The situation in Venezuela is bad, and things are going from bad to worse — as we have highlighted and warned about repeatedly — amid the tumble in the price of global oil, a plunge in the nation’s currency and reserve currencies, consumer goods shortages, hyperinflation, a selloff in emerging markets, a global market selloff. You get the picture.
Last week, Jefferies warned that this perfect storm of drama combined with a social and political upheaval was likely going to undermine the country’s willingness or ability to pay its external debt.
On Friday, Barclays sent out an urgent note to investors — underscoring the severity of the situation in the South American Nation — warning that Venezuela is suffering its deepest economic crisis in its history and that its economic output is likely to tumble 9.1 percent this year.
After crunching the numbers, Barclays estimates that the actual fall in economic activity for Venezuela would be around 16.5 percent between 2014 and 2016. A jump off the bridge in terms of its economy.
But that is just the tip of the iceberg, if you will. Barclays is estimating that Venezuela’s inflation for that period will exceed 1,000 percent. That figure leaves one speechless, as you could only imagine the triumph of the every day worker just to cover the day-to-day needs of themselves or their family.
Venezuela’s hyperinflation — absent of wage growth — has increased to nearly nine times monthly wages necessary for workers to purchase a monthly consumer basket of goods, which is a leading indicator for social unrest, according to Siobhan Morden, head of Latin America strategy at Jefferies.
“It is impossible to understand why the government is not reacting to this reality, why it has not taken measures to alleviate the economic distortions that are destroying the real income of Venezuelans,” Barclays said on Friday.
The Crisis Will Only Get Worse
Despite the above mentioned, Venezuela’s economy has clearly entered a crisis, not today, not yesterday, not last month, more like last year (or years before).
However, despite such troubles, President Nicolas Maduro won’t likely announce any changes in economic policy before congressional elections in December, according to Barclays.
Rather scary, very scary, indeed.
“A weak president who will have lost an election in the middle of a very strong economic crisis will not be able to take any fiscal measures,” Barclays said. “The probability of a political transition in Venezuela seems to be much higher than what the market has been pricing.”
Instead of taking fiscal measures, the government is selling all its liquid assets to maintain an “extremely inefficient” exchange rate system and pay the external debt, according to Barclays.
“All the main political actors appear to be thinking only of the near term, and there is no clarity about what they will do after the elections, leaving a very uncertain scenario for 2016,” Barclays said.
A perfect storm appears to be on the homefront of Venezuela, as a social and political upheaval is likely to drive a default and riots/unrest.
This perfect storm of factors will take its toll on the everyday worker, and their family, and subsequently bring social unrest to a new level.
No, this is not the “U.S. propaganda” that Maduro spins, although there is likely some U.S. destabilization efforts in there. This is simple economics 101. When the average worker cannot afford or cannot pay his or her bills despite all efforts after after a number of months (or years, in this case) …chaos will follow.
So, as the nation continues to crumble, and as its currency continues to plunge, reserves dwindle, global markets selloff, and as residents continue to endure such pain. There appears to be no relief in sight for the nation.
For those of you that are not familiar with Venezuela’s economy. Let me give you a crash course: The nation relies heavily on oil, as it accounts for around 97% of its export revenue, which the nation urgently needs to pay off its debt. As the price of oil has tumbled — alongside the nation’s currency — the situation has remained extremely grave.
One thing is for sure, the nation will suffer some serious pain in the near-term, and for the foreseeable future unless there is a rebound in the price of oil and new leadership.
The only sign of hope that Barclays could offer, and a very slim chance at that, was that Venezuela may have enough money to pay its foreign debt, possibly through the first quarter of 2016, if there was a “moderate increase in the price of oil” and further cut in imports. However, no further details we offered by the bank.
The bottom line is this: unless some kind of miracle in the oil market takes place, at least in the near-term, Venezuelans will need to prepare for further pain. My prayers are with you.