Venezuela Faces Debt Default

Venezuela has only $10 billion in reserves left, and is facing civil unrest and bankruptcy according to insider reports. The country has begun seizing private property to make up the shortfall, and has reacted harshly to protests against President Nicolas Maduro. The International Monetary Fund (IMF) sees no end in sight for Venezuela’s financial crisis, predicting 25 percent unemployment and a whopping 720 percent inflation rate in the upcoming year. To make matters worse, despite laying the blame for the ongoing recession on the United States, Maduro donated $500,000 to the Trump inauguration, instead of dedicating funds to importing food and medicine.

Venezuela's reserves drop to record lows as country faces default.

Misplaced Subsidies Wasted Past Oil Income

The Venezuelan economic crisis is partly fueled by a clash between socialistic ideology and market forces. The country is home to the largest proven reserves of oil in the world, and Maduro’s predecessor Hugo Chavez used the revenue from petroleum sales to provide welfare programs for the citizenry. However, oil prices have been falling consistently since 2013, when Maduro took office following Chavez’s death. In addition to earning less per barrel, the relationship between Venezuela and the United States soured, which resulted in a shortage of dollars with which to buy imports. The country is reliant upon the international community to provide much of its medical supplies, but can no longer afford to purchase them, and instead has turned to the UN to request assistance.

Dwindling Reserves Signal Disaster

Maduro is desperately scrambling to pay looming debts that add up to $7 billion for 2017. Foreign payments have drained Venezuelan reserves, which have gone from $30 billion in 2011 to $10 billion today. As an added factor, economists estimate that at least $7 billion of the country’s reserves are in gold, which is not typically treated as a liquid asset, and which also has a highly unstable value.

Venezuela Escapes Debt Default

Venezuela narrowly avoided default earlier this month, when the state owned oil company PDVSA made a $2 billion debt repayment on time. The true test will come in six months’ time, when another payment of $3.5 billion becomes due. Without sufficient reserves, Maduro is hoping for a deal with Russian oil company Rosneft, which would see an influx of foreign money in return for shares in PDVSA. Without this arrangement, investors current rate the odds of a default within the next five years at nearly 90 percent.

Given the social problems facing Venezuela, many analysts viewed this month’s debt payments as being extremely positive, since the President could have declared a state of emergency and used this as an excuse to avoid repayments. Still, much of Maduro’s zeal to avoid default must be to keep his lines of credit open as long as possible. In order to continue to produce enough oil to meet even the most minimal of the country’s ongoing budgetary needs, PDVSA needs foreign investors to provide supporting services. The oil industry accounts for almost all of Venezuela’s exports, and if that is cut off, the trickle of refugees fleeing for Brazil and Columbia could turn almost immediately into a flood.

Is Venezuela a Dictatorship?

Currently President Maduro has kept a tight rein on the opposition be delaying regional elections and working with a sympathetic Supreme Court to cut out the national assembly, which is antagonistic towards his aims, from the decision making process as much as possible. Critics worry that Venezuela is slowly becoming a dictatorship. This claim was bolstered earlier this month when the government seized a privately owned GM car factory in what it claimed was a legal dispute. GM has argued that the seizure was meant to provide Maduro with access to more equipment without having to draw into its precious foreign funds.

How Does the Venezuelan Crisis Affect Trading?

The cost of oil will continue to be held down if one of the world’s major producers is completely reliant gas to avoid a total economic crisis. Ironically, the seizure of the GM plant should increase GM shares, because the plant was not operating successfully due both to a lack of materials and a lack of local buyers. Until the government takeover, GM was responsible for paying its employees despite there not being any work. Now those funds can be reallocated.