Sunday, November 30, 2014

Venezuela: Crude Drops to $68.08 on Nov. 28, Maduro Orders Drastic Cuts in Spending

According to The Latin American Tribune, Venezuelan President Nicolás Maduro has ordered budget cuts in response to a sharp drop in oil prices, calling for salary reductions for himself and other senior government officials.

He said in a speech on state-run television Friday (November 28) that he was naming a special presidential commission to identify areas of superfluous public spending.

The budget was prudently calculated based on an oil price of $60 a barrel with the idea that excess petroleum-export earnings would be used to fund government-subsidized social programs, but the steep decline in Venezuela’s crude oil has made spending cuts mandatory, Maduro said.

Venezuelan crude, which accounts for nearly all of the country’s export revenue, fell to a four-year low of $68.08 on Friday.

COMMENT: Although in the privacy of the Presidential Palace, it seems clear to virtually everyone that Hugo Chávez’s Socialist experiment has failed, as have similar revolutionary misadventures.

With crude oil being the one natural resource that keeps Venezuela from collapsing into the abyss, it is a sad reality that the country is struggling to effectively feed its population.

According to, the 2013 Global Misery Index Scores, Venezuela was ranked as the top spot globally with the highest misery index score, while the Heritage Foundation ranked Venezuela 175th out of 178 countries in economic freedom, classifying it as a "Repressed" economy.

In early 2013, Venezuela devalued its currency due to growing shortages in the country. The shortages included necessities such as toilet paper, milk, and flour. Fears rose so high due to the toilet paper shortage that the government occupied a toilet paper factory.

In late 2013, Venezuela's inflation rates increased even higher, to 54.3%, and forecasts from the IMF show Venezuela as one of the slowest-growing economies in Latin America for 2013. Black market estimates that most Venezuelans have to use for purchases have risen to almost ten times the official exchange rate.

Venezuela's bond ratings have also decreased multiple times in 2013 due to decisions by President One of his decisions was to force stores and their warehouses to sell all of their products, which may lead to even more shortages in the future.

President Maduro also created "a freeze on commercial rents at rates more than 50% lower than they had been at some malls" which resulted with Venezuela's malls and retail industry losing 75% of their incomes.

Venezuela's outlook has also been deemed negative by most bond-rating services. According to a Johns Hopkins University professor, Venezuela had a 297% implied inflation rate for 2013.

As of early 2014, many companies have either slowed or stopped operation due to the lack of hard currency in the country.

Ford Motor Co. is one of the largest companies that has slowed production in Venezuela due to its lack of foreign currency for supplies. Because of recent economic uncertainties, Ford also believes that there will be a significant devaluation of the bolívar as well.

In January 2014, many airlines, including Air Canada, Air Europa, American Airlines, Copa Airlines, TAME, TAP Airlines, and United Airlines, suspended international flights operating in Venezuela because the government has been restricting access to the US dollar.

There are talks among airlines of canceling even more international flights out of the country since Venezuela still owes foreign airlines nearly $3.3 billion USD.

Venezuela has also dismantled CADIVI, a government body in charge of currency exchange. CADIVI was known for holding money from the private sector and suspected to be corrupt. In February, Toyota, the largest automobile manufacturer, has stopped production indefinitely in Venezuela due to an 87% drop in automotive sales. General Motors Company has also suspended production after losing $162 million USD and stated that they "saw no horizon or resolutions to business operations in Venezuela.”

In February 2014, physicians at the University of Caracas Medical Hospital stopped performing surgeries due to the lack of supplies, even though nearly 3,000 people require surgery.

The government's currency policy has made it difficult to import drugs and other medical supplies. The Venezuelan government stopped publishing medical statistics in 2010 and does not supply enough dollars for medical supplies; doctors say that 9 of 10 of large hospitals have only 7% of required supplies with private doctors reporting many patients that are "impossible" to count are dying from easily treated illnesses due to the "downward sliding economy.”

In March 2014, the executive director of the Venezuelan Association of Hospitals and Clinics explained how in less than a month, shortages of 53 medical products rose to 109 products and explained how the CADIVI system is to blame since 86% of supplies are imported. Both public and private sector hospitals have only about two months of supplies with private sector hospitals claiming they owe suppliers US$15 billion in order to pay for debts.

In April 2014, the IMF said that activity in Venezuela is uncertain, but may continue to slow saying that "loose macroeconomic policies have generated high inflation and a drain on official foreign exchange reserves.” The IMF suggested that "more significant policy changes are needed to stave off a disorderly adjustment.”

Venezuela was also the only country in the world that the IMF predicts will experience a drop in GDP. They predicted Venezuela's GDP to contract at a rate around -.5% for the year 2014.

Coca-Cola Company announced that Venezuela's currency controls created "adverse impact" on its operations expecting a "negative impact of 7% in their overall performance this year from the impact of currency exchange.”

EL TIEMPO reported that some goods in Venezuelan stores had a 114% to 425% premium due to "under the table" negotiations between the Venezuelan government and traders.

EL NUEVO HERALD reported that SEBIN has cut down its work due to the lack of money limiting their work to the monitoring of "potential external threats" and asking for Cuban intelligence agents to return to Venezuela.

In May 2014, the Central Bank of Venezuela announced that the shortage rate of automobiles was at 100%. Citibank believed " that the economy has little prospect of improvement" and that the state of the economy was a "disaster.” General Motors Venezolana stopped automotive production after 65 years of service due to a lack of supplies.

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