Economist and member of the Ecoanalitica firm, Asdrúbal Oliveros draws the most visible lines of the Venezuelan economy in the post-COVID-19 scenario. A doctor would say the prognosis is reserved. Oliveros goes further and says why.
The most disturbing thing is the forecast for the oil sector, affected by declining production, subject to sanctions, and without any capacity to withstand the price war that Russia and Saudi Arabia unleashed. The virus will destroy everything.
What will be the impact of the pandemic on the performance of the Venezuelan economy?
The Venezuelan economy has been in decline for sixth consecutive years, an unprecedented case in Latin America and the world. We are talking about a contraction of almost 70 percent between 2013 and 2019. Beyond the Gross Domestic Product (GDP) figures, the fall has downstream ramifications: An accelerated impoverishment of the population; destruction of wealth and capital, both in the private sector and in the oil industry; a dwarfed economy, and something very important to frame in that context: the destruction of the State’s capacity as a provider of public goods and services. In Venezuela, we are witnessing a paradox. You have a very powerful State from the perspective of social control, submission, fear as a political tactic, but practically non-existent as a provider of public services (health, education, security). We have seen in recent years and recent months the public service infrastructure crumbling.
In this context, the COVID-19 arrived to accelerate an alarming crisis in all areas of the country.
Yes, an unprecedented crisis that also implies —at the same time— a shock that impacts both supply and demand. When people stay at home, on the one hand, consumption is restricted and, on the other, production lines are affected, which are also paralyzed. Furthermore, as Venezuela is an oil country, we face difficult market conditions. No one escapes the virus, but Venezuela’s vulnerability is extreme for two reasons. One, because we come from an unprecedented cycle of contraction, and two, because we have a dismantled State, incapable of positively influencing the economy. To put it in other words, the State is unable to draft economic policies. The room for maneuver in monetary and fiscal policy, which other governments in the world are using, does not exist in Venezuela.
Have you calculated what the impact of the pandemic would be on GDP?
Before the virus, we were expecting a 10 percent economic contraction in 2020, more moderate than we had seen in the last two years, which was around 15 percent, mainly because the economy was transiting a very aggressive cycle of dollarization of transactions. An incipient private sector was becoming independent from the State and that, in part, slowed the contraction. Perhaps the outlook was more benevolent than in previous years. Now those numbers change for two reasons. One, the crisis is not over and, therefore, estimating is difficult in this context. Two, the effect of the pandemic on the oil market is still relevant for Venezuela.
Any specific figure?
We have made preliminary studies of the impact that the pandemic will have on imports, consumption, contraction of remittances, among other variables, and it shows that this year the economy could contract 25 percent. In other words, the initial estimate of 10 became 25 percent. That is divided between an oil GDP falling by about 20 percent and a non-oil GDP falling by 25.5 percent.
That can be described as disastrous.
Absolutely. And you have to compare that with an economy that accumulates a 70 percent contraction. An extremely critical scenario.
How will the pandemic affect the merchant sector, small businesses?
I am going to start with the merchant sector, SMEs, small businesses, and warehouses. Those sectors were benefiting from the dollarization of transactions (more than 60 percent were made in hard currency) and that, of course, created incipient consumption levels that benefited commercial activity. Also, An increasingly considerable amount of dollars was circulating in the Venezuelan economy. A greater number of Venezuelans held foreign currencies, even if it was in small amounts. That scenario changes due to the impact of the coronavirus. First, remittances significantly contract due to the vulnerability of Venezuelans abroad and the excessive increase in unemployment in almost all countries of the world (the initial estimate of 4,000 million dollars in remittances has dropped to $ 2.4 billion.) On the other hand, quarantine puts a brake on commercial activity and small businesses that are very vulnerable, in terms of their cash flow. These businesses have a hard time standing idle for more than 15 days.
A sector affected by the pandemic is banking, which is severely limited by both the Executive power and the Central Bank of Venezuela. What would you say about this sector?
Banking comes from a very aggressive shrinking cycle. It is unable to help, to accompany the private sector, either with credit lines or with reduced interest rates. What we have in Venezuela is an extremely small financial system, I call it a boutique, which has lost its core activity. That is to say, the intermediation — to receive and lend bolivars. The bank thought to reinvent itself, that’s why we saw the boom in dollar accounts. Add the measures that Mr. Maduro took, including the cessation of the collection of credits that affects the income of the financial system. The prospects are very negative. On the one hand, with this measure, the State blocks the source of income of the banking system, and on the other, intermediation is practically non-existent. You also have a significant contraction in the private sector, which puts a brake on credit demand.
What is the scenario for larger companies, whose activity as a share of their installed capacity is minimal? Although noting that the liberalization of prices, for example, came to serve as an oxygen cylinder.
We must establish some elements of differentiation. The sectors that have benefited from dollarization are trade and services. The manufacturing industry, for its part, has been hit very hard because this government, in its survival strategy (2019 and so far in 2020), opened the doors to imported products, anchoring the currency. Thus, producing certain products —in the personal care and food segment— costs 2.5 times more in Venezuela than abroad. This hit the manufacturing sector very hard, which was also working at 20 percent of its installed capacity. In other words, it was in very precarious conditions.
What will be the impact of coronavirus in the manufacturing sector?
It has multiple sources. One, the reduction of domestic demand (consumption). Two, it is a sector whose ability to access credit will continue to be very restricted. Three, their ability to bring inputs and raw materials will also be very limited because supply chains have broken across the world. Furthermore, Venezuela is sanctioned. In this scenario of a deepening crisis, the conditions will be very critical. Furthermore, all this occurs in a context where there will be more inflation and more depreciation in the exchange rate. That, of course, is very bad news for the industrial sector, because it implies a very important increase in its costs. Wherever you look at it is a very restrictive scenario.
What can you say about the informal economy, vital for a significant number of Venezuelans?
This includes entrepreneurs, small companies, own-account workers (professionals or not). This sector was the first to dollarize its income because it showed managerial flexibility you are unlikely to see in large companies subject to fiscal and tax controls and certain accounting and financial rigidities. In entrepreneurship, in small businesses, there is more flexibility in how you invoice, how you set prices, how you manage accounting and tax processes. In other words, the mischief of the Venezuelan, of which certain sociologists speak, is beginning to be a characteristic of survival of this new managerial establishment in the face of the iron controls imposed by the Venezuelan State. That is the greatest advantage over a big company.
What are the disadvantages?
Small businesses cannot endure a prolonged quarantine; they do not have large cash reserves, they do not have a history of accessing international lines of credit or credits from local banks. In a scenario like the one we are living in, no matter how flexible you are, this whole model collapses and as the dollarization of the economy stops, the informal economy will quickly enter a standstill.
It means the pandemic will be the final blow.
Right. A consequence of the pandemic is that people lock themselves in their houses and lower consumption. Small businesses, which enjoyed certain maneuverability and were a determining factor for estimating a drop of 10 percent and no more, disappear and become one of the factors that will notably affect the contraction of the Gross Domestic Product.
What is going to happen in Venezuelan homes?
I always say there is an illusion of “staying at home browsing social media and watching Netflix.” That is a minority. Some studies indicate that 50 percent of Venezuelan households survive on the informal economy, live day by day, and cannot save. As the crisis deepens for the reasons we have discussed, you are left with a brutal deterioration in the consumption of Venezuelan households. It is a condition of greater precariousness among families that were already under the poverty lines. Households will be much more affected in terms of access to basic services and feeding capacity. We have shifted from an economic crisis to a major social crisis.
The scenario you propose is apocalyptic.
More than apocalyptic it is a crisis scenario. I would say, extrapolating, that it is a scenario that you can foresee in Latin American countries or the so-called emerging markets. What is the common denominator? A vulnerable population, with little or no saving capacity, poor public services. But when you go into the details, the case of Venezuela is among the worst of all. Perhaps that is why the crisis has that apocalyptic characteristic that you assign to it. But the deterioration is global. There are, of course, nuances: Deterioration in Norway is not the same as in Peru.
The price of a barrel of oil is around $ 20. What would be the impact of the pandemic in this area? Venezuela has no saying in the price war between Russia and Saudi Arabia, due to diminished production capacity.
It is more than apocalyptic. I mention some background. In the first place, production levels were falling for various reasons, including disinvestment and the effect of sanctions, among others. Before the coronavirus crisis, the Venezuelan State perceived income for about 480,000 barrels. We were practically selling crude through Russia with significant discounts of between 25 and 30 percent. We stopped selling refined products. A paradox must be noted. Part of the dollars we obtained from the sale of crude oil was used to import fuel. So the effect is pernicious. Before the pandemic, the oil sector was expected to generate between 13,000 and 14,000 million dollars. At the moment, that estimate may be below $ 4 billion. The contraction of income is dramatic. Furthermore, much of our production is heavy crude, which is not competitive at the prices we are seeing today. That is to say, it is more expensive to produce it than to sell it and, additionally, under these conditions of falling prices and oil flooding – the storage capacity in the world is at its maximum – it is not unreasonable to think that in the coming weeks, Venezuela will not be able to sell its crude. There is a very strong deterioration of oil revenue. This is going to have very serious consequences for the Venezuelan State, which imports two things: food for CLAP boxes and fuels, two critical areas that may deteriorate in the coming weeks.
I imagine that after getting out of the confinement, Venezuela will have no other option than knocking on the doors of the International Monetary Fund. There is no other way out. However, we already know the agency’s response to the letter Mr. Maduro sent it.
Indeed, Venezuela urgently needs international support. Support from multilateral organizations. IMF, World Bank, Inter-American Development Bank, Andean Development Corporation. That will not be possible if the political problem we have is not resolved in depth beforehand. There has to be a solution, and that goes through a negotiation based on credible bases and agreements that can be fulfilled between the parties.
There is already a proposal from the United States, which is the same one that was raised in Barbados.
Exactly, but there is more. 85 countries that are approaching the IMF. For that reason, the agency is establishing a line of credit that can exceed $ 2.5 trillion – with 12 zeros -. Now Venezuela, under the conditions just described, is going to have to compete with all those countries.
Countries with institutional government systems, whose economies are in a better position than ours and not submerged in the deep political crisis that has characterized us since 2002.
Exactly.
