradual re-structuring of PDVSA Oil Industry • Direct subsidies will replace indirect subsidies, particularly oriented to address the economic complex emergency in food and medicines. • The price of the public services will be adjusted, assuring the social programs that guarantee the access to the most vulnerable people. Social Policy
  39. 39. What would we have achieved? 39 Fuentes: World Development Indicators. VEN * = Venezuela, VEN ** = Venezuela no-petrolera 80 100 120 140 160 180 200 220 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 2016 2018 2020 2022 Venezuela: GDP per capita (1950=100)
  40. 40. 40 Hey Miguel! Heard you talking on the program this morning. Nine years is nothing! The best is that the morning after we change the slope and start ascending!!! Can you imagine? Nine years ascending, and then reaching the summit!

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