Authored by Michael Cembalest, CIO JPMorgan,
Venezuela is a place of severe contradictions. It’s the only country we found that ranked in the top ten regarding improvement in the UN Human Development Index since 2006, and also ranked in the top ten regarding intentional homicides per capita. Usually, these two things do not go together. Similarly, income inequality has been reduced, but has been accompanied by very high inflation. Chavez’ redistribution policies contributed to a large decline in Venezuela’s Gini coefficient since 2002, now the lowest in the region (lower implies less income inequality). This is no small achievement, as Latin America is notorious for income inequality: half of the top 20 most unequal countries in the world are in Latin America. However, Venezuela has also experienced the highest inflation in the world over the last 5 years (excluding Zimbabwe, of course), which suggests that Venezuelans have in part been made more equal by having their incomes inflated away. The tables tell the story.
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While the UN Human Development scores suggest modestly improved living conditions, other measures are quite downbeat, and frankly a bit startling. The World Economic Forum compares conditions across 144 countries, and as shown below, Venezuela ranked extremely poorly in many of its basic pillars in 2012, including two last-place finishes. I added the three countries that outperformed Venezuela in each category to give you a sense for what neighborhood they are operating in. Venezuela’s gains have been in health, basic education and higher education, with little progress elsewhere.
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Venezuela appears to be continuing to underutilize its oil riches. While the level of Venezuelan per capita GDP has always been among the highest in Latin America, other than during the oil boom of 2002 to 2007 when crude prices quintupled, Venezuela’s growth in per capita GDP has been at or near the bottom. One possible conclusion regarding the last few years is that a chaotic redistribution of wealth has a cost, one that prevents the economic pie from growing.
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Where does Venezuela go from here? There are certainly strange things happening with Venezuela’s balance of payments, some of which help explain why per capita GDP growth has stalled since 2008. The net foreign asset position of the private sector has been growing, most likely a function of rapid capital flight, a process which diverts resources away from domestic investment and infrastructure. The public sector net foreign asset position, on the other hand, has been shrinking. One would expect it to be rising at a time of current account surpluses and high oil prices. Its decline suggests that the public sector has been spending its accumulated riches to sustain growth, something that it might not be able to do forever. Venezuela stands out unfavorably compared to other oil exporters by having both fewer foreign exchange reserves, and higher external government debt. We tried to get an assessment of Venezuela’s total national wealth including its sovereign wealth fund Fonden (the National Development Fund), but the accounting is very opaque; the Sovereign Wealth Fund Institute gives Venezuela its lowest transparency score, along with Libya, Algeria and Mauritania.
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Despite all the challenges, Venezuela’s economic model may well survive given how high oil prices are. The budget deficit and growth in domestic debt in Bolivars is explosively high, but so is inflation; as a result, domestic debt has only risen from 9% of GDP in 2010 to 13.5% by Y/E 2012. On hard currency debt, Venezuela only owes $11bn each year on its government/PDVSA debt, and takes in over $80 bn in oil revenues. What no one knows is how much hard currency the government needs to spend to maintain support from the Chavistas. The government has been draining its external asset position for several years, both through spending and external borrowing. If the current pace of spending has to be sustained to maintain its legitimacy, Venezuela may eventually run out of lenders, unless oil prices rise again. And if oil prices fall…then watch out. But to me, more of the same looks like the most likely outcome.
As with Cuba, there are those who sit in constant wait for regime change as the patriarchs of the revolution pass on. I’m not so sure; neoliberal market economies have not always generated enough growth for the majority of people to have an unquestionable stake in keeping the status quo. That is something we have seen at work in a few places in Latin America, and is a topic for another day.