While unbridled capitalism has its faults, the opposite side has many problems. Venezuela is a perfect example of the opposite extreme.
An ongoing economic crisis in Venezuela has seen the country start to sell its gold reserves.
There are fears that Venezuela could default next year, when multiple debt payments are due. Reserves are already falling sharply as the country struggles to meet repayments and also attempts to maintain its social programs, writes Patrick Gillespie for CNN Money.
Mounting debts see Venezuelan reserves dwindle
Before the end of 2016 Venezuela has to pay around $15.8 billion in debt payments, despite only having $15.2 billion in foreign reserves. A large proportion of those reserves are in gold, less than $1 billion is in cash and another few billion are held at the IMF.
In May $11.7 billion of its total reserves were in gold, but that number was falling fast. “It’ll have to sell some of its gold reserves to make the debt payments,” says Edward Glossop, emerging markets economist at Capital Economics. “[Cash] reserves are almost virtually zero.”
Low world oil prices mean Venezuela is making little from its chief export. Despite holding the world’s largest reserves of black gold, Venezuela is in serious trouble. Its economy is expected to shrink by 10% this year.
What can save Venezuela now?
Social programs such as those implemented by President Nicolas Maduro are impossible to maintain when oil prices are low. Improved pensions, subsidized groceries and free health care cost a lot of money, which Venezuela does not have.
Officials in Caracas must be hoping for a rally in oil prices, but that does not seem likely. Otherwise Venezuela could rely on key allies Russia and China to pay its debts.
Russia seems unlikely to do so given its own economic struggles, and help from China is likely but far from guaranteed given its own slow down. “It’s likely that they get some financing from China,” says Alejandro Arreaza, an economist at Barclays, who is from Venezuela.
Falling reserves provide more evidence of how badly run Venezuela is. “What kind of government does it take to bring a country with the largest oil reserves in the world to the brink of bankruptcy?” says Russ Dallen, managing partner at LatInvest, a Miami-based firm that invests in Venezuela.
In a recent research note to clients, Focus Economics stated:
Emerging evidence continue to suggest that Venezuela’s economy remains in freefall. Although no official data has been released for GDP or inflation this year, the available evidence points to a spiraling economy. The bolivar traded in the parallel market plummeted past 800 VEF per USD at the end of September and car sales record the third consecutive annual drop.
Moreover, FocusEconomics estimates suggest that inflation continued to balloon in the same month. Against the backdrop of economic crisis, the government has yet to make any significant change to their economic policies and the 6 December parliamentary elections are approaching.
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Despite a possible change in Venezuela’s parliament, the country’s prospects are grim. A shrinking economy, runaway inflation and low oil prices are likely to propel the largest contraction in over a decade. Economic analysts who took part in this month’s LatinFocus Consensus Forecast panel see a 7.2% contraction in GDP for 2015, which is down 0.6 percentage points from last month’s forecast. For 2016, the panel sees GDP falling 4.0%.
Inflation rose to levels not seen since 1997 last year and is expected to have soared past 100% in recent months. The panel sees inflation ending 2015 at 173.0% and 2016 at 177.0%.
