Date: 4 Feb 2019
What difference will the latest US aid make to Venezuelans given that so much of the unrest is about living standards and the economic crisis in the country?
This is a unique opportunity to restore democracy in Venezuela and to put in place sound economic policies for stability and growth. This can only happen if international and domestic political forces act in tandem as has been the case now.
What needs to change for Venezuelans to enjoy the wealth that the world's biggest proven oil reserves should bring?
1. Rule of law and property rights must be fully restored
2. restoring the independence of the central bank
3. Deregulating economic activity / dismantling crippling controls over all business decisions
4. Orderly public debt restructuring for debt sustainability
5. Multilateral and bilateral loans for transition + Aid
6. Macroeconomic stabilization aimed at eradicating hyperinflation and restoring growth
7. Growth to be driven by private investment
9. Rebuilding the oil industry
10. A sustainable and effective social safety net
What difference will the US sanctions on PDVSA make and will they be easy to implement?
US sanctions have effect on two areas:
1. Venezuela's foreign assets are placed under Guaidó's control -- this is in process of being implemented in the financial sector.
2. By sanctioning Pdvsa they hit the heart of the government's source of income
By designating Pdvsa as a Specially Designated National (SDN) it toxifies any business with the company and all its subsidiaries. Seven General Licenses have been issued by the Office of Foreign Assets Control (OFAC) to allow winding down Pdvsa purchases and contracts over a 3-6 month period.
But in my view the impact is almost immediate and oil production will fall by about 300-400 kbd in the first 1-2 months, until Pdvsa can find new markets for its heavy oil and new suppliers of diluents.
The sanctions virtually bring the flow of Venezuelan oil to the US to a halt by forcing that all payments be placed in blocked accounts (this hits 50% of Venezuelan oil exports -- $6 bn), prohibiting US exports of diluents to Venezuela which are indispensable to upgrade Venezuela's heavy oil (50% of diluents used by Pdvsa come from the US). US persons have 3-6 months to wind down their operations in Venezuela and it is likely that they will stop operating sooner rather than later if they don't get paid.
Moreover, the broad scope of the SDN declaration may lead companies in many sectors (including suppliers, buyers, contractors, and insurers) to withdraw from doing business with Pdvsa in order to avoid the risk of being sanctioned.
What are the main reasons that Venezuela's economy is in such a bad situation?
Bad policy for over 20 hears, encompassing both the Chavez era (14 years) and Maduro's six-year term (2013-2019):
- no rule of law
- harassing and threatening the private sector: industry and banks
- over-regulating businesses / price controls / forced sales of goods to the government at below cost prices
- minimum wage increases by decree
- heavy fiscal deficits financed by the central bank --> monetary expansion
- abysmally negative real interest rates
- foreign exchange controls, an overvalued currency and a soaring black market
- destruction of institutions
- gross mismanagement of pdvsa
The decline in oil production and oil prices made this situation untenable, and Venezuela landed in a 5-year recession, having lost more than half of its GDP, hyperinflation (2 million% last year, heading towards at least 24 million% this year) and massive emigration.