4th February 2019.
As the dire situation in Venezuela unfolds, we aim to take a factual look at what is currently happening in the country and the causes of its current collapse.
As the dire situation in Venezuela unfolds, we aim to take a factual look at what is currently happening in the country and the causes of its current collapse. Venezuela’s last credit assessment by Moody’s in March 2018 was a C rating and stable outlook. This is the lowest possible rating by Moody’s,with no other country sharing this rating. Holders of Venezuela government bonds were
told to brace for large losses, with more defaults expected. Meanwhile poverty, disease and famine are rife with people starving in the streets and a murder rate that is 54 times higher than in
Britain. Inflation is currently at 80,000%. As of July 30 2018, an ounce of gold would have gone for 211 million bolivars—an increase of more than 3.1 million percent from just the beginning of the year. Any Venezuelan family that had the good fortune to save some money in the form of gold during the better times now are in a far better position than those just in cash.
Rewind back to the 1970s, the oil price was booming and Venezuela was the richest country in Latin America. Workers pay, conditions, living standards and state benefits all enjoyed massive increases due to the price of Oil. The Venezuela government at the time thought in its infinite wisdom the situation would last and continued on a policy of expenditure and started investing, spending too much money, more than Venezuela’s reserves had at the time. The consequence was that by the mid-1980s, the country was immersed in foreign debts unable to pay them back, leading to an economic crisis.
The current crisis mirrors ones from the past, only this time much worse. On 6 December 1998, Hugo Chávez proclaimed a new dawn of social justice and people power: “Venezuela’s resurrection is under way and nothing and nobody can stop it”. Hugo Chavez had a noble aim, to try and redistribute the abundant riches in oil wealth on a more equal scale for the Venezuelan people, but through ineptitude, corruption and the crippling effect of U.S led sanctions this concept of a social regime has failed dramatically. Hugo Chavez died in 2013 only to be replaced by his successor President Nicolas Maduro. Maduro has faced a difficult task to get the country back on track, and largely blames US sanctions for the current state of affairs.
Maduro often said he was fighting an “economic war”, calling newly enacted economic measures “economic offensives” against political opponents he and loyalists state are behind an international economic conspiracy.
Maduros recent economic initiatives have failed to work, having set up a crypto currency called the PETRO in 2017 the first attempt for a country to enter a fully digital online currency backed by oil, gold and steel reserves. The idea sounded good on paper but the currency is largely illiquid and untraded, a large number believe it to be a scam.
The fault of the Venezuela government lies with its dependency on imports and reliance on a strong oil price for prosperity.
The future at this point remains uncertain, it is unlikely that Maduro will be able to cling to power as the people starve slowly around him. Even his strongest supporters may concede. For a country with the largest oil reserves in the world, the country is in dire need of a new solution that works. The external global intervention is a complex issue, the US has placed sanctions such as the prohibiting of investing in Venezuelan government debt and its state-owned Petroleum company PDVSA. At the beginning of the year the national security adviser, John Bolton said $7bn of PDVSA assets would be immediately blocked as a result of the sanctions while the company would also lose an estimated $11bn in export proceeds over the coming year. This is just one example of the many sanctions that have been placed on Venezuela, this alone will have large knock on effects to the average person.
The country is experiencing a large “brain-drain” with a large percentage of the middle class choosing to leave the country, currently around 3 million have left since 2015. Only the unfortunate and people without economic means will be the hardest hit. The SWIFT payment system allows for cross border global payments, countries like Iran, Venezuela etc which are put on sanctions lists cannot transact using SWIFT; this effectively cripples their ability to trade with other countries. If you aren’t with SWIFT, you are on your own. The US will outline who will utilise SWIFT and who will not. The current world crisis’s playing out at the moment may completely change the status quo with regards tothe banking system and the likes of a decentralised crypto-currency may unseat and be the undoing of corporations like SWIFT in the future.
The US is sponsoring a campaign for international recognition of Venezuelan opposition leader and head of the country’s elected legislative body Juan Guaido over President Nicolas Maduro. President Nicolas Maduro is seen as being more closely aligned to Russia.
Juan Guaido prior to 2018 had been largely an unknown. On 23 January 2019 during the 2019 Venezuelan presidential crisis, Guaido took a public oath to serve as interim President of Venezuela, contesting the leadership of Nicolás Maduro. As of February 2019, his claim to presidency, based on an interpretation of the Constitution of Venezuela, has been recognized by around 50 governments. Maduro believes this opposition is a “puppet government controlled by Washington”. His belief is that after sanctions, which play a vital role in making a country poor, destabilising it causing widespread rioting and poverty, the US will step in, bring democracy and then largely takeover the countries resources, in this instance the largest oil reserves in the world. The UK recently got a request by the Venezuelan government fearing sanctions, to withdraw 1.2billion worth of gold from the Bank of England. The request was denied.
The US and Russia are engaging in a proxy power struggle with Venezuela, and the Venezuelan people will be the innocent victims. To summarise the problems with Venezuela is a difficult one, navigating media bias, Juan Guaido may deliver immediate results but it is easy to win the crowd over when they are poor, starving and easily influenced at this point. Maduros faults considered, one cannot help thinking his incentives may have yielded more positive benefit without external influences being present. But ultimately, a single-minded economy set on imports and a reliance on a single commodity sounds like a recipe for disaster.
One lesson learnt from this scenario, we all think this couldn’t happen to us, and we all have predefined ideas of what is extreme poverty, an image of a poor third world child is an image we are used to seeing from organisations like Oxfam. When we see the problem that seems more closer to home, one we relate to more, the reality becomes more worrying. These were people who had TVs, cars, internet, mobile phones and Facebook accounts. This was after all the richest Latin American nation, now turned into the poorest in a matter of decades. We can hope that if Juan Guaido gets into power then the US will very quickly resolve to cancel the current sanctions leading to an improvement in economic conditions. Nobody has recently mentioned the miracle
that was the Greece Bond price recovery in only a matter of years. It may be too soon to be going shopping for Venezuelan bonds just yet, but we all hope that the situation improves quickly for the people of Venezuela.
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