As markets brace themselves for the negative effects of the decline in oil prices, Venezuela will probably be the first big domino to fall.
Domestically, the most likely scenario is an imminent economic collapse and a humanitarian crisis. Internationally, it will imply the largest and messiest emerging market sovereign default since the Argentine crisis of 2001. The situation is made worse by the inability of the political system, at present, to address the situation.
Why Venezuela? First, because while most other oil exporters used the boom to put some money aside, former president Hugo Chávez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111. He also used it to maim the private sector through nationalisations and import controls. With the end of the boom, the country was put in a hopeless situation.
The year 2015 was an annus horribilis in Venezuela with a 10 per cent decline in gross domestic product, following a 4 per cent fall in 2014. Inflation reached over 200 per cent. The fiscal deficit ballooned to 20 per cent of GDP, funded mainly by the printing press.
In the free market, the bolivar has lost 92 per cent of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered. Shortages and long queues in the shops have made daily life very difficult. No wonder the government lost the elections for the National Assembly in December.
As bad as these numbers are, 2016 looks dramatically worse. Imports, which had already been compressed by 20 per cent in 2015 to $37bn, would have to fall by over 40 per cent, even if the country stopped servicing its debt.
Why? If oil prices remain at January’s average levels, exports in 2016 will be less than $18bn, while servicing the debt will cost over $10bn. This leaves less than $8bn of current income to pay for imports, a fraction of the $37bn imported in 2015. Net reserves are less than $10bn and the country, trading as the riskiest in the world, has no access to financial markets.
In the meantime, the government has not announced any plans to address the domestic imbalances or the balance of payments problem. It has no strategy to seek the financial assistance of the international community. It has not even increased petrol prices from their current level, where $1 buys over 10,000 litres.
By contrast, the opposition, which now controls the National Assembly, is fighting to have its authority recognised by the other powers. It is in no position to lead an economic adjustment. Even the best and most stable government could not avoid a lousy performance in such circumstances. But in the middle of a political crisis, things are bound to get very messy indeed.
The fallout for Venezuela’s neighbours and the global economy will be substantial. Colombia has already felt the impact of the decision taken in September by Nicolás Maduro, Chávez’s successor as president, to close the border to avoid smuggling. Exporters to Venezuela are owed tens of billions of dollars of unpaid bills.
Under these conditions, a disorderly default, on a scale similar to the Argentine crisis, is almost inevitable. And it will not only be Venezuelans who get hurt.
Faced with this problem, neighbouring countries and the international community have remained surprisingly passive. They seem to have forgotten that the International Monetary Fund was created to avoid countries causing harm to others through their economic policies. Article IV of its founding charter, adopted in 1944, empowers the IMF to perform economic surveillance on member countries. The obligation to accept such monitoring is the corollary of the right of countries to be informed about what is happening elsewhere. But other countries cannot know what is happening in Venezuela now because the government has not let the IMF in since 2004, violating its obligations under Article IV.
To protect their economies from the coming mayhem, countries should start by exerting pressure to have IMF surveillance performed immediately, thus restoring their right (and that of Venezuelan civil society) to know what the current situation is.
It is probably too late to avoid a Venezuelan catastrophe altogether. But to reduce its length and intensity, the country needs to adopt a sound economic plan that can garner ample international financial support. This is unlikely to happen while Mr Maduro remains in power. But a transition will be facilitated by positive international signals of a willingness to support an alternative government that can formulate a credible path to recovery. This is no time to remain on the sidelines.