Venezuela: Reeling under Hyperinflation

Case Code: ECON066 Case Length: 12 Pages Period: 1999 - 2018 Pub Date: 2018 Teaching Note: Not Available

Price: Rs.300 Organization : - Industry : oil Countries : Venezuela Themes: Hyper-Inflation

Abstract Case Intro 1 Excerpts

Excerpts

Background

The Bolivarian Republic of Venezuela, a federal republic spread across the area of 916,445 Sq Km on the northern coast of South America, had a population of more than 31 million people in the year 2017. Surrounded by countries like Guyana, Brazil, Colombia, the Dutch Lesser Antilles, and Trinidad and Tobago, its economy had been largely based on the petroleum sector, manufacturing, and export of heavy industry products such as steel, aluminum, and cement. The economy had been robust with a steady growth seen in manufacturing as well as exports during the period 1950 to 1990. (See Exhibit 1 for an overview of economy of Venezuela)....

Nationalization of Venezuelan Oil Industries

However, things changed when the then president, Carlos Andrés Pérez (Pérez), nationalized the Venezuelan oil industry in the mid-1970s. The nationalization of the oil industry became fully operational with the creation of Petroleos de Venezuela (PDVSA) in 1976. For decades, the country's oil wealth had mostly benefited the country's privileged class and the government felt that the oil money should be used to help the country's poor. Pérez, therefore, employed the country’s huge oil wealth to fund welfare schemes like education, healthcare, transport, and food subsidies . The economy became heavily dependent on a single source of revenue – oil – which was used to fund all these government programs...

Chavez Era

Chávez had a turbulent start as president. The initial four years of his governance from 1999 onward were marred by political and economic instability, which included a disastrous flood and landslides in December 1999, a coup attempt in 2002 , and a massive business strike in 2002-03 that eroded 24% of the GDP of the country and drove the poverty rate to over 60%....

Beginning of the Crisis

Taking advantage of the seemingly optimistic state of affairs on the economic front, Chávez silently and gradually started taking over Venezuela’s autonomous democratic establishments to secure his position. Chavismo supporters were appointed judges, prosecutors, and election officials. Even media was controlled, with the vocally critical outlets being suspended and those who toed the line being encouraged. Chavez suppressed the labor unions by either blacklisting or replacing them. The opposition was portrayed as anti-nationals "who were trying to sell Venezuelan interests out". The second decade of the new millennium therefore saw the country polarized between two opposing parties...

Inheriting A Crumbling Economy

Chávez succumbed to cancer in 2013 just a few months after his re-election in 2012. He was succeeded by Nicolás Maduro (Maduro), who instead of taking strong steps to improve the crumbling economic situation, continued with most of the economic policies of his predecessor. He subsidized food products massively depending entirely on the oil wealth, on the assumption that the price of oil would continue to go up. However, Maduro, after taking over, immediately saw a crash in oil prices in 2014 from US$100 a barrel to US$50 a barrel . The result was a chaotic social and political situation and the beginning of the country’s long-term battle with inflation...

Economic Contraction Together With Hyperinflation

The years since 2016 saw the average life of Venezuelans becoming severely affected on various levels due to hyperinflation. Unemployment rose, resulting in an increase in the level of poverty. The currency lost 90% of its value. This occurred four times since 2012, which meant that the worth of the currency in December 2017 was almost 10,000 times less than in August 2012, since it had lost more than 99.99% of its value. On top of it, the rate at which the value fell increased every time. The first time the currency lost 90% of its value in 2 years and 2 months; the second time it took 1 year and 10 months; the third time 10 months; and the fourth time only 4 months...

Economic Reforms

President Nicolas Maduro announced a series of economic reforms to combat the crisis including launching the country's new 'crypto currency', the Petro , and unveiling a revaluation of the country's traditional currency, the Bolivar. Taking a cue from the case of Brazil, the president stated that the launching of virtual money had been done to restructure the finances of the nation and “overcome [the US-led] financial blockade."...

The Road Ahead

Venezuela’s oil misery appeared set to persist in the year 2018 as well, with the major uncertainty among economic analysts being on the extent of fall in oil production in the country. A further fall in oil production could drive cash-strapped Venezuela into full default, which would be one of the biggest and nastiest credit disasters in economic history. Maduro had been making attempts to restructure foreign debt, including some US$60 billion in bonds issued by PDVSA and the government, but that also depended on the faith the investors were ready to keep intact. The reason for their distrust was the delay in bond payments in the last few months in 2017...

Exhibits

Exhibit I: An Overview of Venezuelan Economy
Exhibit II: Major economic indicators: GDP, Per Capita GDP
Exhibit III: Venezuela’s Crude Oil Production and Exports
Exhibit IV: Economic Indicators: Inflation, Unemployment Rate, and Poverty Rate

Buy this case study (Please select any one of the payment options)

Price: Rs.300 Instant Download

Price: Rs.300 Express Checkout

PayPal (7 USD)