Mises Wire

Venezuela’s March Toward Default

It is only a matter of time until Venezuela will default on its foreign debt. After a short peak in 2009, when the country’s foreign exchange reserves stood at over $40 billion, Venezuela has been steadily hemorrhaging its reserves down to $10 billion. In 2016, Venezuela started to sell gold in order to compensate for the loss of its monetary reserves. As a consequence, Venezuela’s gold reserves plunged from over 360 tons down to less than 190 tons. Other than in the case that some foreign power, such as China, for example, would jump in as a lender, Venezuela’s default seems unavoidable (graph 1).

Image

Venezuela is not only the victim of falling oil prices although these have the strongest immediate effect on the country’s finances. Oil revenue finances more than half of Venezuela’s government budget and accounts for almost all export income. Venezuela’s deeper problem comes from the fact that almost all of the government’s so-called social benefits in the wake of the “Bolivarian Revolution” under presidents Hugo Chavez and Nicolás Maduro have been financed by monetary expansion.

In 1998, before Hugo Chavez became president, the extended broad money supply (M3) stood at 10.6 billion bolivars. By 2010, the Venezuelan money supply had already risen to more than 290 billion bolivars, and as of October 2016, money supply M3 reached 7,513.9 billion Venezuelan bolivars (graph 2).

Image

Consequently, annual price inflation shot up from around 25 percent in the years before 2012 to over 180 percent by the end of 2015 until the government practically stopped publishing the official figure. The International Monetary Fund estimates an inflation rate of 480 percent for 2016 and of 1,640 percent for 2017.

Since 2012, the price of Venezuelan oil has dropped from $100 per barrel to less than $50. Due to political turmoil and socialization of the industry, the overall oil production of the country has fallen to a 13-year low in 2016. Venezuela’s exports that consist almost completely of oil have plummeted from a peak of $30.7 billion in the third quarter of 2008, to currently less than $10 billion per quarter. In February 2016, the Venezuelan government officially devalued its currency by 37 percent against the US dollar from 6.3 to 10 bolivars all the while when the black market rate stood at over 1,000 bolivars for one dollar.

The Bolivarian Revolution, which Hugo Chávez started in 1999, is coming to its end. Severe shortage of basic goods, food lines, exorbitant black market prices, the collapse of the currency and hyperinflation now afflict a country that claims to possess the highest proven oil reserves of the world.

It is only a matter of time until Venezuela can no longer finance its imports and social and political chaos of unprecedented proportions will afflict the country. The fallout will also affect Venezuela’s neighboring countries.

image/svg+xml
Image Source: Alexis Espejo www.flickr.com/photos/129885322@N02/
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute