Venezuela Squandered Oil Riches, Now Faces Default

When

December 15, 2014

Details

As global oil prices fall, the Venezuelan government must decide between devaluing the country's currency, cutting costs—including the state’s generous gasoline subsidy, or relying on Chinese support to keep the country's economy afloat, says Americas Quarterly Editor-in-Chief and AS/COA Senior Director of Policy Christopher Sabatini. Read his December 14 editorial in CNN Money below.

Venezuela squandered oil riches, now faces default

If you ever had a desire to invest in oil rich Venezuela, you may want to hold your money.

The government, first under the self-proclaimed revolutionary government of President Hugo Chávez and now under his handpicked successor Nicolás Maduro, has managed to squander one of the longest, greatest oil booms in history, not just misspending the oil windfall that at one point reached $133 per barrel, but also destroying the country's domestic economy.

As a result, Venezuela teeters on the edge of default on its debt.

Venezuelan benchmark sovereign bonds are now trading at 22 cents on the dollar--a shocking, sad situation for any petro-state, now made urgent with oil selling at around $60 per barrel.

The risk of default stems from the broad economic disaster wrought by the past 15 years of revolutionary government. At more than 60%, Venezuela has the highest inflation rate in the region, a result of government profligacy that produced a fiscal deficit reaching 12% of GDP and public debt at 26% of GDP by 2012. Part of this has gone to the government's popular social missions that provide free access to health care and education to the poor as well as subsidized food through state stores.

The larger problem is the gasoline subsidy that makes filling your SUV's gas tank in Venezuela (and there are many) the cheapest in the world and the hangover of former President Chávez' revolutionary ambitions both domestically and globally, supported by Venezuelan oil patronage.

A gallon of gasoline today costs a driver around 18 cents per gallon, but costs the Venezuelan government $15 billion a year to maintain. Similarly, thanks to former President Chávez' regional ambitions, the Venezuelan oil give-away program to allies in the Caribbean basin---supplying to Cuba, for example, around 100,000 barrels of oil per day--costs the Venezuelan people an estimated $7 billion a year.

Read more...




Like what you're reading?

Subscribe to Americas Quarterly's free Week in Review newsletter and stay up-to-date on politics, business and culture in the Americas.