Venezuela is in a hole, that&s;s for sure. But how deep the problem runs has been something of a mystery. That is until now.
It&s;s not just bad: It is monstrous.
&l;strong&g;A long way down at the bottom of a deep hole&l;/strong&g;
The country now owes over seven times more money to its foreign creditors, than it earns from its increasingly limited exports, new research shows.
The country&s;s external debts total $145 billion, according to the &l;a href=&q;https://www.iif.com/&q; target=&q;_blank&q;&g;Institute of International Finance&l;/a&g;&a;nbsp;(IIF) a Washington-based think tank, which just published a report on the matter. Those debts stem from direct government borrowing and as well as from loans taken out by the state-owned oil company PDVSA. There is also a small level of private sector borrowing.
Overall the combined debt (overwhelmingly&a;nbsp;from the state and PDVSA) would not be considered a huge amount of money for many developed countries, but it is to Venezuela.
The problem is that the debts dwarf the country&s;s key source of foreign currency revenue -- exports.
This year the country&s;s debts will total 7.4 times the size of the country&s;s exports, which mainly comprise oil, the IIF projections show.
In other words, for every $1 of export revenue, there are $7.40 of debts to be paid. That&s;s an increase from a ratio of $5 of debts per dollar of exports last year, IIF says.
&l;strong&g;Few choices&l;/strong&g;
Unlike the U.S. or the U.K., Venezuela cannot use its currency, the Bolivar, to pay off these debts. Venezuela is suffering a horrendous bout of hyperinflation, with the price level rising at an annualized rate of 150,097% as of March 7, 2019, according to an estimate by hyperinflation expert Steve Hanke, who is also a professor of applied economics at the Johns Hopkins University. That level of inflation makes the currency worthless, and hence investors won&s;t accept it. Instead, lenders want dollars or euros or the like.
What Venezuela relies on for much-needed foreign currency is hard currency revenue from exports. Unfortunately, not all of the export money can be used to pay the creditors. Much of it must be used to cover the costs of food, medicine, other necessities, or even maintenance spending on the PDVSA&s;s oil operations.
&q;It is safe to say that until policies change they have no money for anything,&q; says Sergi Lanau, deputy chief economist at IIF.
&l;strong&g;Possible good news ahead&l;/strong&g;
Here is a glimmer of good news. Venezuela has the largest proven oil reserves in the world, and if it can get through this crisis and implement robust market-led policies, then the economy should bounce back. Unfortunately, it could take a while to get the oil fields pumping at anything like full capacity.
&q;That is a privilege that other countries don&a;rsquo;t have,&q; says Lanau. Put bluntly, oil resources are something that most countries don&s;t have at their disposal.
On average it takes around six years for oil operations to return to their previous output following a crisis like the one Venezuela is suffering, says Lanau.
The issue at that heart of the delay in restoring the countries oil output is that oil wells and the specialized equipment needs maintaining. That hasn&s;t happened in Venezuela these past few years. Also, the country&s;s president Nicolas Maduro has taken to giving jobs in the state-owned oil company to political cronies rather than to qualified petroleum engineers.
&q;Oil industry capital expenditures are way less than depreciation and amortization,&q; says Hanke. In other words, PDVSA isn&s;t spending enough money to maintain output where it is let alone get it back to the higher levels of a few years ago.
&q;They&s;ve gutted the human capital as well,&q; he says. That&s;s led to &q;a huge safety problem which is somewhat connected to the low quality of the human capital and the low-quality infrastructure.&q;
The results have been disastrous with&a;nbsp;oil output&a;nbsp;close to halving to 1.5 million barrels a day recently from almost 3 million a day in early 2014,&a;nbsp;&l;a href=&q;https://tradingeconomics.com/venezuela/crude-oil-production&q; target=&q;_blank&q;&g;according to data from the financial information website Trading Economics&l;/a&g;.
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