The Strategist

Does Venezuelan economy have a future?

07/25/2018 - 10:40

Hyperinflation in Venezuela is gaining momentum against the backdrop of the most severe financial, economic and humanitarian crisis that has been going on for five years. Tens of thousands of Venezuelans are leaving the country in search of a better life in Brazil and Colombia.

The IMF warns in the updated forecast of the development of Latin America that the "diseases" of Venezuela are contagious and can spread to neighboring countries.

"We forecast the rise of inflation to 1,000,000% by the end of 2018," Alejandro Werner, head of the Western Hemisphere's administration at the IMF, commented on Venezuela's results. "It's very similar to what happened in Germany in 1923, or in Zimbabwe at the end of the 21st century".

At the same time, Werner stressed that the forecast for Venezuela is very approximate. By the end of the year, he says, inflation may reach either 800,000 % or 1.2 million %.

The IMF expects that Venezuela's GDP will decrease by 18% this year. This will be the third consecutive year, when the GDP of this South American country is reduced by double digits. For five years of the most severe crisis, the country's GDP has declined by 50%. For the last 50-60 years, this happened on the planet a few times. It is noteworthy that this is an adjusted forecast and that in May, that is, just two months ago, the IMF forecasted a 15% decline in Venezuela's GDP.

The economy of Venezuela depends entirely on oil. Proceeds from its sale make up almost 96% of the country's budget. The oil industry is on the verge of collapse, so that the general economic crisis does not surprise anyone. According to OPEC, oil production in Venezuela fell to a new 30-year low, to 1.5 million barrels per day, in June. Recall, we are talking about the country with the largest explored reserves of oil on the planet.

President Nicolas Maduro won presidential elections in May and extended his term of office for another six years. He blames Venezuela for the economic war waged by both external (the US and Europe) and the internal (the opposition) enemies.

The scale of the crisis is also indicated by the fact that the government has ceased to regularly publish data on economic development. To make forecasts, analysts have to resort to the data of independent economists and resort to cunning. For example, according to the Bloomberg Cafe Con Leche Index, which assesses a country’s economic situation depending on the cost of a cup of coffee, inflation in Venezuela last year exceeded 60,000% and keeps gaining momentum in 2018. Over the past three months, it almost reached 300,000% on an annualized basis according to the coffee index.

If we return to the economic situation in the region, IMF analysts note in their forecast that the crisis in Venezuela will slow the development of the Latin American economy this year to 1.6%. In May, the growth of the regional economy was projected to be 2% in 2018.

Excluding Venezuela from the list of countries in the region, Latin American economic growth this year will accelerate to 2.3%, and in 2019 - to 2.7%.