Venezuela has entered an unprecedented economic, humanitarian and health crisis. President Maduro is desperately trying to save what he can by putting in place radical economic measures. What is the current situation and what are these economic measures?
Regarding the current economic situation of Venezuela, real GDP growth is expected to drop by 15% in 2018 according to the International Monetary Fund (IMF) in its last World Economic Outlook of April 2018. The decline could be even worse in the light of recent developments. The recession started in 2014 and has since greatly intensified. The IMF even talks of inflation that could reach 1,000,000% this year. This serious economic crisis is now accompanied by a crisis of confidence coupled with a humanitarian and health crisis. Indeed, two factors that often foreshadow hyperinflation are increasing and often accelerating inflation and an increase in the velocity of money. The velocity of money refers to how fast money passes from one holder to the next. The increase in the velocity of money clearly indicates a confidence crisis. Moreover, beyond this domestic confidence crisis, confidence in Venezuela has been largely altered from an external point of view since Venezuela was defaulting on its debt at the end of 2017.
In the wake of a serious confidence crisis and hyperinflation often comes a humanitarian and health crisis. Indeed, since the epidemiological bulletins have not been accessible since 2014, a National Survey of Conditions of Life of the population (ENCOVI for Encuesta Nacional de Condiciones de Vida), conducted by independent researchers, is alarming! Poverty is steadily increasing from 53% in 2014 to 87% in 2017. The food crisis is a huge concern as 80% of households say they are food insecure and over 64% say they have lost weight. On this point, according to this survey, the average weight loss recorded is 8 kg in 2016 and 11.4 kg in 2017. At the same time, few hospitals are operating today in Venezuela. Those still in operation are experiencing a serious lack of means, drugs, and equipment. 79% of surgical material is unavailable and 88% of the drug supply is missing. In addition, 79% of hospitals have water supply problems when almost all of them are no longer used to feed patients. These shortages of basic drugs cause an increase in mortality rates in patients suffering from harmless health problems. The disappearance of vaccination campaigns and other factors related to shortages are leading to the resurgence of previously under control or even extinct diseases such as measles, diphtheria or tuberculosis. How are local authorities responding to this massive crisis?
After launching on August 20th, new notes lost five zeros (a devaluation of more than 96% against the USD) replacing the bolivar (Venezuela’s official currency) by the sovereign bolivar, President Maduro’s reform program moves to “anchoring” the new sovereign bolivar to petro. This is the first time that a country anchors its currency on a cryptocurrency. Prices and wages will be fixed in these two currencies. According to the socialist leader, each petro is equivalent to about USD 60, based on the price of a barrel of Venezuelan oil, or 3,600 sovereign bolivars. This measure aims to circumvent the lack of liquidity and financial sanctions of the United States. The stimulus plan of President Maduro also provides for the multiplication by 34 of the minimum monthly wage from September 1st. It will rise to half a petro, or 1,800 sovereign bolivars, against the equivalent of 52 sovereign bolivars before the rise.
Venezuela: Beyond Ratings Sovereign Risk Scores (in %)
At the end of the day, it is imperative to study the merits of President Maduro’s reform program before the country sinks past the point of no return. To bring the country out of hyperinflation and the humanitarian and health crisis, Venezuela needs very deep economic reforms. This is always how countries come out of this kind of situation. But President Maduro will probably not be the hero that Venezuela needs. A new political force would be desirable, if not urgently needed, to try to reverse the situation…
Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, IMF, ENCOVI