Photo: Alberto Cárdenas Almeida
Say you run a small corner store, an abasto. You have about $100 in sales a month, your costs are about $80, but you also have some debts. Your monthly payment on the debt is $30. You’re going hungry to somehow make those payments each month. The bank is making threatening noises about foreclosure. Is your abasto solvent?
On some fundamental level, it sounds insane. How can the country that controls access to the world’s largest oil reserves imaginably be unable to pay its creditors?
Oh, except we forgot one detail: there’s a small patio behind your abasto, and there’s an immense hoard of old Spanish morocotas buried there. Maybe $12 trillion worth of gold coins. Is your abasto solvent now?
This, basically, is the common sense response to the notion that Venezuela is bankrupt. On some fundamental level, it sounds insane. However bad things may look in the short-term, however screwed up the cash-flow situation may be, the country that controls the world’s largest oil reserve can’t imaginably be insolvent, can it?
Well, let’s take the thought experiment in a different direction. Say instead of morocotas in the patio, your abasto is the legal owner of Asteroid 433 Eros. (It’s a thought experiment, it’s allowed to be far-fetched.) 433 Eros happens to be shot through with enormous gold deposits, estimated to be worth $12 trillion.
Is your abasto solvent now?
The real question concerning Venezuela’s solvency is whether it’s closer to the morocota-rich abasto or closer to the 433 Eros-rich abasto. In the first case, turning the theoretical wealth it owns into financial flows is dead simple: all it takes is a shovel. In the second case, the existence of gold on a far-off asteroid doesn’t really have much bearing on the abasto’s creditworthiness: there’s just no feasible way of turning that gold into the revenue stream you need to pay your creditors.
Morocotas or Asteroid?
We know our oil reserves are vast: so vast, chances are the vast bulk will never come out of the ground. At today’s prices, they’re theoretically $12 trillion. Yes, the oil market is volatile — tomorrow it could be $24 trillion, or $6 — but either way, it’s an unimaginably vast number.
But how feasible is it to turn that wealth into income streams that can be used to pay our debts? Are we an abasto over a huge hoard of morocotas? Or an abasto that owns a golden asteroid?
Turning that theoretical wealth into actual revenue flows is tricky.
Clearly we’re somewhere in the middle.
Turning oil reserves into actual revenue flows is tricky. It’s slow. It’s risky. And it can’t be done without resources: not just financial but managerial, institutional and technological resources as well. All of those resources are in short supply in Venezuela today. And none of it can be improvised.
The current government has demonstrated again and again that it’s just plain not able to manage the transition to higher production levels. For a decade, oil production target after oil production target has been missed. With chavismo in power, our huge oil reserves might as well be on some distant asteroid. We can’t even stem the decline in production, let alone mobilize the resources to boost it.
How much would that change with a less crazy group of people in power? That’s a harder question. And it’s at the heart of the long-running argument between the FRodista and the Hausmannista camps. It may be that, in a day-after scenario, it’s possible to find private lenders willing to advance the capital to develop Venezuela’s vast reserves. But on what conditions? At what interest rates? And would the new, enlarged stock of debt be sustainable?
Things get murky real fast, because the galloping opacity of official sources leaves us without the basic information we’d need to answer the key questions. Questions like exactly how big Venezuela’s GDP is in dollar terms — an unanswerable conundrum in a country with multiple exchange rates orders of magnitude apart. Questions like “what are Venezuela’s real import needs?” And, “how large are the direct subsidy programs we will need to be to soften the blow of price and FX adjustments?” And “what kinds of deficits will we need to run during transition and how we are going to finance them?”
As long as the answers to basic questions in public finance remain as unanswerable as a Zen kōan, we can only speculate about where we lie on the Morocotas/433 Eros spectrum.
Take just one of these unknowns — in some ways, the most basic: the dollar value of our GDP. If you think once it’s all said and done, Venezuelan GDP will settle in the $300-$400 billion range, then yes, we’re much closer to the abasto-over-the-morocotas side of the spectrum. A $400 billion economy can probably shoulder the debt it will take to turn the theoretical wealth under the ground into the revenues used to pay the old debts…and the new ones.
If you think Venezuelan GDP is going to settle in the $100-$150 billion range, then that’s clearly a fantasy: in that scenario, Venezuela’s carrying over 100% of GDP in public debt and paying credit card-level interest rates for the privilege. That puts us more in 433 Eros territory: the costs of financing the capital you need to turn that wealth into a stream of government revenues are as foreboding as the cost of financing a spaceship to go mine an asteroid.
As long as the answers to basic questions in public finance remain as unanswerable as a Zen kōan, we can only speculate about where we lie on the Morocotas/433 Eros spectrum. How can you plan public finances in a country where you know neither the numerator nor the denominator in the the Debt/GDP ratio?
But are there answers to these questions that lead you to think the unimaginable is true? That a country sitting atop a virtual ocean of oil can nonetheless be insolvent?
There sure are.