Venezuela is on the brink of a 'political and economic meltdown'

Venezuela has been teetering on the edge of political and economic disaster for some time now.

But the situation hit a critical point on Wednesday as Venezuela’s political opposition called for massive protests on the heels of President Maduro’s declaration of a 60-day state of emergency over so-called “plots from Venezuela and the United States to subvert him.”

And it doesn’t seem like things will be improving in the near-term.

“With every passing day, Venezuela, the most imperiled [oil] producer, moves closed to the brink of a political and economic meltdown,” RBC Capital Markets’ head of commodity strategy Helima Croft wrote in a note.

“Political challenges and mounting debt continue to stress an already challenging situation and there appears to be no end in sight.”

Venezuela, an OPEC member which has the largest oil reserves in the world, has been struggling with ongoing political, security, and economic issues.

On the economic front, things went south after oil prices collapsed in 2014. The country heavily relies on the commodity for its export revenues, and also previously relied on oil’s higher prices to funded many of the government’s social programs. Most notably, a bombshell New York Times report elucidated how the country’s economic crisis has led to a huge public-health emergency.

Venezuela has also been suffering from water and electricity cuts amid a prolonged drought. The government has come up with some unorthodox strategies to combat the situation — such as changing the daylight savings time, urging women to cut use of hairdryers to save electricity, and forcing holidays for state employees.

And on top of all that, Venezuela has also been struggling with security issues. The country still has one of the highest murder rates in the world, and has seen episodes of vigilante violence.

Most recently, the Associated Press’s Hannah Dreier reported how a 42-year old Venezuelan man was burned alive over $5 dollars — but “amid the general haze of violence, [his] killing didn’t even stand out enough to make the front pages or provoke comment from local politicians.”

Unfortunately, the country’s economic future does not look good.

Croft also detailed that the country is now also flirting with a potential debt crisis in the back half of the year.

As she explained in a note to clients:

“…the state-owned oil company PDVSA faces a $1.3 billion debt payment in October and an additional $2.9 billion one in November. Maduro may already be making contingency plans for a PDVSA default. In February, the government announced the creation of a new military controlled oil and mining company, which some analysts speculate could be used to strip the PDVSA assets in the event of default or bankruptcy.”

As for the larger scheme of things, data from the central bank suggests that Venezuela’s gross domestic product contracted by 5.7% in 2015, and International Monetary Fund figures suggest that it will shrink by 8% in 2016.

Meanwhile, inflation is expected to rise from a world high of 275% in 2015 to a mind-blowing
720% in 2016, according to a January estimate from the IMF.
And because of this insanely high inflation, Venezuela is likely to once again be the most “miserable” country in the world. (Arthur Okun’s “Misery Index” adds together a country’s unemployment and inflation rates. The higher the number, the more “miserable” a country is.)

In short, things are not looking good.

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