Today, we’re going to talk about Venezuela. The International Monetary Fund estimates that inflation in Venezuela will hit 720 percent this year – making it the highest rate in the world.
This hyperinflation in Venezuela is the result of a central bank gone amuck. Since the central bank lost its independence, the money supply was doubled. Venezuela is a cash economy for the most part, and with its currency – the bolivar – becoming increasingly worthless, there have been some strange reactions.
For instance, some recent reports have claimed that Venezuela’s central bank is engaged in secret negotiations to order 10 billion additional bank notes be put into circulation. Such an undertaking would require planeloads of jumbo 747s just to deliver the currency.
In fact, that would put more currency in circulation in Venezuela than in the U.S. or the Eurozone, areas that have nearly 10 times’ the population of Venezuela. Consequently, the black market for bolivars has pushed the exchange rate from the official 6.3 bolivars per one U.S. dollar to over 1,000 bolivars per dollar.
These extremes may not be surprising in a country wrecked by years of overspending and the collapse in oil prices, considering that Venezuela is a petroleum-exporting country. And while the overspending is in the rear view mirror, the problem of $30-a-barrel oil looks to continue for the balance of the year. Last month, Venezuela called on OPEC to hold an emergency meeting to cut production and try to raise the price of oil, but the Saudis would have none of it.
The result has been disastrous for Venezuela. Its oil exports, expected to be valued at $22 billion this year, just barely cover the cost of the country’s debt and servicing its oil industry. Market pricing for Venezuela’s sovereign debt has moved into the area where a default this year is generally expected. That would put it into the same predicament as faced by Argentina and Ukraine in recent years.
My View: I don’t see a way out for Venezuela and its current government. The numbers just don’t add up in the current macroeconomic environment. Expect Venezuela to be the first sovereign state to succumb to crisis in 2016, having being pushed over the edge by oil prices.
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