venezuela: where are we now and how long will it take to recover?

Venezuela:

Where are we now an how long will it take to recover?

Miguel Angel Santos@miguelsantos12

www.miguelangelsantos.net

Where are we now?

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Venezuela:*GDP*per*capita*1950<2016(1950=100)

In three years 29.3% of Venezuela´s income per capita vanished: It is now just above national strike levels, at the same point it was in 1956

Source: Venezuela Central Bank, Reuters, author´s own calculations.

Faced with plummeting oil prices and hefty debt service, the government chose a draconian import cut: Imports per capita today are 26% of 2012 peak

0"

500"

1,000"

1,500"

2,000"

2,500"

3,000"

3,500"

4,000"

1983

1984

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1991

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1999

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2003

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2011

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2015E

2016EConstant"2016"dollars"pe

r"capita

Venezuela:)Exports)and)Imports)per)capita(constant)2016)dollars)

Exports"real"per"capita Imports"real"per"capita

Source: Venezuela Central Bank, IMF International Financial Statistics Reuters, author´s own calculations.

The import nose-‐dive was also the end of the illusion of abundancy, as now production and consumption are forced to be more aligned

60.0

80.0

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160.0

180.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2015

Venezuela: Gross domestic product and consumption per capita(1998-‐2015, 1998=100)

Private consumption Government consumption Gross domestic product Baseline

Source: Venezuela Central Bank, author´s own calculations.

Poverty skyrocketed to record-‐levels: 81.8% of households are estimated to be poor and 30% are now in extreme poverty – only 18.2% are not poor

Source: INE. Encuesta de Hogares por Muestreo. 1997-‐2015. UCAB-‐UCV-‐USB. ENCOVI 2014-‐2015-‐2016

-

10,0

20,0

30,0

40,0

50,0

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70,0

80,0

90,0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014E 2015 2015E 2016E

EVOLUCIÓNDELAPOBREZAENVENEZUELA1997- 2016

PobresNoExtremos PobresExtremos

55,654,0

26,429,5

33,1

48,4

73,0

81,8Venezuela: Evolution of poverty and extreme poverty

(1997-‐2016)

Total poverty Extreme poverty

Multidimensional poverty has gone up (71%) and become more intense: The average income of a poor household is now 39% away from the poverty line

0,320

0,190

0,529 0,560

0,71

0,370 0,350 0,352 0,3430,39

0,1180,067

0,186 0,192

0,28

0,000

0,050

0,100

0,150

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0,000

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0,200

0,300

0,400

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0,700

0,800

0,900

1,000

2005 2012 2014 2015 2016

Mo

(H x

A)

Inci

denc

ia e

Int

ensi

dad

Incidencia Intensidad Pobreza Ajustada (Mo)

Source: INE. Encuesta de Hogares por Muestreo. 2005-‐2012. UCAB-‐UCV-‐USB. ENCOVI 2014-‐2015-‐2016

Incidence and Intensity of Multidimensional Poverty

Incidence Intensity Adjusted poverty

Incide

nce an

d intensity

of p

overty

In three years, a significant number of households that were not poor became (recent) poor, and an alarming figure ended up in chronic poverty

2014 Not poor Poor

Not poor Not poor44,7%

Inertial poverty6,1%

Poor Recent poverty33,1%

Chronic poverty16,1%In

come po

verty

Structural/Multidimensional poverty

2015 Not poor Poor





come po

verty


2016 Not poor Poor





come po

verty


ü Non-‐poor households decrease 63% in two years (28.3 percentage points)

ü Recent poverty increased 49% (16.3 percentage points)

ü Chronic poverty increased 95% (15.3 percentage points)

Are the precedents to such a catastrophe?

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2000*

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2010*

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2014*

2016*


Spells where countries lost 29.3% capita in three years are not very common; almost unheard of in cases with no natural disasters or armed conflicts


In the modern history of Latin America (1960 onwards) there is only one episode where a country has suffered a greater loss: Cuba

!32.8%!29.1% !29.0%

Cuba.(1991!1993) Venezuela.(2014!2016) Nicaragua.(1978!1980)

The only precedent had been the income loss registered in Nicaragua at the outbreak of the Revolución Sandinista between 1978-‐1980

!32.8%!29.1% !29.0%

Cuba.(1991!1993) Venezuela.(2014!2016) Nicaragua.(1978!1980)

Over the previous twenty years, only four episodes worldwide registered higher economic losses than Venezuela 2014-‐2016

!60.5%

!45.9%

!36.2% !35.5%!29.1%

Libya&&&&&&&&(2009+2011)

South&Sudan&(2010+2012)

Iraq&&&&&&&&&&&(2001+2003)

Central&African&(2012+2014).&

Venezuela&(2014+2016)

Largest GDP loss worldwide in three years(1985-‐2015)

What do we need to do to recover?What exactly do you mean by “recover”?

How much would we have to grow?For how many years?How likely is that?

We are going to define recovery in terms of income per capita as:a) Our historical peak (1977), and b) the most recent peak (2012)


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1950*

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1986*

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1990*

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1996*

1998*

2000*

2002*

2004*

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2008*

2010*

2012*

2014*

2016*


209.98&

192.08&

80#

100#

120#

140#

160#

180#

200#

220#

1950#

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Based on these targets, we calculate how much do we need to grow for how long, and how likely is that according to our history?

Years&required&to&achieve&target&2012&GDP&per&capita

CAGR&over&these&years&to&achieve&target&2012&GDP&per&capita

Frequency&in&Venezuelan&history&(1961D2015)&of&these&CAGR&rates&over&

these&years

5 8.3% 2.0%10 4.6% 8.9%15 3.4% 12.5%20 2.7% 17.1%25 2.3% 50.0%30 2.0% 64.0%35 1.8% 95.0%

Most&recent&peak&(2012)

Years&required&to&achieve&target&1977&GDP&per&capita

CAGR&over&these&years&to&achieve&target&1977&GDP&per&capita

Frequency&in&Venezuelan&history&(1961C2015)&of&these&CAGR&rates&over&

these&years

5 10.3% 2.0%10 5.6% 2.2%15 4.0% 10.0%20 3.2% 5.7%25 2.7% 20.0%30 2.3% 44.0%35 1.8% 95.0%

Historical&peak&(1977)

What about oil? We have lots of oil!

Can we make it in five years?

Let us think of a fixed time horizon: Five years. How much is the maximum we have managed to increase oil production in five years?

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

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2001

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2007

2010

2013

2016

Million ba

rrels p

er day

Venezuela: Total oil production (1935-‐2016)

Chavez-‐Maduro

2003-‐2007:0.34 MBD

1994-‐1998:0.71 MBD

(1978-‐2016)

(1935-‐2016)

1953-‐1957:0.71 MBD

Even assuming that we reach the maximum oil increase, the growth required in the non-‐oil sector is substantial… and not very frequent in our experience

Historic(peak((((1977)

Most(recent(peak((2012)



Maximum'increase'in'oil'production'registered'over'a'five5year'period'during'chavismo'(200352007)

340 11.83% 9.44% 1.96% 9.80%

Maximum'increase'in'oil'production'registered'over'a'five5year'period'since'1978'(199451998)

712 11.23% 8.80% 3.92% 11.76%

Maximum'increase'in'oil'production'registered'over'a'five5year'period'in'our'history'(195351957)

1,014 10.74% 8.26% 5.88% 13.73%

ScenariosTotal(increase(in(oil(

production(in(five=year((million(barrels(per(day)

CAGR(on(non=oil(GDP(required(to(reach(target(GDP(per(capita(peak(

in(5(years

Frequency(in(Venezuelan(history((1961=2015)(of(these(CAGR(rates(

over(these(years

And what about the world´s experience? Are these episodes of growth in five years more frequent in the international experience (1961-‐2015)?

0

200

400

600

800

1000

1200

Frecuency(of(CAG

R(in(five1year(sequence

Compounded( annual(growth(rate((CAGR)(in(a(five1year(period

Fail+target Reach+most+recent+peak Reach+historic+peak

What about ten years?

How much is the maximum we have managed to increase oil production in ten years?

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

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1995

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2001

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2007

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2013

2016

Million ba

rrels p

er day

Venezuela: Total oil production (1935-‐2016)

Chavez-‐Maduro

1999-‐2008:0.20 MBD

1989-‐1998:1.42 MBD

(1978-‐2016)

(1935-‐2016)

1948-‐1957:1.44 MBD

In this case, still growth required from non-‐oil sector is still sizable, although more likely according to our own experience…





Maximum'increase'in'oil'production'registered'over'a'five5year'period'during'chavismo'(199952008)

201 6.52% 5.36% 21.74% 32.61%

Maximum'increase'in'oil'production'registered'over'a'five5year'period'since'1978'(198951998)

1,420 5.63% 4.37% 28.26% 36.96%

Maximum'increase'in'oil'production'registered'over'a'five5year'period'in'our'history'(194851957) 1,440 5.62% 4.36% 30.43% 39.13%

ScenariosTotal(increase(in(oil(

production(in(five=year((million(barrels(per(day)

CAGR(on(non=oil(GDP(required(to(reach(target(GDP(per(capita(peak(

in(5(years

Frequency(in(Venezuelan(history((1961=2015)(of(these(CAGR(rates(

over(these(years

And what about the world´s experience? Are these episodes of growth in five year-‐sequence more frequent in the international experience (1961-‐2015)?

0

100

200

300

400

500

600

700

800

900

Frecuencia)of)C

AGR)in)te

n1year)se

quence

Compounded) annual)growth)rate)(CAGR))in)a)ten1year)period

Fail/target Reach/most/recent/peak Reach/historic/peak

Some caveats are due…

• We have taken growth episodes as if they come from a random sampling

(but priors are important)

• We have not evaluated the quality of growth

• 1961-‐1977: Import substitution industrialization model

• 2004-‐2012: Longest oil bonanza ever recorded, foreign debt

quadrupled in six years

• Most of the growth spells of Venezuela were registered in the earlier side

of our sample (1961-‐1977), the fact is that are only two four-‐year

sequences of growth over the previous forty years

What have we learnt from the exercise?

• Oil it´s today our only source of foreign exchange and we must make the

most out of it, but the key to a fast recovery lies in the non-‐oil sector

Oil has gradually become increasingly small for the size of Venezuela…

0.0

20.0

40.0

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120.0

140.0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

19651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009201120132015

Barrels per capita per yearMillion ba

rrels p

er day

Oil production: Total and per capita(1965-‐2016)

Oil production per day Barrels per capita per year

Source: PODE and PDVSA, and author´s own calculation based on population reported by INE.

What have we learnt from the exercise?

• Oil it´s today our only source of foreign exchange and we must make the

most out of it, but the key to a fast recovery lies in the non-‐oil sector

• The longer the time it takes to introduce political change and start a

transition, the steeper the slope (the longer the time) of recovery

• Going back to what we used to have will not be enough to recover: The

“chavismo well managed” is a myth, and it it is not true that ”we were

happy and we did not know”

• The recovery has scant probabilities if we continue formulating policy the

way we have over the previous 40 years

How can we get on track?

The technical solution: Main elements of a new policy framework

Reestablish market mechanisms Substitute indirect subsidies for direct subsidies

Reestablish sustainable international finance

Curb deterioration of oil industry

• Unify exchange rate

• Liberalize price and interest rate controls

• Privatize small and medium SOEs in the short term & regulate larger ones

• Secure international financial assistance (IMF, WB, IDB and CAF)

• Re-profile debt and address arrears

• Reestablish credit lines (EximBanks, Bilateral)

• Launch new oil policy with corresponding regulatory changes

• Revamp relationships with JV partners and service providers

• Audit finances, optimize expenditures and review cooperation agreements

• Reform regressive indirect subsidies (Gasoline, electricity, water, gas, telecom, food and medicine)

• Improve provision of public goods

• Supplement income through direct subsidy systems (i.e.: electronic transfers)

The problem is not technical,is mostly adaptive:

How can we manage to implement thethings we know we need to do?

Some example of the adaptive challenges we face…

• A new social contract, a common understanding of what the State must do for its citizens (equalize opportunities) and what people must do for the State and for themselves

• Too many claims on too little resources: What are the priorities?

– Foreign financial debt (PDVSA; sovereign, Chinese Funds, Russia, multilaterals)

– Commercial debt

– ICSID demands

– Social debt!• Reinvesting Venezuela and igniting recovery necessarily passes for an IMF package,

regulatory changes regarding the oil industry, and dismantling the systems of controls that has suffocated private initiative and ruin the economy: We need a leadership convinced of the strategy, prepared for the challenge, and a public narrative of the reform process

• Reform will take place within the context of:-‐ large institutional destruction and State fragmentation-‐ significant social unrest and chaos-‐ some characteristics of failed state

Epa Miguel. Te escuché en el programa esta mañana. Nueve años no son nada. Lo mejor es que a la mañana siguiente cambiamos la pendiente y empezamos a subir!!! Me gusta esa idea. Te imaginas? Nueve años subiendo, hasta llegar a la cumbre !!

Thanks!

Miguel Angel Santos@miguelsantos12

www.miguelangelsantos.netMarch 3, 2017 Stanford University: Venezuela at a crossroads

venezuela: where are we now and how long will it take to recover?

Economy & Finance