The macroeconomic problems in Venezuela do
not mirror the situation in the Ukraine.
BY WALTER T. MOLANO
anniversary of President Hugo Chavez’s death coincided with street riots, as
well as the meltdown of the Ukraine.
Immediately, a tidal wave of reports and articles heralded the imminent demise
of President Nicolas Maduro. Clearly, things are not going well for the former
bus driver. There are widespread shortages, due to the application of draconian
exchange rate controls. Almost a third of the basic consumer basket is in short
Inflation is soaring, more than doubling during the past year to an annual rate
of 56 percent. Venezuelans are desperate to take their money out of the
country, tripling the parallel exchange rate to 83 from a level of 24 a year
ago. International reserves have dropped by a third, and hover close to the $20
billion mark. This leaves the country with an import coverage ratio of less
than 5 months, which is a relatively low number.
Moreover, the economy is flat lining. The combination of low growth, high
inflation and shortages of basic goods makes for an explosive environment.
Hence, it is little wonder that people are taking to the streets. There have
been more than two dozen deaths and scores of people have been injured. The
government has responded forcefully, using riot police to put down the
Yet, a closer look at the situation shows that severity of the macroeconomic
problems in Venezuela do not mirror the situation in the Ukraine. Furthermore,
the imbalances in Venezuela are relatively easy to fix.
VENEZUELA AND PDVSA
For all practical purposes, Venezuela is an oil producing company with a
national anthem. The country’s woes start with PDVSA. However, its solution
also sits with the national oil company. PDVSA was always a highly politicized
entity, with a great deal of independence. For most of the 1980s and 1990s, it
was the nation’s kingmaker, with the ability to shape policy and the national
However, Chavez’s decision to sack most of the company’s senior personnel and
technicians in 2003 transformed the institution. Losing its independence, it
became the principal instrument for the president’s foreign and domestic
policies. In 1998, Chavez complained that the company’s payroll of 45,000
employees was too large, and that he would do something about it.
Unfortunately, he expanded the payroll by adding another 100,000 workers. The
company was also affected by the departure of so many skilled technicians,
leading to an 18 percent decline in oil production.
Furthermore, Chavez decided to create new PDVSA subsidiaries to further his social
programs. For example, he created PDVAL for the distribution of food products,
poultry and pork processing and the construction of low income homes. These
projects sapped the company’s resources, reducing the amount it had for
additional production. Another major problem is the ridiculously low gasoline
prices. At a price of about a nickel a gallon, there are no incentives to use
gasoline effectively. Millions of gallons per year are smuggled into Colombia.
Since 2011, daily gasoline consumption has jumped 37 percent to 329,000 barrels
per day. Therefore, there is a lot of slop in PDVSA that could easily be
AVOIDING A SUDDEN COLLAPSE
At the same time, Maduro’s popularity is hovering close to 40 percent. It is
true that many of his supporters are turning against him, due to the shortages
and economic slowdown. Nevertheless, he still remains in firm control of the
governmental apparatus. The military has been extremely loyal and firmly
ensconced in their barracks. There is also a sense that the opposition does not
want to push too hard. They are asking for the Catholic Church to serve as a
mediator in order to defuse the tensions. A sudden collapse of the Venezuelan
government would do no good. It would destabilize the economy and society, thus
imperiling the country’s ability to service its external obligations. Moreover,
it’s not certain that a change in government would improve the country’s
prospects. A painful recession looms on the horizon whenever the government
decides to reform the oil sector and reduce the energy subsidies.
Last of all, there is a fair chance that a new government could repudiate the
external debt—since almost all of it was issued by Hugo Chavez and his
successor. Probably, the best scenario for bond holders is that the government
continues to look for patches to shore up its finances, such as the recent
Chinese loan for oil transaction of $5 billion.
In other words, Venezuela may be down, but it is not out.
Walter Molano is head of
research at BCP Securities.