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THE DISMAL SCIENCE | Venezuela Can’t Feed Its Cats

Courtesy of Allcat.net

Long lines and empty shelves plague Venezuela’s grocery stores as its economic crisis shows no signs of stopping. Pets are also feeling the effects of the prolonged food shortages as residents are struggling to spare a single morsel, according to a report by CBS.

The South American nation traditionally relies on foreign goods to stock its stores, but imports are down 40% from last year, according to a report by NPR. The reason for such a sharp cut is simple: the government is running out of money.

It is easy to blame the problem on a worldwide slump in oil prices. Oil contributes to 95% of Venezuela’s export revenues and 25% of its gross domestic product (GDP), according to the Organization of Petroleum Exporting Countries (OPEC) website. This means that Venezuela’s export revenues dropped by about 49% over the past two years following Brent crude’s plummet from $100 per barrel to $48.50 as of this article’s publishing.

The outlook for oil suggests that prices will not rise above $60 in the foreseeable future. Members of OPEC believe that prices above that level would lead to a new wave of U.S. shale oil operations and a subsequent glut that would drive prices down again and eat into their profits. This spells trouble for Venezuela’s bank account.

Oil dependency is unsustainable at current prices, but it is an integral component of the nation’s economy and identity. What else is contributing to the crisis that Venezuela can look to change?

Price and currency controls introduced during the Hugo Chavez administration are nearly as integral to the government’s identity. Price controls are damaging for two main reasons. First, the government must subsidize food in order to keep prices low. This eats into the government’s funds. If Venezuela were to stop subsidizing goods it would have more capital to allocate to imports. Second, price controls create an arbitrage opportunity. Smugglers can buy low in Venezuela, cross the border to Colombia and sell at market price. In addition to contributing to shortages this leads to tension on the border.

President Nicolás Maduro claimed last year that “From Colombia, all of the poverty and misery is coming over” according to the Wall Street Journal. He closed the border in response to drug-trafficking, smuggling and the shooting of three border officers in 2015. The border reopened to pedestrians in mid-August in response to demand for access to neighboring Colombia’s grocery markets. Since then, the government has resolved to at least temporarily re-open the border to vehicles at six different checkpoints later this month.

A temporary border opening is a Band-Aid to larger problems and inconsistent with the government’s policies. Venezuela must either abandon price controls or accept the fact that smugglers will relentlessly exploit the price differentials of each country. Since the long-standing controls seem unlikely to change anytime soon, the open border will not put items back on the country’s own shelves. In the short run Venezuela must look elsewhere to restock its pantries: government debt.

Debt service is a huge component of the country’s expenses. Its government debt to GDP ratio is 49.8%, which places it in the 62nd percentile among all countries according to data published by Trading Economics. This alone is not cause for alarm, but the fact that the year over year GDP growth rate is -7.06% according to Bloomberg is. If Venezuela does not start generating more output it will need to reevaluate where it spends in the very near future.

Emerging markets economist Guillermo Mondino of Citi stated that “Very few countries have gone to similar lengths” to avoid defaults, in an interview with the Wall Street Journal. President Maduro is committed to satisfying lenders, but there is a difference between a country’s willingness to pay and its ability to pay.

Venezuela will default on its government debt in the next year. Nothing in this article is investment advice, but that makes now a good time to purchase credit default swaps on any outstanding Venezuelan debt and to avoid purchasing any more issued by the government. It cannot continue to balance the effects of oil dependency, price controls and debt payments. Unless the country overhauls either its economy or government immediately it will reallocate its funds from debt service to food orders. In the long run, it can protect against shortages by ending price controls and permanently opening its borders. In the short run, Venezuela cannot afford to feed its cats, let alone its own people. It is unreasonable to expect it to keep feeding lenders.

1 comment

  • Ah, the wonders of socialism, on display once again, for all the world to see. And yet, SO many people are hell-bent on applying this utterly failed economic policy to America. Truly, “there are none so blind as those who will not see.”

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