Francisco J. MonaldiBaker Institute Fellow and Adjunct Professor, Rice University

Belfer Center Associate, Kennedy School of Government, Harvard UniversityFounding Director, Center on Energy and the Environment, IESA, Venezuela

francisco_monaldi@hks.harvard.edu@fmonaldi

Kuwait, November 2015

Venezuela: After the Party, the Collapse

The best regional performance in 1938-1978The worst regional performance in 1978-2003

1.57

1.95

2.37

1.90

1.54

2.27

0.00

0.50

1.00

1.50

2.00

2.5019

5019

5219

5419

5619

5819

6019

6219

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

10

Inde

x (1

950

= 1)

In 2003 GDP per capita bellow the 1962 level. In 2010 close to peak level of 1978.

GDP per capita

Source: Venezuelan Central Bank.

Source: Own calculations based on ONAPRE (several years).

-100%

-50%

0%

50%

100%

150%

200%

250%

Perc

enta

ge v

aria

tion

Oil fiscal income and spending growthPublic Spending Oil Fiscal Revenue

Venezuela has never implemented an effective stabilization policy

Poor overall economic performance even during peak oil prices…

…but a large consumption boom

IMF Study: Unprecedented Resource Windfall(comparable only to Middle East oil exporters)

Emerging Latin America and Selected Regions: Income Windfall during Terms-of-trade Booms, 1970-2012 1/

(Share of annual GDP)

1975

PER

ECU

200 0

NOR

AUS

CAN

EM Latin America

200 0

RUS

UKR

BEL

200 0

IDN

0.0

0.1

0.2

0.3

0.4

200 0

SAUKUW

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

3.2

1970 2000

VEN

BOLCHL

ARGPER

PARCOL

ECU

BRA

PAR

Sources: IMF, International Financial Statistics; and Chapter 5.¹ Cumulative percentage change in terms of trade (of goods and services) from start to peak of each identified episode (that meet the criteria of at least 15 percent cumulative and 3 percent average increase). Episodes are grouped in 5-year window s according to the date of their first year. Dotted lines indicate group averages.

EM Europe AE MENA Oil exporters EM Asia

Bars: cumulative income windfallDots: Annual average (right scale)

Second worse growth performance, behind Libya, among major oil producers and second worse inflation rate behind Angola.

Collapsing exports, booming importsReal

Imports

RealExports

50

10

015

020

025

0

1985 1990 1995 2000 2005year

Venezuela

Chile

Higher oil dependence, with declining net oil exports

10

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Poverty Evolution in Venezuela (1997-2012)

Poverty

ExtremePovertyN

umbe

r of p

eopl

ePoverty and the Boom: 2004-2008

Source: INE and Miguel A. Santos

>5 million out of poverty

0.35

0.4

0.45

0.5

0.550.60

0.80

1.00

1.20

1.40

1.60

1.80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP and Consumption per Capita (1998=100) andGini Coefficient (1980-2012)

GDP PC 1998=100 CON PC 1998=100 Gini

Growth and Inequality or Consumption and Inequality?

14.3%CAGR:0.8%

60.0%CAGR:3.2%

Source: INE and Miguel A. Santos

IMF: Latin America’s Golden Decade: Strong Social Gains

40

44

48

52

56

2000 2004 2008 201212

16

20

24

28

32

Poverty (%, rhs)²

Inequality (Gini coefficient)

Poverty, Inequality and the Middle Class since 2000¹

Sources: PovcalNet; SEDLAC; World Bank, World Development Indicators; and authors' calculations.¹ Simple average of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Honduras, Mexico, Panama, Paraguay, Peru, Uruguay, and Venezuela.² Poverty line of US$2.5 per day.³ Middle class is defined as people with per capita income between $10-$50 per day (2005 PPP), as defined by Milanovic, Branko and Yitzhaki, Shlomo (2002), “Decomposing World Income Distribution: Does the World Have a Middle Class?”, Review of Income and Wealth,International, Vol. 48(2).

-20 0 20 40 60

URYCHLCRI

MEXARGBRAVENPER

GUAPRYECU

DOMPANCOLNICESVBOL

HON

2000Change

2010 Middle Class³(Percent of population)

Boom in public expenditure and imports exceeded the oil bonanza

28.7

05

28.4

55

29.0

67

26.1

04

25.9

42

27.7

02

28.8

53

28.1

38

30.5

34

26.5

98

38.6

81

50.9

09

67.4

49 85.3

04

98.0

11

105.7

79

106.0

48

0

20.000

40.000

60.000

80.000

100.000

120.000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-II

Deuda Pública Externa(USD Millones)

Fuente: BCV

Foreign Public Debt(US$ Million)

Venezuela: The highest level of public expenditures (% GDP) in the region

Gasto Público Consolidado (% del PIB)

18.2 19.122.1 23.3

28.732.5

34.638.8 40.0

41.9

47.250.6

26.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Argenti

naBoli

viaBraz

ilChil

e

Colombia

Costa

Rica

Ecuad

or

Mexico

Paragu

ayPeru

Urugua

y

Venez

uela

2011

vene

zuela

2012

51.3

Fuente: Ministerio de Finanzas, CEPAL, Miguel A. Santos

Unsustainable path even before the oil price collapse

16

GDP Growth 2015: OPEC members

-10%

-6%

-1%

0.03%1%

1%

3% 3%3% 3%

4%5%

Venezuela Libia Ecuador Irak Iran Kuwait EmiratosÁrabesUnidos

Argelia ArabiaSaudita

Angola Nigeria Catar

GDP Growth Forecast 2015

Source: IMF

Inflation 2015: OPEC members

190%

14% 14% 12% 11%4% 3% 3% 3% 2% 2% 2%

Venezuela Iran Angola Libia Nigeria Ecuador EmiratosÁrabesUnidos

Kuwait Irak ArabiaSaudita

Argelia Catar

Forecasted Rate of Inflation 2015

Source: IMF

The Politics:electoral cycles on steroids

World Governance Indicators

0

10

20

30

40

50

60

1996

1998

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

Perc

entil

e R

ank

(0 -

100)

Venezuela 1996 - 2010

Voice and Accountability Political StabilityGovernment Effectiveness Regulatory QualityRule of Law Control of Corruption

26.1

11.3

18.6

3.8 2.8

8.1

51.4

35.9

44.447.6

33.8

43.5

0

10

20

30

40

50

60

Inde

x

2009

Venezuela Latin American Average

Institutional Collapse

An electoral budget cycle on steroids...

ElectionsElections

The public sector deficit in the year to the election at historical high of close to 19% of GDP, with total public expenditures also at a historical high of around 51% of GDP. This when the price of oil is also at a historical peak.

Source: BCV and Barclays

ElectionsElections

Ven

Ven

Ven

Consumption and Popularity

-25-20-15-10-50510152025

25

35

45

55

65

75

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Chavez popularity (lhs)Maduro (lhs)Real consumption growth (rhs)

Source: BCV and Datanalisis

Source: Keller y Asociados

Source: Datanalisis, July 2015

Public Opinion: How is the country doing?

28

Source: Datanalisis, July 2015

Public Opinion: Maduro’s Approval

29

The Oil Industry: another wasted opportunity

31

Venezuela will continue to produce oil… until the world demands itVenezuela’s official proved oil reserves are 298 billion barrels (using a 20% recovery rate on the Orinoco Belt, for 257 billion barrels). The USGS estimates that510 billion barrels would be ultimately recoverable in the Orinoco Belt (using a 45% recovery rate). Even using a 10% recovery rate Venezuela would have thesecond largest reserves after Saudi Arabia, at around 190 billion barrels (close to Canada’s).

0 50 100 150 200 250 300

US

Venezuela

Russian Federation

Iran

Kuwait

Saudi Arabia

United Arab Emirates

Nigeria

OPEC

Non.OPEC

Years of production

Reserves/production (years)

Source: BP Statistical Review of World Energy (2013)

Canada including oil sands 110 years

Venezuela low estimate 190 years

The Rise and Fall…and Rise again and Fall again… of the Venezuelan Oil Industry

32

• Significant contributions to FONDEN & social programs, compared to investment.

• Financial Debt has increased to more than US$ 45 bn. Debt with suppliers and partners above $15 bn. Debt with Central Bank above Bs. 800 bn. Arbitrations $7-8 bn. (estimate)

Cash Flow availability – PDVSA

Venezuela Domestic Oil Consumption

Gasoline price: $0.07 per gallon or $0.002 at black market exchange rate. 1 cent per barrel versus $21 in Saudi ArabiaDomestic subsidies: $24 billion in 2013. $13 bn. in 2015 34

• Texas 5• Qatar 33• United Arab Emirates 39• Colombia 48• Alberta 51• Trinidad and Tobago 58• Brazil 66• Alaska 83• Angola 118• Nigeria 124 • Algeria 126• Russia 127• Libya 128• Iraq 129• Kazakhstan 131• Iran 132• Bolivia 133• Ecuador 134• Venezuela 135

Fraser Institute Global Petroleum Survey 2011: Jurisdictional rankings according to the extent of investment barriers

(based on All-Inclusive Composite Index values) 135 jurisdictions ranked

The Reputational Legacy

Ranking sobre barreras a la inversión Fraser Institute 2009 2010 2011 2012 2013 2014

Ranking Venezuela 141 132 135 146 157 156Jurisdicciones Consideradas 141 133 135 147 157 156

35

The Future?

• Macro-adjustment? – Devaluation? Gasoline price hike?

• Hyperinflation?• Price of oil?

• Legislative elections the end of 2015?– The opposition today has a 30 point lead, but margin would be probably smaller.

Gerrymandering and malapportionment help the PSUV.

• Recall Referendum in 2016 or 2017?• Presidential elections in 2018 or 2019?• Non-electoral outcomes? Social upheaval?

Thanks for your attention

francisco_monaldi@hks.harvard.eduTwitter: @fmonaldi

37