View from the Street: Don't cry for me Venezuela?

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View from the Street: Don't cry for me Venezuela?

It’s fair to say that Venezuela gets a good amount of bad press.

Don’t worry; I’m not here to propagandise one way or another. The international coverage of the government of Hugo Chávez or more recently, Nicolás Maduro, can speak for itself.

But as a Venezuelan living in the UK, I’ve noticed some of the uses and abuses of my country in British politics. To politicians in the UK, we are either an example of socialism’s worst excesses or, as the shadow chancellor put it, that we “took a wrong turn” and are no longer socialist enough.

Beyond widespread disbelief as events unfold, there’s also no small amount of ignorance which it’d help to correct.

Take one such area of disbelief – inflation – the sheer magnitude of which is hard to comprehend. It is also hard to know its exact measure, given that the Central Bank stopped publishing economic statistics in 2015. The National Assembly puts it at 82,766%, and the IMF calculates 13,860%, although it expects it to rise to one million per cent by the end of the year.

Its consequences have bordered on the apocalyptic. During an internship at a wholesale distributing business in Caracas last summer, I experienced the effort that goes into avoiding them: updating inventory prices twice a week, following up on clients that have not paid before inflation diminishes the value of earnings, and looking for ways of converting cash into something more worthy on a regular basis. Decisions had to be made quickly. If we didn’t get rid of our bolívares by the end of the week, we would lose money by Monday. Back then, inflation was only around 1,000%.

So how did Venezuela end up in this situation? A hostile business environment coupled with dwindling oil output has severely limited the country’s domestic supply of goods and commodities. Strict foreign currency exchange controls have reduced imports (foreign currency remains inaccessible for most of the population). Most importantly, the government has funded its large budget deficit through unlimited seigniorage – or flooding the market with currency. The first two result in the scarcity of most products which drives prices up, but the latter is a one-way trip to hyperinflation.

But neither can we rely on our institutions. Needless to say, the Venezuelan Central Bank (BCV) is not autonomous. Over the past two years, the bank has had three presidents, all in some way connected with the ruling PSUV party which has held power since 1999. Besides the BCV, most institutions in the country are under tight control of the party, meaning the system of checks and balances that made Venezuela a relatively strong democracy in the latter half of the 20thcentury was eroded.

Independent institutions seemed more robust than they actually were. If you visit any government office in Caracas today, to pay taxes or renew your passport, you will find party paraphernalia everywhere. Even worse, there are de facto political requirements to qualify for government jobs, social programmes and even subsidised food, on which an increasing number of people rely to live.

This strategy is proving to be self-defeating. Notable high ranking officials such as Rafael Ramirez, the previous president of the PDVSA (the State oil company), and the former Chief Prosecutor, Luisa Ortega, have openly criticised the system. They are now in exile. More dangerous for the stability of the ruling party, however, are the consequences that partisanship has had on oil output, by far still the main source of revenue for the country.

After Rafael Ramirez was sacked as president of PDVSA, an army General who was key in suppressing the 2014 wave of protests, Manuel Quevedo, was appointed president. Quevedo, who at the time had no relevant educational or professional experience, has since driven the company to the brink of collapse. PDVSA’s output currently sits at 1.4 million barrels per day, down from 2.654 million bpd in 2015. The lack of liquidity and poor governance has distanced China and Russia, which traditionally invested heavily in the country but now are concerned about current debt repayments.

“PDVSA’s declining production reflects the lack of knowledge and experience of the current board of directors and the political infighting taking place at the oil conglomerate” Ramirez said in an interview for Bloomberg in May. In the midst of the chaos, most of the skilled workers that remained at PDVSA have fled the country. Without a revenue source, the PSUV is now unable to sustain the patronage system that keeps it in power. Looking for ways of increasing its reach, the party inadvertenly undermined itself.

Nonetheless, it is difficult to estimate any ending to the crisis. May Venezuela serve as a strong reminder of why independent state institutions matter.

Juan Palenzuela is a researcher with Charlotte Street Partners, currently studying for a degree in Economics and Politics at the University of Stirling. A native of Caracas, Venezuela, he is interested in financial markets and public policy. During his free time, he works for the University’s Student Managed Investment Fund, of which he is the Secretary, and plays squash.