Venezuela Circles the Drain

We have chronicled the accelerating decline of Venezuela’s economy under its narco-socialist rulers. When a country can neither produce nor buy toilet paper, you know the end is approaching. Now, Venezuela’s international reserves are disappearing, as its currency implodes. Dimitra DeFotis reports at Barron’s:

Russ Dallen, who contributes to a newsletter for investors, and writes about Latin America, writes today that “Venezuela’s situation continues to unravel at increasing speed as the bolivar tumbled 30% over just the last week, while the country’s international reserves simultaneously hit a new 12-year low, closing at $17.5 billion.” He says the weak currency and decline in reserves means the country is “essentially running on fumes.” He writes:

“Venezuela’s reserves have now fallen 21% since the beginning of the year, but more importantly $6.7 billion from their high just 2 months ago – a high that not only included $2.8 billion from mortgaging Citgo, $1.9 billion from the selling of $4 billion of oil receivables from the Dominican Republic, and the transfer of previously unreported China Fonden funds into the reserves.”

Venezuela’s regime is long past eating its seed corn; now it’s selling the furniture. Will Maduro’s government default on the country’s debt, some of which carries 30% interest? Moody’s rates Venezuelan debt as “speculative and subject to very high credit risk.”

We believe the sovereign will likely be able to close its 2015 external funding gap. Nevertheless, should oil prices remain at current levels through 2016, the sovereign could run down its external assets, heightening the probability of a default despite the authorities’ strong willingness to meet debt payments…

Total international reserves have fallen steeply in recent months, to $17.9 billion in mid-May, their lowest level since 2003.

The IMF is helping to keep Venezuela’s economy afloat, and if oil prices rise, the Maduro regime might be able to buy a little more time. But the end game is obvious: economic collapse.

Hollywood’s Chavez/Maduro acolytes haven’t been heard from for a while, have they? Maybe Sean Penn would like to contribute some much-needed hard currency to Venezuela’s coffers. Just kidding. More likely, the Hollywood left would join Maduro in blaming Venezuela’s decline on “wreckers” and “saboteurs.” But the only wrecker is socialism, and the only saboteurs are the leftist elite who suck out the country’s remaining wealth.

STEVE adds: I have been meaning to post this piece (PDF file) from economist Steve Hanke of the University of Maryland and the Cato Institute, which tells the same story and has some nifty charts showing Venezuela’s precipitous decline. Hanke reports:

I estimate Venezuela’s annual inflation rate at 335%. That’s the highest rate in the world. For those holding bolivars, it amounts to: “no rule of law, bad money.” It is worth noting that currency debasement and inflation robbery were not always the order of the day in Caracas. During the decade of the 1950s, the average annual inflation rate was only 1.7% — not much above Switzerland’s.

In the 1960s, inflation in Venezuela fell to a 1.2% average annual rate. It wasn’t until the 1980s that Venezuela experienced a decade of double-digit annual inflation. Today, inflation, contrary to the official numbers and amateur estimates, has soared well into triple-digit territory.