For Venezuela, the rise in the price of oil to a 2016 high is much too little and way too late. Every commodity-producing country has been vulnerable to the dramatic slump in the cost of crude, but Venezuela more than most.
Energy accounts for almost all of Venezuela’s exports and so the drop in the oil price from $115 a barrel in the summer of 2014 to its current level of just over $45 a barrel has been a body blow to the government in Caracas.
Oil exports pay for the imported goods Venezuela needs and a high oil price has allowed the country to fund an ambitious programme that led to a dramatic fall in poverty in the years before the price slump. It needs an oil price well above $100 a barrel to balance the books.
Earlier this week, a report by the consultancy firm Oxford Economics looked at how vulnerable oil producers were to a period of low prices. The study looked at their economic dependence on commodities, and their resilience. This was measured by a range of indicators including their level of public debt as a share of gross domestic product, the size of the budget deficit, the current account deficit, GDP per head of population, and foreign exchange reserves.
Oxford Economics identified eight countries as being in the “red zone” – Venezuela, Iraq, Mongolia, Zambia, Angola, Nigeria, Algeria and Gabon. Venezuela was the most vulnerable of the lot.
To make matters worse, Venezuela is suffering from a serious drought which has reduced water levels at its main hydro-electric dam, with knock-on effects on electricity supply.
But the problems go deeper than that. The economy contracted in both 2014 and 2015 and, according to IMF forecasts, the recession will intensify in 2016. The IMF was anticipating a drop in GDP of 8% this year, although the recent rise in oil prices might make this slightly too pessimistic.
Even so, a further contraction in the economy is being pencilled in by the IMF for 2017.
The risks are obvious. There will be a persistent hit to government tax revenues and shortages of imported goods because Venezuela lacks the foreign currency to pay for them. Inflationary pressure will be strong, and owners of capital will seek to get it out of the country.
Venezuela needs help from its creditors and from the IMF to re-schedule its external debt until such time as it has made a start on sorting out its economic problems. Otherwise a debt default cannot be ruled out.
