Venezuela: Chaos Draws Near


EspañolIt is no longer a secret to any financial analyst that, even in a best case scenario, Venezuela will not have sufficient foreign currency in 2014 to meet the already low volume of imports recorded in the previous year. In 2013 the country suffered through a severe shortage of even basic goods like toilet paper, and will this year, likewise, be barely able to pay for its citizens’ most essential needs.

Any analyst who understands Venezuela’s balance sheet has realized by now that it will be impossible for the government of Nicolás Maduro to honor the debt of US$13 billion owed to foreign and domestic companies that supplied the country last year, and at the same time have the resources to pay for all this year’s imports.

Venezuela’s access to international credit has also been completely shut down. Venezuelan debt has the highest rate of risk in the world, even greater than Zimbabwe and Ukraine.

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At the same time, the communist government in Caracas continues to suffocate businesses, who besides operating in a country with the highest inflation rate in the world, must now also deal with draconian price controls that include decades in prison for simply trying to set a price without first seeking the permission of the “Superintendent of Protection of the Socioeconomic Rights of the People.”

Without expropriating all real-estate property, as done in Cuba in 1961, Maduro has effectively cancelled all rights to property. Leases for housing and commercial properties have been set well below market values and are subject to a de facto indefinite freeze. New regulations have made it so that a property owner recently noted that it was easier to kill a non-paying tenant, than to evict one.

Businesses that still qualify for the allocation of foreign currency by the government, such as in the food or medicine market, must now deal with new regulations and requirements to obtain those precious dollars. For these supposed privileged businesses, regulations are so complex and full of so many absurd requirements that it makes obtaining foreign currency incredibly difficult — akin to the biblical phrase, “passing a camel through the eye of a needle.”

Meanwhile, sales in the commercial sector have fallen more than 40 percent so far this year, while other industries, such as automotive, have already registered decreases of up 80 percent.

Following the student protests and street actions led by Leopoldo López, Maria Corina Machado, and Antonio Ledezma, the government has been forced to show a willingness toward dialogue. In a very calculated way, the government has been trying to send a message of encouragement to the private sector, seeking to break the natural alliance between the few business that still exist in the country and the political opposition that has taken to the streets to try and save Venezuela from Cuban communism. To manage this new dialogue, the government has resurrected their old snake charmer, José Vicente Rangel, in an attempt to convince a few in the business herd that the wolf in sheep’s clothing, Nicolás Maduro, is actually harmless.

Venezuelan businessmen and local directors of the remaining large multinational companies have kept their appointments, talked with government officials, and feigned tranquility. The truth is, unlike other moments in the past, no one has allowed themselves to be convinced by the “Little Red Riding Hood” of Chavismo. Everyone now realizes that the only hope to avoid the economic chaos that is already on its way to Venezuela is to disassemble the restrictions Nicolás Maduro has imposed on the economy since the death of Chávez. Even that may not be enough unless the government puts a stop to the financial aid to Cuba, which has become the country’s bleeding ulcer.

The government, in its desperation, shifts the blame to businesses, the same ones to which it owes US$13 billion for their 2013 imports, accusing them of not importing this year despite having the required permits and the promise that this time, really, they will get paid. Meanwhile, in an attempt to buy time, the government sends officials to friendly countries like Argentina, with checkbooks and hundreds of millions of dollars to buy goods directly. These Chavistas, having received their economic education in Havana, believe this will actually supply and sustain the country.

These latest missions of Venezuelan officials dedicated to buy goods abroad will end up like so many others in the recent past. Billions of dollars will be used to acquire a few products at greatly inflated prices, enriching several intermediaries along the way, most of them foreigners. The latest example of the results of these desperate attempts to substitute the knowledge and experience of the private sector with that of the state, is in the recent decision to buy newsprint to supply the country’s press.

After months of delays in allocating foreign exchange for newspaper publishers to buy their own newsprint, the government decided to import the paper directly. Each company was forced to pay the government the equivalent in bolívares in advance according to what each one would receive. In the end, the prized newsprint finally arrived, but with completely different specifications than those required by the printing equipment of almost all major newspapers throughout the country, making it impossible to use.

This is just one example. We could give many more. Maduro has handcuffed the private sector and suffocates it as he pretends to be able to replace it at a time when Venezuela no longer has the resources that kept Hugo Chávez in power. The shortages the country has experienced so far are only a small sample of what is coming, and very soon.

The recent announcement of a new source of “open” foreign currency that the government has called SIDAD II, has raised the optimism of a few insiders within the financial circles of Caracas. They say they are optimistic about the drastic reduction in domestic liquidity that this mechanism will produce, and for the new life it will give to multinational companies that have billions of dollars locked inside the country in non-convertible local currency. In my view, these analysts are wrong and this new mechanism will only accelerate the path to economic chaos.

Some large multinationals will indeed make huge transactions through SICAD II, and initially, they will be quite happy to get funds out of Venezuela. However, this same mechanism will produce huge accounting losses for these very same companies. The losses will be so great that once those funds have been withdrawn from the country, there will be no sense in continuing to be exposed to the risks of a communist economy. Multinational companies will be happy, yes, but happy as they head towards the exit.

Further, the enormous reduction in the money supply that SICAD II may produce will have the same effect over the national economy as an orthodox adjustment in the style of the IMF, an organization so hated by Chavismo. In effect, this huge reduction in liquidity will occur just as the surviving firms in the country are experiencing a drastic drop in sales and a sharp decrease in margins from price controls. The result will be a credit crunch at the worst moment possible time for many businesses, and the result will be the financial ruin of thousands. In the end, SICAD II will have the same effect as a traditional or orthodox adjustment. Inflation will drop because the economy will shrink drastically.

The end of this story will be dramatic. Besides having suffocated the economy with controls and regulations and having squandered oil funds, Maduro has now allowed himself to be led by a small self-serving group within the Caracas financial circles and will attempt to put out a fire with gasoline. Instead of initiating a real dialogue and trying to get some oxygen into the economy by dismantling controls, Maduro will enrich a small group, who designed this scheme, and — perhaps for the best — proceed to commit economic suicide.

Many if those who believe SICAD II can save the government are the same ones who believe Leopoldo López and his allies were too extreme in calling for street action. These are many of the same people who said it wasn’t “the right time.” What will soon happen in Venezuela will test how wise this decision was by those brave leaders. Venezuela will soon witness the total collapse of an incompetent, corrupt, and incapable regime.

Translated by PanAm Post staff.

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