Political and economic turmoil in Venezuela threatens Latin American and global markets
Venezuela is suffering an economic and political catastrophe that has led to malnourishment, mass protests, two presidents and interference from global powers.
The continued crisis ensuing in Venezuela threatens what is considered healthy economic growth in South America, especially Colombia. If the U.S. government doesn’t lift economic sanctions and PDVSA is unable to participate in the bond market to generate equity to elevate oil production, detrimental financial projections will ensue.
The resulting impact is likely to be felt around the world, but especially in Latin American and Caribbean markets.
Venezuela’s Interim President Juan Guaidó, who has been recognized by more than 50 countries worldwide, recently identified the transitional board members for the state-owned oil company PDVSA to restrict indispensable revenue from President Nicolas Maduro. In a highly disputed election in 2018 in which the opposition took no part, it resulted in Maduro’s re-election. Progress in removing Maduro is evident, yet stability is far from certain for the country.
Foreign powers continue to intervene on both sides, principally with the U.S. on one and Russia on the other. The economic sanctions on PDVSA to induce Maduro’s exit have inadvertently caused a butterfly effect – not only cutting off the U.S. Gulf Coast refineries’ supply of heavy crude oil but crippling Venezuela’s main source of public income. While oil prices are expected to rise within the US; as a result, OPEC’s production cuts will undoubtedly also contribute.
The implementation of further economic sanctions on Venezuela was in response to Maduro preventing humanitarian aid from entering the country. The U.S. vice president called upon the Lima Group – who are currently attempting to resolve Venezuela’s conflict peacefully – to seize PDVSA and any remaining government-owned assets to destabilize Maduro’s leadership further. Maduro’s efforts to stabilize his government and economy internally have failed; however, despite several hundred defections within the military, he has retained the support of most of the higher-ranked officers.
While some contrarians like Roger Waters dubiously explain their discontent with aid operations like Richard Branson’s benefit concert, Venezuela is indeed suffering terribly. Food prices have soared, leading to undernourishment throughout the country, inflation is at record levels (380,000 percent approximately), and millions have fled overseas causing the largest mass migration in the Western Hemisphere. Initially activism against Maduro, commonly dubbed a dictator, began with peaceful protests, but it has grown ever more combative as the president’s attempts to bring “order, justice and peace” constitutionally have been seen to be merely a ploy to oust the opposition through legislation, much like how the National Socialists recanted the Weimar Republic in 1933.
However, why is the U.S. interfering in Venezuelan affairs? OPEC has flooded the market with oil since 2014, dropping the value from $110 per barrel to $75 by mid-2018, which has crippled the Venezuelan economy due to its gregarious reliance on the commodity. Venezuela’s current state of crisis adheres to U.S. foreign policy – to keep oil prices moderate. The U.S. is a significant supplier of oil, meaning low prices hurt producers in major petroleum states while high prices cause an artificial increase to inflation and detrimentally impact economic growth. As Venezuela has the largest deposits of oil worldwide, its ability to influence on inflation is apparent which has a ripple effect on global economies reliant on the commodity.
Economists expect a knock-on effect onto South America as a whole that will eliminate 0.2 percent of GDP growth throughout 2020. Add in one million Venezuelan immigrants entering Colombia and 250,000 emigrating to Peru, Ecuador and Chile. Argentina, Brazil and Uruguay are also sought-after countries for further immigration if conditions in Venezuela worsen. Venezuela will ostensibly experience a recession, albeit growth will continue throughout 2019 and 2020 as multinational oil companies inject additional investment into production.
With emigration continuing, Venezuela may suffer deficiencies in certain labor markets. However, future economic projections for oil and their respective investors look bright. As the economy begins to stabilize, Venezuelan emigrants will return with improved job prospects and assist in accumulating greater economic growth.
As Guaidó attempts to establish his position, Russia continues to defend Maduro’s claim. The self-proclaimed Marxist remains a close ally to Russia and other left-leaning countries such as China, Cuba, Bolivia and Nicaragua. To allow Guaidó to usurp power from Maduro would be a blow to Russia’s newfound desire to demonstrate itself as a global force to be reckoned with and would show weakness in the eyes of Putin’s constituents. Add into the mix that Venezuela owes billions in dollars to both Russia and China and this calls into question whether Venezuela has become the grounds for an economic and political proxy conflict.
Although both domestic and third-party stakeholders are suffering the inevitable hardships to achieve political stability, progress to steady Venezuela’s circumstances is undeniable although an end to the clash is nowhere in sight. While this sparks news on global levels, Latin America and the Caribbean islands will feel the economic impact.
As world superpowers continue to maneuver their pieces on the board, the state of the world economy exemplifies how both macro- and micro-economic issues are beyond investors’ control. To be successful in today’s market, one must pay attention to world events.
• James Maxwell is head of Latam Sales at the Carlton James Group, a private investment group specializing in diversified portfolios across varying global asset classes including equity, FX trading and real estate. Published with the permission of Caribbean News Now.