Venezuela’s outlook is apocalyptic. As the oil industry collapses and hyperinflation torches what’s left of the economy, Maduro is tightening his grip on power and doubling down on destructive policies. Chavismo doesn’t particularly care about Venezuelans—instead, the governing clique is focused on staying alive, in power and out of jail as sanctions mount and they drift into diplomatic isolation.
Today, the DolarToday exchange rate rose to 5,600,000 VEF/USD and is a billion percent higher than on Chávez’s first day in 1999.
Left unchecked, hyperinflation will continue to cripple the Venezuelan economy and society, driving hundreds of thousands if not a million or more of refugees into Colombia, Brazil and elsewhere this year. Today, the DolarToday exchange rate rose to more than 5,600,000 VEF/USD and is a billion percent higher than on Chávez’s first day in 1999. In six to nine months, the VFX rate will have another three zeros and the FX rate will be a trillion percent higher than 1999. Such is life in the world’s worst managed economy.
Incomes have fallen 98% in real terms since 2013, so even if people earn five times the minimum wage, it’s five dollars a month or three U.S. cents an hour—not enough to feed a single person, nevermind a family. You hear of people fainting because they didn’t have breakfast or dinner the night before. You hear about bank executives and engineers that quit to clean toilets in Miami. It’s all true: About 90% of the population is poor and 40% of Venezuelans eat just once a day.
Real demand for the bolivar has been slashed in four since December as Venezuelans have grown allergic to the local currency. As a result, Maduro’s regime needs to create new bolivars at four times the rate to get the same spending power, fueling hyperinflation. All the while, businesses are closing en masse as payments systems collapse thanks to an unprecedented shortage of physical cash.
But that’s just half of the story.
The collapse of the oil industry is as bad as hyperinflation or worse.
The collapse of the oil industry is as bad as hyperinflation or worse. In seven months, crude production has nosedived 470,000 barrels per day from 1.75 mbpd last December to 1.28 mbpd this August. To nobody’s surprise, analysts predict production will drop to a million barrels per day by year-end and continue falling through 2019.
PDVSA was already too broke to sustain production this year when Maduro replaced Eulogio del Pino, its halfway-decent CEO, with Manuel Quevedo, a military general with no industry experience. With employees quitting in droves, creditors attempting asset seizures and banks abandoning PDVSA on money laundering concerns, the new CEO paralyzed the company with a factional power-grab disguised as a corruption purge. He now plans to recover production at over 20,000 mature oil wells, which isn’t possible according to oil experts.
Declining oil production is extremely serious. Venezuela pays for imports with remittances and exports, but it basically only exports oil. So, if oil production and exports collapse, imports of food and medicine and everything else also collapse. Mismanagement at PDVSA directly translates to empty supermarket shelves and hunger.
This won’t end well.
One day, when daily inflation is at Zimbabwe levels, the electric grid will fray and all the engineers that can repair it will have quit. One day, when PDVSA is pumping just a few hundred thousand barrels a day, the turbines at the main hydropower plant will blow out and there won’t be money to repair them. And that’ll be that—power will go out for a whole city or state, and not just for 24 or 72 hours but for good. Same for waste collection, telecom and water.
One day, when daily inflation is at Zimbabwe levels, the electric grid will fray and all the engineers that can repair it will have quit.
Then it’s anybody’s guess. Hungry policemen and national guards could join in lootings and protests instead of repressing them and it could spiral out of control into anarchy and civil war, destroying what little is left and sending millions more refugees into the western hemisphere. This may sound far-fetched, but it isn’t far from the baseline “nothing changes” scenario.
Time is running short for the international community to re-think its strategy. Diplomatic isolation and targeted sanctions are welcome and appropriate, but they won’t destabilize the regime or trigger policy changes—not with the population subjugated by hunger, the political opposition in prison or exile and all democratic avenues for change closed shut.
Increasingly, it looks like the regime will only make way for a new government if it’s forced to do so by an external actor. Nobody wants a military invasion, but as Harvard’s Ricardo Hausmann argued, a peaceful power transition may only be possible if a military coalition of countries from the continent forces the regime to negotiate the terms of its exit. It’s time to discuss this option seriously, because if the international community does nothing and chavismo stays in power indefinitely, Venezuela will become a desolate wasteland.