5 updates on the Venezuelan economic crisis
It has been a few weeks since our last Venezuelan economy update and economist Jean-Philippe Pourcelot has a new post discussing five updates on the Venezuelan economy including the bolivar's latest plunge, the results of the bond swap saga, Venezuelan oil prices, and the government's newest plans to tackle soaring inflation.
1. Bolivar nosedives to all-time low in November
The bolivar has been depreciating sharply in the parallel market since late September and on 4 November, the bolivar reached a new all-time low, trading in the parallel market at 1,758 VEF per USD.
The result marked a 38.3% depreciation from the same day of the previous month and a massive 54.8% depreciation over the same day last year. The parallel dollar has shed 52.6% of its value since the start of the year.
The depreciation of the bolivar has coincided with the highly publicized escalation of the country’s political crisis and an increase in the money supply of the economy.
In our latest LatinFocus Consensus Forecast, we project a non-official exchange rate of 1,198 VEF per USD by the end of 2016. In 2017, with no end to the crisis in sight, we project the non-official exchange rate to depreciate further to 1,804 VEF per USD.
As for the rest of the convoluted exchange rate system the Dipro exchange rate has remained unchanged and the free-floating Dicom has remained broadly stable.
Find out how long analysts see the exchange rate system lasting in its current variation.
2. Venezuela receives a lifeline from bond holders
In other news, the bond swap saga of Venezuela’s state-owned oil company (PDVSA) came to an end on 24 October with bondholders agreeing to exchange 39.4% of bonds due in 2017 after the government had modified the original swap deal extending the deadline four times.
Although the swap was below the 50% objective outlined by the government, it provides some much-needed short-term relief to the cash-strapped oil company as it battles low oil prices, falling production and tight liquidity.
The swap buys the PDVSA and the government time to kick its payments down the road until 2020. However, it will not do much in the way of alleviating their debt burden nor will it solve the structural imbalances plaguing the economy.
Mauro Roca, senior economist at Goldman Sachs, reflects on Venezuela’s new debt payment schedule and the insufficient support the debt swap is expected to provide to the economy:
“The temporary relief in PDVSA external debt payments becomes even less relevant when considering total external debt payments faced by both Venezuela and PDVSA. […] As a result of the bond swap, external bonds payments for 2017 have been reduced to $8.11bn from $9.12bn, but have concurrently increased to $8.59bn from $7.51 for 2018. Moreover, the sovereign and PDVSA still jointly face an average yearly debt service commitment of $8.7bn until 2020.”
The first payments of the new 2020 bonds are due in Q4 2017 while the liquidity crunch that the country is facing shows no sign of improving. With international reserves staying at USD 12.0 billion at the start of October and falling to a record-low USD 11.9 billion on 27 October (the last reported figure) and oil output declining, the prospects of a default still loom large as the country has fewer economic buffers to avoid a sovereign debt default.
3. Oil prices rally to over one-year high
And speaking of oil, it does appear that the OPEC oil production deal has had a positive effect on Venezuelan oil prices, for now. In October, the average price of Venezuela’s mix of crude oil rose 11.3% from the previous month to USD 42.6 per barrel. October’s print marks the second consecutive increase in Venezuelan oil prices and the highest price reached since July 2015.
The preliminary agreement made by oil-producing countries to cut output from 33.2 million barrels per day (mbpd) to 32.5 mbpd has supported oil prices since September. Statements made by Saudi Arabian officials in October on their commitment to reduce production increased confidence in the prospect of reaching a final agreement, though its ability to influence Venezuelan oil prices significantly remains to be seen.
Limited cuts to output, coupled with increased production in key countries such as Nigeria and Libya, will do little to rebalance the oversupplied market. Reluctance by some countries such as Iraq to cut output also undermines efforts to reach a far-reaching agreement. Overall, the deal is unlikely to provide enough support to shore up Venezuela’s public finances or alleviate the country’s economic crisis.
According to the latest OPEC Monthly Oil Market Report released on 12 October, oil production in Venezuela has been declining consistently and is now hovering at multi-year lows.
The slump in output reflects a very challenging investment climate, chronic underinvestment in industry, difficulties in importing oil diluents and the problem of outstanding payments with suppliers.
The combination of depressed oil prices and falling production has raised concerns about the cash-strapped government’s capacity to meet its multibillion-dollar international debt obligations.
Venezuela’s capacity to circumvent a default partly hinges on whether oil prices will increase enough to improve public finances and enable the country to meet its international debt obligations due in the coming years. Latest forecasts for Venezuelan oil prices in 2016 and 2017 available here.
4. The government plans to increase wages again...
And what about that little problem of skyrocketing inflation? Met the why particular Consensus Forecast analysts estimate that inflation jumped from 368.1% at the end of Q2 to 448.8% at the end of Q3 and indicators from official sources continue to point to mounting price pressures in the fourth quarter.
With oil output declining to multi-year lows, the government has resorted to printing money to finance the deficit. According to the Central Bank of Venezuela, the money supply increased by 113.7% in September, up from 114.3% in August.
In October, the government announced a 11% hike in minimum wages to keep up with soaring prices, which will be the fourth wage increase this year. According to President Maduro, minimum wages have increased by 454% since the start of this year.
5. ...and issue higher denomination bills to tackle inflation
In a tacit recognition of ballooning inflation, the government recently stated that larger denomination bills will start circulating in the economy at the end of the year. The government will print 20,000 VEF banknotes, 200 times higher than the current largest denomination of 200 VEF bills. The move aims to facilitate daily economic transactions in the country.
In light of the above we have the latest Venezuelan inflation forecasts for you.
As always, you can count on Met the why particular to keep you updated on the Venezuelan crisis as well as news and forecasts on 126 other countries and 33 key commodities. Visit our News page for the latest country and region economic indicator and commodity news.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Author: Jean-Philippe Pourcelot, Economist
Date: November 11, 2016
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