To say that Venezuela is seeing hard economic times would be an understatement. Since the death of Hugo Chavez, financial issues within the Socialist nation have worsened with each passing day, descending to a new low as Venezuela defaults on a debt payment. Though Venezuela’s economic future has been questionable before, the likely outcome has never looked so bleak.
Hugo Chavez nationalized Venezuela’s oil production, seizing control of the equipment from British-owned corporations. During Chavez’s lifetime, Venezuela was able to profit handsomely from their oil industry, mostly due to limited access to oil around the world and various shortages.
With the advent of techniques such as fracking, which has increased the supply of oil around the world and allowed for great accessibility to once unusable sources, the price of oil has dropped precipitously, and the need for Venezuelan oil has lessened. Due to their reliance on the oil industry, the Venezuelan economy began to falter as their oil was less in demand.
Many across the world have watched as the Venezuelan government began to lose control of their economy and as the policies of Chavez, now being parroted by Maduro, caused economic woes to worsen. The socialist central planning of the economy has left the country with citizens starving and unable to purchase the most basic of necessities for life.
Shortages began during the years of Chavez’s leadership when Chavez instituted price controls. As the oil industry began to collapse, Maduro tightened the price controls, and began to restrict imports of food from outside Venezuela, further limiting access to food for the citizens of Venezuela. Coupled with agricultural legislation begun under Chavez that caused domestic food production to contract, this led to a food supply that is simply not enough to feed the country.
Starvation has spread throughout the country, with as much as 75 percent of the population not able to get appropriate nutrition every day. The average citizen in Venezuela has lost 20 pounds in the last year, and the availability of food is only getting worse as time goes on.
What little food there is often comes from an organization called CLAP, the government-operated Local Supply and Production Committee, which buys and imports food from a Maduro-owned Mexican corporation. Corruption runs rampant in the Venezuelan government as high-ranking officials line their pockets in preparation for the country’s collapse.
Amidst all these ills comes news that heralds the collapse of Venezuela’s economy; the nation has failed to make a payment on their debt which was due in October. As the socialist government of Venezuela is currently the only source of affordable food and medicine in the country, this threatens to not only collapse their economy and further devalue the Bolivar, but to cut the supply of necessary goods to the already-starving nation.
The failure of Venezuela to make its debt payment makes it likely that Venezuelan bondholders, who may not see the country’s economy improving, will demand immediate payment. Venezuela is cash-poor, and could not cover all of the bonds the nation has issued, which would entitle its investors to seize Venezuelan assets abroad (oil tankers and barrels of oil from Venezuela, for example).
Venezuela is deep in debt. The nation’s central bank has a paltry $9.6 billion in reserve, while the country and its various nationalized entities owe over $196 billion to bondholders, to say nothing of the debt the country has accrued to other nations and to individual businesses such as airlines and oil service providers.
If bondholders demand repayment, Venezuela will collapse. The country will have little to no money to pay for needed goods in a nation where medicine and food are already scarce. Fernando Freijedo makes clear what hangs in the balance if bondholders demand repayment; “Then it’s pandemonium.” Freijedo continues, saying that it ‘boggles the mind what could happen next’ if such repayment is demanded.
The looming insolvency of Venezuela could have catastrophic outcomes for its citizens. The fiscal state of Venezuela mirrors many such examples of unsustainable government spending around the world, including here in the United States.
Illinois, for example, has similar issues with overspending, and with the rating of their bonds being dropped to the lowest rating recognized by Moody’s. Indeed, Illinois has the lowest credit rating of any American state, and with its repeated failure to make payments on outstanding bills, coupled with its growing pension deficit, the state is in danger of default and bankruptcy.
To make matters worse, its low bond rating means that to attract investors, newly-issued Illinois bonds will have to offer higher rates of interest. Even Illinois Governor Bruce Rauner acknowledged the issue, saying, “We’re like a banana republic. We can’t manage our money.” Illinois is on track to be the first state to declare bankruptcy.
Poor spending controls, combined with incompetent centralized planning of an economy, is likely to result in the collapse of Venezuela in the near future. We must be careful in the United States not to make the same mistakes via over-regulation of business and overspending on benefits and entitlements.