Petro-dictatorships typically boom and bust with the price of oil, so you’d think that Venezuela would be riding high right now.
But a new report from Morgan Stanley presents a picture of a country that’s actually falling further and further out of debt, while running low on hard dollars.
The firm doesn’t see an imminent credit “event” but it’s not good.
There seem to be two main explanations for the apparent shortage of hard currency. One version – put forward by the authorities – is that Venezuela is embarking on a significant upgrade of its oil complex and needs major investment, especially in developing the Orinoco belt fields. However, there has been a conspicuous absence of news of major new oil investment on the ground from either official sources or the private companies operating in Venezuela. Most news accounts have focused on announcements of planned investments or signing ceremonies. Indeed, inward foreign direct investment that would be necessary to develop the Orinoco belt does not appear to have materialised. Instead, FDI has seen almost uninterrupted outflows since 3Q08 (see Exhibit 3).
Photo: Morgan Stanley: Paolo Batori
So if iol investment spending isn’t the problem, what it?
Basically, bad economic polices:
There is an alternative explanation for why Venezuela appears to be short of hard currency cash: policy heterodoxy has hurt domestic supply, forcing an increase in imports as a substitute. Policy heterodoxy – especially the expropriations, lack of property rights and rising participation of the state in the production and distribution process – have led to a structural decline in Venezuelan production capacity, forcing a greater dependence on imports to satisfy demand. In turn, Venezuela’s reliance on imports means that it must generate enough dollars to finance those imports. Indeed, we suspect that the fundamental trade-off faced by Venezuelan policy-makers appears to be between economic growth and the health of external accounts.