February 4, 2019 / 4:38 PM / 3 months ago

Breakingviews - Breakdown: How to fix Venezuela

NEW YORK (Reuters Breakingviews) - Oil-rich Venezuela looks increasingly like a failed state. More than a tenth of the Latin American country’s people have fled as its economy shrank by half over the past five years. And the cause of much of the problem, President Nicolás Maduro, remains in power even though Juan Guaidó, head of the National Assembly, recently declared himself his interim replacement – and won the backing of the United States and other Western powers.

A supporter of Venezuelan opposition leader and self-proclaimed interim president Juan Guaido takes part in a protest against Venezuelan President Nicolas Maduro's government in Caracas, Venezuela January 30, 2019. REUTERS/Andres Martinez Casares

Venezuela will need the help of friends abroad to restore basic functions if Maduro departs. That will best be provided by loans and investment, though, not the kind of throwback U.S. military intervention that President Donald Trump hinted at on Sunday. Breakingviews provides an overview of how the country could rebuild itself.

HOW MUCH WOULD IT COST?

Some $15 billion to $20 billion a year seems a reasonable starting point. That's the estimate Venezuelan economist Francisco Rodríguez came up with (reut.rs/2MMnZRa ) while campaigning last year with unsuccessful presidential candidate Henri Falcón. That would need to be provided by loans from the International Monetary Fund and other multilateral lenders, as well as by private investment. More recently, former Planning Minister Ricardo Hausmann, now at Harvard University, has put the funding need at $60 billion or more over several years, perhaps as much as $80 billion (reut.rs/2HS7apr ).

THAT SOUNDS LIKE A LOT.

Yes and no. Venezuela has a lot of oil: 300 billion barrels of proven reserves, the world’s biggest (reut.rs/2WINXtJ ).

BUT ISN’T ITS OIL INDUSTRY A MESS?

Yes. Production is likely to fall below 1 million barrels per day this year from 2.4 million in 2013. That’s the result of a lack of investment, the departure of trained staff and the appointment of military officers more noted for their loyalty to Maduro than industry expertise. Nevertheless, if 2013 production levels can be restored, $80 billion would represent less than two years of output, assuming $50 a barrel, for state oil firm Petróleos de Venezuela.

WHAT WOULD MADURO’S POLITICAL OPPONENTS DO TO FIX PDVSA? PRIVATIZE IT?

Not according to their recovery plan, presented by Guaidó last week. Formally called “Plan for the Country: The Coming Venezuela,” (reut.rs/2HObuWB ) it would keep a restructured and resized PDVSA in state hands as a “competitive public enterprise focused on the hydrocarbon sector.”

However, a new law would welcome foreign and private capital in the energy sector, allow private money to take majority stakes in oil projects, set competitive tax rates and create a new regulatory agency to oversee “efficient technical administration” of hydrocarbon deposits, which would remain the property of the nation.

Economist José Toro Hardy, helping present the opposition plan, said Venezuela could get output back up to 3 million bpd in seven years, though that could require $25 billion to $30 billion a year in investment.

WHAT ELSE DOES THE “PLAN FOR THE COUNTRY” SAY?

According to a summary, the opposition promises to restore market mechanisms and economic freedom, lift price controls, restore an independent judiciary, demilitarize security forces and immediately address basic food-supply and medicine shortages that have led to widespread malnutrition and illness. This would require “direct subsidies” to the most vulnerable households until they can look after themselves.

HOW WILL IT ADDRESS HYPERINFLATION? WILL VENEZUELA DOLLARIZE THE ECONOMY?

Some economists have suggested adopting the U.S. dollar to replace the discredited bolívar would be the best way to kill inflation, which the IMF reckons could reach 10 million percent this year. The opposition plan doesn’t advocate this but says authorities will “adopt a system of exchange-rate anchoring backed by the funds received” from multilateral lenders.

WHAT ABOUT FOREIGN DEBT?

Venezuela is in default on almost all its foreign bonds. It may owe $140 billion or more in sovereign and public-entity debt, as well as court settlements over expropriations, unpaid bills and other commitments. The opposition plan calls for a “deep restructuring” of external public debt to “open fiscal space to guarantee a sustainable path for public finances.” Sovereign-debt lawyer Lee Buchheit and Mitu Gulati of Duke University have proposed (reut.rs/2MQemkq ) President Donald Trump could help a new government until it has its house in order by ordering, on national-security grounds, that Venezuelan assets be temporarily protected from seizure through U.S. courts by creditors. President Barack Obama did a similar thing for Iraq.

IS MADURO GOING ANYWHERE, THOUGH?

Not necessarily, at least for now. As long as the top tier of the military and security forces see a better outcome for themselves in keeping him in power than embracing the opposition, Maduro is likely to stay. However, the latest U.S. sanctions on PDVSA mean it will be harder for his government to buy food, gasoline and medicine, or provide privileged access to dollars for cronies and backers. Some 95 percent of the country’s foreign-exchange earnings come from oil.

WHAT IF THE UNITED STATES INVADES?

Trump says military action is an option, but would probably not love the nation building it could entail. Venezuela is not Grenada or Panama, which the United States invaded with relative ease in the 1980s. Iraq, with oil and a similar-sized population, might be a better comparison, and it is half the size of Venezuela.

Getting in might be relatively easy, but getting out far harder. Military action would lose the United States goodwill in the rest of Latin America, alienate allies elsewhere and even perhaps spark a nationalist insurgency.

Financial and diplomatic assistance aside, rebuilding Venezuela is for Venezuelans.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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