In 2014 Venezuela acted like a cartoon character: before the abyss, it stepped forward and sank into a mixture of recession, hyperinflation, and devaluation that led to a dwarfed economy, where the quality of life decreases continuously.
The Central Bank hides the official statistics, but the International Monetary Fund estimates that in 2019 the economy fell 35%, which implies that between 2014 and 2019 Venezuela experienced a similar debacle to that of a country at war and the Global Domestic Product (GDP) contracted by 65%.
Urbi Garay, professor at Instituto de Estudios Superiores de Administración (Institute of Higher Administration Studies, IESA), contextualizes the performance and explains that according to the projection of the International Monetary Fund at the end of last year, GDP per capita, a determining indicator to measure the country’s wealth, fell back to 1944 levels: In other words, after adjusting for inflation and dividing the value of goods and services produced in 2019 by the total population, Venezuelans received an average income per person similar to that of 75 years ago.
Urbi Garay says that “in 1944 Venezuela was a poor, rural country, the economy was just beginning to grow due to the appearance of the oil industry. The destruction has been tremendous: if there was a change where everything gets done well and the GDP per capita began to grow at an optimistic annual rate of 8%, it would take 14 years to return to the level of 2013; If growth were only 5% per year, it would take 22 years”.
Oil production, an activity that provides more than two-thirds of the dollars that enter the country, fell in 2019 to a level similar to that of 1946 and, interestingly, diseases that plagued the population in the mid-forties of the twentieth century have also reappeared, like malaria and measles.
The cause of the Venezuelan bankruptcy is simple: after not saving during the years in which the barrel was traded at record levels, not investing to maintain oil production, borrowing heavily, wasting money, and losing international credit, the Bolivarian revolution found itself without enough dollars and cut the supply of foreign exchange, leading to a severe decrease in imports that companies need to produce.
At the same time, the government opened the door to hyperinflation and the collapse of the currency by creating money in large quantities to artificially cover the imbalance in their accounts. Later, it is noteworthy the added impact of sanctions from the U.S, who considers fraudulent the elections in which Nicolás Maduro was re-elected as president in 2018.
The new size
Economists agree that the amount of imports is an important thermometer to assess the size of production in Venezuela because companies use a large amount of raw material and inputs they buy abroad.
According to the foreign trade bulletin prepared by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Venezuela traditionally ranked sixth in terms of imports, but last year it fell to eleventh place, below countries it used to surpass, such as Peru, Ecuador, Costa Rica, Guatemala, and the Dominican Republic.
During the first quarter of 2019, the latest data period disclosed by the Central Bank of Venezuela, the imports of Venezuela totaled 2,947 million dollars while according to ECLAC, those of Panama totaled 3,163 million dollars, Costa Rica 4,023 million, Guatemala 4,771 million, Ecuador 5,573 million and Peru 10,297 million.
Ecoanalítica estimates that the imports of Venezuela in 2019 were 9,207 million dollars while the imports of the Dominican Republic totaled 15,172 million between January and September, although the population of Venezuela triples that of the Dominican Republic.
The fall in oil production, the limitations to export, and the moderation of barrel prices have caused foreign sales to fall significantly. In 2013, Venezuela was in third place in terms of exports in the list of Latin American and Caribbean countries only surpassed by Mexico and Brazil, but at the end of the first quarter of 2019, it had dropped to the seventh place.
Credit collapse
In a healthy economy, the main role of banks is to finance consumption and investment through credit. Yet, credit in Venezuela is in danger of extinction. At the end of 2013, the year before the start of the recession, the financial system allocated half of the deposits to credit, and at the end of 2019, it only assigned one-eighth, a historically low ratio.
The Government forced the financial entities to reduce the loans, ordering them to freeze all new deposits in February 2019, adding to the weakness of the credit sector. The cut reduced the growth in the amount of money and helped curb inflation, but at the cost of deepening the recession.
Credit contraction and currency devaluation have crushed the dollar value of loans managed by Venezuelan banks. According to Global Ratings, the total of credits in the financial system in October 2019 amounted to $ 295 million at the official exchange rate, a tiny figure in the region.
A single financial institution in the Dominican Republic, Banco Popular, has a total of credits equivalent to 5,817 million dollars, a figure that exceeds twenty times the volume of loans of the entire Venezuelan financial system.
The president of an important financial institution says that “banks have become simple means of payment. They no longer fulfill their essential function. They are living on service fees”.
The reports of the Superintendency of Banks confirm this statement: the income from fees for services such as transfers between accounts, payment terminals, and use of cards, exceeds by 87% the income from credits.
Foreign currency custody also reports income. Every week, financial institutions send an armored vehicle to the Central Bank to receive euros in cash that the administration of Nicolás Maduro sells to companies and individuals through banks.
Financial executives explain that euro purchasing companies leave the money in custody and pay a commission of 2% per month for this service. Consulted banks affirm that each week the Central Bank sells around 20 million euros.
Another year in decline
Consultants, financial institutions, and multilateral organizations expect Venezuela to continue on the slide during 2020, and that the economy will shrink again. The latest Latin Focus report notes that Goldman Sachs and UBS forecast a 10% decline, as does the International Monetary Fund, while Ecoanalítica expects a 10.8% decline.
The projections are based on the fact that growth triggers such as government spending, credit and consumption will continue to be weakened.
If these projections are finally fulfilled and the economy continues to be immersed in the recession tunnel in 2020, Venezuela’s GDP will be reduced by around 70%, one of the worst economic disasters in contemporary history.
