NS4540 Winter Term 2019 Venezuelan Outlook Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Macroeconomic Trends

Strengths/Weaknesses

Venezuela Vulnerabilities

Venezuela Prosperity Gap

Trade Blocks

Venezuela: Governance Trends

Overview In many ways the current situation in Venezuela is similar to that in Iraq Question of how long it will take Venezuela to restore oil production critical Like Iraq, Venezuela will need massive amounts of money to rebuild infrastructure. Like Iraq Venezuela’s oil industry has suffered serious damage and the damage could be harder to restore than Iraq Has taken Iraq almost a decade for oil production to get on a positive trajectory Amy Jaffe, No Easy Path for Venezuela’s Oil in the Struggle for a Transition in Power, CFR January 28, 2019

Iraqi Oil Production

Oil Sector Recovery I True Iraq oil facilities took military beating that won’t be analogous to Venezuela However tremendous violence on the ground in Venezuela Multiple armed groups looting and raiding the country’s key infrastructure – oil industry has been targeted Violence has caused many international oil companies to withdraw New government will have to deal with Multiple renegade armed groups operating inside Venezuela Cuban mercenaries and Others deeply entrenched in drug trafficking Will make guarding Venezuela’s oil industry a major challenge

Oil Sector Recovery II Further complicating restoring oil sector Venezuelan military has taken over operation of the industry Employment at PDVSA now 160,000 up from 40,000 at the time Chavez took over Organizations like the Military Corporation for Mining Petroleum and Gas industries (Camimpeg, created in 2016) now intercept income flow of income from oil sector Camimpeg’s soldiers have been Suppressing strikes by oil workers Siphoning off barrels for smuggling

Oil Sector Recovery III Overall condition in oil industry dire Of four refineries only one is running Fires, looting and miss operation has shut down most of the country’s refining capacity Refining problems have led to gasoline and diesel shortages across the country Sharp drop in oil production Fall from 2.2 million b/d in early 2017 to 1.1 million b/d Estimates are it would take an injection of over $20 billion of new investment to reverse current downward path of production Situation might be more difficult than that faced in Iraq

Oil Sector Recovery IV

Assessment Another source of difficulty is the size of the debt both the country and PDVSA have. According to IMF estimates The Venezuelan government has $153 billion in debt (160% of GDP) while PDVSA reports $35 billion. In both cases, the issuers have incurred a technical default, but have yet to declare themselves in default. Lack of infrastructure and brain drain will be big hurdles to the overall recovery. If the regional and multilateral organizations do not provide funds for initial reconstruction, Venezuela will have a very difficult time stabilizing and transitioning to a normal economy.