Venezuela, once the richest country in Latin America, is coping with one of the worst economic disasters in the world.
Venezuela, once considered one of the richest countries in the world, is now suffering from skyrocketing inflation, emigration, starvation and political unrest. The national currency, the bolivar, has become almost useless.
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The IMF predicts inflation will continue to rise by up to one million this year. To put that into perspective, Venezuelans are now paying about two million bolivars for a cup of coffee.
In an attempt to solve the problem, the government has introduced a plan to curb hyperinflation, reports Latin America editor Lucia Newman, from Caracas. There is a new currency, the “sovereign bolivar”, which removed five zeroes from banknotes. It is backed by a cryptocurrency, the petro, that is pegged to the price of oil.
The government is also raising the minimum wage by 3,000 percent, raising taxes, and increasing petrol prices for some drivers. And faced with a squeeze on the country’s cash reserves, President Maduro wants
Venezuelans to pay more for what is currently the world’s cheapest gas.
oil production continues to decline, international reserves are not enough to cover any type of imports, and the government is unable to cover its debts and obtain more financing.”]
According to Carlos Cardenas, head of Latin America, Country Risk, IHS Markit, the current crisis is a culmination of a number of factors years in the making. “It has been accompanied by indiscriminate public spending via the printing of currency, the implementation of draconian price and exchange controls that were never relaxed, a policy of expropriations of companies that ended up being mismanaged and bankrupt – all of these compounded by economic mismanagement and widespread corruption.”
Additionally, US sanctions on Venezuela have had a crippling effect. “The key issue about US sanctions is they’ve operated in two ways. One, they’ve targeted top individuals of the government elite in an effort to promote regime change … the other one, and most critical for the economy, is the sanctions prevent Venezuela from restructuring its debt,” explains Cardenas.
“The country is in default because of the depletion of the foreign exchange reserves, it doesn’t have the ability to honour any payments to bondholders or any company operating in Venezuela. But it’s also unable to restructure that debt in the US financial system.”
“Regardless of the sanctions, the key issue is the authorities are still unable to present a credible economic package or programme that would take out the economy out of the current crisis – so that and,[in] combination with US sanctions, make the economic and political situation more difficult.”
Overall, the new currency will have “very little impact,” according to Cardenas. “The critical point here is that oil production continues to decline, international reserves are not enough to cover any type of imports, and the government is unable to cover its debts and obtain more financing.”
Also on this episode of Counting the Cost:
Tesla cars: Tesla has a market value of between $60-70bn. The electric carmaker’s been trading as a public company for eight years, but it has never made an annual profit. CEO Elon Musk’s vision of integrating clean energy with transport and home power – some might say is the perfect marriage. But is Tesla on the cusp of profitability or is this a bubble?
Arash Massoudi, corporate finance and deals editor at the Financial Times offers his take.
Greece bailout: Greece is celebrating the end of eight years of bailouts. It has avoided bankruptcy since 2010 through $300bn of international loans from the IMF and the European Union. But alongside the punishing austerity policies, Greece had to abide by there was also a human cost involved, as John Psaropoulos reports from Athens.
US-Russia sanctions: It’s been a busy week for US President Donald Trump who has been pushing ahead with his “America First” agenda. Negotiations with Beijing over trade tariffs have failed to reach an agreement. The US president imposed new sanctions against Russia and his dispute with Turkey over tariffs sees no sign of abating. Shihab Rattansi takes a deeper look at how the Tump administration is using its financial clout to go after those it feels are adversaries.