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Venezuela: Where are we now and how long will it take to recover?

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Venezuela is undergoing one of the worst economic losses ever registered by any country in a three-year period, either by Latin American or world standards. Poverty rates have skyrocketed and stand today beyond 80%. We define two landmarks for recovery, and revise how much would Venezuela need to grow - oil and non-oil sectors - and how likely are those rates from the Venezuela and the world´s experience. We end up by outlining some of the adaptive challenges Venezuela would need to tackle to engine a sustainable recovery.

Published in: Economy & Finance
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Venezuela: Where are we now and how long will it take to recover?

  1. 1. Venezuela: Where  are  we  now  an  how  long  will  it  take  to  recover? Miguel  Angel  Santos @miguelsantos12 www.miguelangelsantos.net
  2. 2. Where  are  we  now?
  3. 3. 100.0 120.0 140.0 160.0 180.0 200.0 220.0 240.0 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* Venezuela:*GDP*per*capita*1950<2016 (1950=100) In  three  years  29.3%  of  Venezuela´s  income  per  capita  vanished:  It  is   now  just  above  national  strike  levels,  at  the  same  point  it  was  in  1956 Source:  Venezuela  Central  Bank,  Reuters,  author´s  own  calculations.
  4. 4. Faced  with  plummeting  oil  prices  and  hefty  debt  service,  the  government   chose  a  draconian  import  cut:  Imports  per  capita  today  are  26%  of  2012  peak 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 2015E 2016E Constant"2016"dollars"per"capita Venezuela:)Exports)and)Imports)per)capita (constant)2016)dollars) Exports"real"per"capita Imports"real"per"capita Source:  Venezuela  Central  Bank,  IMF  International  Financial  Statistics  Reuters,  author´s  own  calculations.
  5. 5. The  import  nose-­‐dive  was  also  the  end  of  the  illusion  of  abundancy,  as   now  production  and  consumption  are  forced  to  be  more  aligned 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  2015   Venezuela:  Gross  domestic  product  and  consumption  per  capita (1998-­‐2015,  1998=100) Private  consumption Government  consumption Gross  domestic  product Baseline Source:  Venezuela  Central  Bank,  author´s  own  calculations.
  6. 6. Poverty  skyrocketed  to  record-­‐levels:  81.8%  of  households  are  estimated   to  be  poor  and  30%  are  now  in  extreme  poverty  – only  18.2%  are  not  poor Source:  INE.  Encuesta  de  Hogares  por  Muestreo.  1997-­‐2015.  UCAB-­‐UCV-­‐USB.  ENCOVI  2014-­‐2015-­‐2016 - 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 E 2015 2015E 2016E EVOLUCIÓN DE LA POBREZA EN VENEZUELA 1997 - 2016 Pobres No Extremos Pobres Extremos 55,6 54,0 26,4 29,5 33,1 48,4 73,0 81,8 Venezuela:  Evolution  of  poverty  and  extreme  poverty (1997-­‐2016) Total  poverty Extreme  poverty
  7. 7. Multidimensional  poverty  has  gone  up  (71%)  and  become  more  intense:  The   average  income  of  a  poor  household  is  now  39%  away  from  the  poverty  line 0,320 0,190 0,529 0,560 0,71 0,370 0,350 0,352 0,343 0,39 0,118 0,067 0,186 0,192 0,28 0,000 0,050 0,100 0,150 0,200 0,250 0,300 0,000 0,100 0,200 0,300 0,400 0,500 0,600 0,700 0,800 0,900 1,000 2005 2012 2014 2015 2016 Mo(HxA) IncidenciaeIntensidad Incidencia Intensidad Pobreza Ajustada (Mo) Source:  INE.  Encuesta  de  Hogares  por  Muestreo.  2005-­‐2012.  UCAB-­‐UCV-­‐USB.  ENCOVI  2014-­‐2015-­‐2016 Incidence  and  Intensity  of  Multidimensional  Poverty Incidence Intensity Adjusted  poverty Incidence  and  intensity  of  poverty
  8. 8. In  three  years,  a  significant  number  of  households  that  were  not  poor   became  (recent)  poor,  and  an  alarming  figure  ended  up  in  chronic  poverty 2014 Not  poor Poor Not poor Not  poor 44,7% Inertial  poverty 6,1% Poor Recent  poverty 33,1% Chronic  poverty 16,1% Income  poverty Structural/Multidimensional  poverty 2015 Not  poor Poor Not poor Not  poor 23,1% Inertial  poverty 5,5% Poor Recent  poverty 47,1% Chronic  poverty 24,3% Income  poverty Structural/Multidimensional  poverty 2016 Not  poor Poor Not poor Not  poor 16,4% Inertial  poverty 3,2% Poor Recent  poverty 49,4% Chronic  poverty 31,4% Income  poverty Structural/Multidimensional  poverty ü Non-­‐poor  households  decrease  63%  in   two  years  (28.3  percentage  points) ü Recent  poverty  increased  49%                     (16.3  percentage  points) ü Chronic  poverty  increased  95%                   (15.3  percentage  points)
  9. 9. Are  the  precedents  to  such  a  catastrophe?
  10. 10. 100.0 120.0 140.0 160.0 180.0 200.0 220.0 240.0 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* Venezuela:*GDP*per*capita*1950<2016 (1950=100) Spells  where  countries  lost  29.3%  capita  in  three  years  are  not  very  common;   almost  unheard  of  in  cases  with  no  natural  disasters  or  armed  conflicts Source:  Venezuela  Central  Bank,  Reuters,  author´s  own  calculations.
  11. 11. In  the  modern  history  of  Latin  America  (1960  onwards)  there  is  only   one  episode  where  a  country  has  suffered  a  greater  loss:  Cuba !32.8% !29.1% !29.0% Cuba.(1991!1993) Venezuela.(2014!2016) Nicaragua.(1978!1980)
  12. 12. The  only  precedent  had  been  the  income  loss  registered  in  Nicaragua   at  the  outbreak  of  the  Revolución  Sandinista  between  1978-­‐1980 !32.8% !29.1% !29.0% Cuba.(1991!1993) Venezuela.(2014!2016) Nicaragua.(1978!1980)
  13. 13. Over  the  previous  twenty  years,  only  four  episodes  worldwide   registered  higher  economic  losses  than  Venezuela  2014-­‐2016 !60.5% !45.9% !36.2% !35.5% !29.1% Libya&&&&&&&& (2009+2011) South&Sudan& (2010+2012) Iraq&&&&&&&&&&& (2001+2003) Central&African& (2012+2014).& Venezuela& (2014+2016) Largest  GDP  loss  worldwide  in  three  years (1985-­‐2015)
  14. 14. What  do  we  need  to  do  to  recover? What  exactly  do  you  mean  by  “recover”? How  much  would  we  have  to  grow? For  how  many  years? How  likely  is  that?
  15. 15. We  are  going  to  define  recovery  in  terms  of  income  per  capita  as: a)  Our  historical  peak  (1977),  and  b)  the  most  recent  peak  (2012) Source:  Venezuela  Central  Bank,  Reuters,  author´s  own  calculations. 100.0 120.0 140.0 160.0 180.0 200.0 220.0 240.0 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* Venezuela:*GDP*per*capita*1950<2016 (1950=100) 209.98& 192.08& 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#
  16. 16. Based  on  these  targets,  we  calculate  how  much  do  we  need  to  grow   for  how  long,  and  how  likely  is  that  according  to  our  history? Years&required&to&achieve&target& 2012&GDP&per&capita CAGR&over&these&years&to&achieve& target&2012&GDP&per&capita Frequency&in&Venezuelan&history& (1961D2015)&of&these&CAGR&rates&over& these&years 5 8.3% 2.0% 10 4.6% 8.9% 15 3.4% 12.5% 20 2.7% 17.1% 25 2.3% 50.0% 30 2.0% 64.0% 35 1.8% 95.0% Most&recent&peak&(2012) Years&required&to&achieve&target& 1977&GDP&per&capita CAGR&over&these&years&to&achieve& target&1977&GDP&per&capita Frequency&in&Venezuelan&history& (1961C2015)&of&these&CAGR&rates&over& these&years 5 10.3% 2.0% 10 5.6% 2.2% 15 4.0% 10.0% 20 3.2% 5.7% 25 2.7% 20.0% 30 2.3% 44.0% 35 1.8% 95.0% Historical&peak&(1977)
  17. 17. What  about  oil?  We  have  lots  of  oil! Can  we  make  it  in  five  years?
  18. 18. Let  us  think  of  a  fixed  time  horizon:  Five  years.  How  much  is  the   maximum  we  have  managed  to  increase  oil  production  in  five  years? 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Million  barrels  per  day Venezuela:  Total  oil  production  (1935-­‐2016) Chavez-­‐Maduro 2003-­‐2007: 0.34  MBD 1994-­‐1998: 0.71  MBD (1978-­‐2016) (1935-­‐2016) 1953-­‐1957: 0.71  MBD
  19. 19. Even  assuming  that  we  reach  the  maximum  oil  increase,  the  growth  required   in  the  non-­‐oil  sector  is  substantial…  and  not  very  frequent  in  our  experience Historic(peak((( (1977) Most(recent( peak((2012) Historic(peak((( (1977) Most(recent( peak((2012) Maximum'increase'in'oil'production'registered'over' a'five5year'period'during'chavismo'(200352007) 340 11.83% 9.44% 1.96% 9.80% Maximum'increase'in'oil'production'registered'over' a'five5year'period'since'1978'(199451998) 712 11.23% 8.80% 3.92% 11.76% Maximum'increase'in'oil'production'registered'over' a'five5year'period'in'our'history'(195351957) 1,014 10.74% 8.26% 5.88% 13.73% Scenarios Total(increase(in(oil( production(in(five=year( (million(barrels(per(day) CAGR(on(non=oil(GDP(required(to( reach(target(GDP(per(capita(peak( in(5(years Frequency(in(Venezuelan(history( (1961=2015)(of(these(CAGR(rates( over(these(years
  20. 20. And  what  about  the  world´s  experience?  Are  these  episodes  of  growth  in  five   years  more  frequent  in  the  international  experience  (1961-­‐2015)? 0 200 400 600 800 1000 1200 Frecuency(of(CAGR(in(five1year(sequence Compounded( annual(growth(rate((CAGR)(in(a(five1year(period Fail+target Reach+most+recent+peak Reach+historic+peak
  21. 21. What  about  ten  years?
  22. 22. How  much  is  the  maximum  we  have  managed  to  increase  oil   production  in  ten  years? 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Million  barrels  per  day Venezuela:  Total  oil  production  (1935-­‐2016) Chavez-­‐Maduro 1999-­‐2008: 0.20  MBD 1989-­‐1998: 1.42  MBD (1978-­‐2016) (1935-­‐2016) 1948-­‐1957: 1.44  MBD
  23. 23. In  this  case,  still  growth  required  from  non-­‐oil  sector  is  still  sizable,   although  more  likely  according  to  our  own  experience… Historic(peak((( (1977) Most(recent( peak((2012) Historic(peak((( (1977) Most(recent( peak((2012) Maximum'increase'in'oil'production'registered'over' a'five5year'period'during'chavismo'(199952008) 201 6.52% 5.36% 21.74% 32.61% Maximum'increase'in'oil'production'registered'over' a'five5year'period'since'1978'(198951998) 1,420 5.63% 4.37% 28.26% 36.96% Maximum'increase'in'oil'production'registered'over' a'five5year'period'in'our'history'(194851957) 1,440 5.62% 4.36% 30.43% 39.13% Scenarios Total(increase(in(oil( production(in(five=year( (million(barrels(per(day) CAGR(on(non=oil(GDP(required(to( reach(target(GDP(per(capita(peak( in(5(years Frequency(in(Venezuelan(history( (1961=2015)(of(these(CAGR(rates( over(these(years
  24. 24. And  what  about  the  world´s  experience?  Are  these  episodes  of  growth  in  five   year-­‐sequence  more  frequent  in  the  international  experience  (1961-­‐2015)? 0 100 200 300 400 500 600 700 800 900 Frecuencia)of)CAGR)in)ten1year)sequence Compounded) annual)growth)rate)(CAGR))in)a)ten1year)period Fail/target Reach/most/recent/peak Reach/historic/peak
  25. 25. Some  caveats  are  due… • We  have  taken  growth  episodes  as  if  they  come  from  a  random  sampling   (but  priors  are  important) • We  have  not  evaluated  the  quality  of  growth • 1961-­‐1977:  Import  substitution  industrialization  model • 2004-­‐2012:  Longest  oil  bonanza  ever  recorded,  foreign  debt   quadrupled  in  six  years • Most  of  the  growth  spells  of  Venezuela  were  registered  in  the  earlier  side   of  our  sample  (1961-­‐1977),  the  fact  is  that  are  only  two  four-­‐year   sequences  of  growth  over  the  previous  forty  years
  26. 26. What  have  we  learnt  from  the  exercise? • Oil  it´s  today  our  only  source  of  foreign  exchange  and  we  must  make  the   most  out  of  it,  but  the  key  to  a  fast  recovery  lies  in  the  non-­‐oil  sector
  27. 27. Oil  has  gradually  become  increasingly  small  for  the  size  of  Venezuela… 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 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 Barrels  per  capita  per  year Million  barrels  per  day Oil  production:  Total  and  per  capita (1965-­‐2016) Oil  production  per  day Barrels  per  capita  per  year Source:  PODE  and  PDVSA,  and  author´s  own  calculation  based  on  population  reported  by  INE.
  28. 28. What  have  we  learnt  from  the  exercise? • Oil  it´s  today  our  only  source  of  foreign  exchange  and  we  must  make  the   most  out  of  it,  but  the  key  to  a  fast  recovery  lies  in  the  non-­‐oil  sector • The  longer  the  time  it  takes  to  introduce  political  change  and  start  a   transition,  the  steeper  the  slope  (the  longer  the  time)  of  recovery • Going  back  to  what  we  used  to  have  will  not  be  enough  to  recover:  The   “chavismo well  managed”  is  a  myth,  and  it  it  is  not  true  that  ”we  were   happy  and  we  did  not  know” • The  recovery  has  scant  probabilities  if  we  continue  formulating  policy  the   way  we  have  over  the  previous  40  years
  29. 29. How  can  we  get  on  track?
  30. 30. 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, WB, IDB and CAF) • Re-profile debt and address arrears • 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)
  31. 31. The  problem  is  not  technical, is  mostly  adaptive: How  can  we  manage  to  implement  the things  we  know  we  need  to  do?
  32. 32. Some  example  of  the  adaptive  challenges  we  face… • A  new  social  contract,  a  common  understanding  of  what  the  State  must  do  for  its  citizens   (equalize  opportunities)  and  what  people  must  do  for  the  State  and  for  themselves • Too  many  claims  on  too  little  resources:  What  are  the  priorities? – Foreign  financial  debt  (PDVSA;  sovereign,  Chinese  Funds,  Russia,  multilaterals) – Commercial  debt – ICSID  demands – Social  debt! • Reinvesting  Venezuela  and  igniting  recovery  necessarily  passes  for  an  IMF  package,   regulatory  changes  regarding  the  oil  industry,  and  dismantling  the  systems  of  controls  that   has  suffocated  private  initiative  and  ruin  the  economy:  We  need  a  leadership  convinced    of   the  strategy,  prepared  for  the  challenge,  and  a  public  narrative  of  the  reform  process • Reform  will  take  place  within  the  context  of: -­‐ large  institutional  destruction  and  State  fragmentation -­‐ significant  social  unrest  and  chaos -­‐ some  characteristics  of  failed  state
  33. 33. Epa Miguel.  Te  escuché  en  el   programa  esta  mañana.  Nueve  años   no  son  nada.  Lo  mejor  es  que  a  la   mañana  siguiente  cambiamos  la   pendiente  y  empezamos  a  subir!!!   Me  gusta  esa  idea.  Te  imaginas?   Nueve  años  subiendo,  hasta  llegar  a   la  cumbre !!
  34. 34. Thanks! Miguel  Angel  Santos @miguelsantos12 www.miguelangelsantos.net March  3,  2017 Stanford  University:  Venezuela  at  a  crossroads

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