How’s it going in Venezuela these days?
…is something you probably weren’t asking yourself.
But just in case you’re curious, the answer is – drum roll – not great!
When last we checked in Nicolas Maduro’s authoritarian hellscape, the cost of a cup of coffee in Caracas had exploded to a cool one million bolivars. That, according to Bloomberg’s “Cafe Con Leche Index”.
That’s hyperinflation for you and it comes courtesy of a truly “impressive”, years-long effort on the part of the Maduro regime to mismanage the economy and put the country on the fast track to “failed state” status.
Gross incompetence, rampant corruption and the deleterious effect of sanctions have turned Venezuela into a geopolitical punchline. Last year, for instance, Maduro put OFAC-designated drug trafficker Tareck El Aissami in charge of restructuring the country’s debt. At the time, Reuters wrote that El Aissami “has no known experience in debt negotiations.” I thought that was a bit unfair. After all, it’s probably not realistic to say that someone who moves thousands of kilos of coke has “no known experience in debt negotiations”. In fact, it’s probably not a stretch to say that when it comes to debt “negotiations”, El Aissami has more experience than all of Wall Street combined.
I jest. Or not.
In mid-November, Maduro hosted a summit for the nation’s creditors and in a scene right out of a Chappelle Show sketch, El Aissami brought bondholders to the capital, put out an actual red carpet at the Palacio Blanco, led bemused visitors to a meeting room the entrance to which was adorned with a giant picture of Hugo Chavez and then served everyone actual pancakes.
That’s a true story.
In any event, oil production is collapsing (see Figure 6 from Barclays below) and things are deteriorating literally by the day. According to the IMF’s Alejandro Werner, inflation is set to top 1,000,000% this year. The following is from a blog post penned by Werner and published on Monday:
Venezuela remains stuck in a profound economic and social crisis. Real GDP is projected to fall by about 18 percent in 2018–the third consecutive year of double-digit declines in real GDP–driven by a significant drop in oil production and widespread micro-level distortions on top of large macroeconomic imbalances. We expect the government to continue to run wide fiscal deficits financed entirely by an expansion in base money, which will continue to fuel an acceleration of inflation as money demand continues to collapse. We are projecting a surge in inflation to 1,000,000 percent by end-2018 to signal that the situation in Venezuela is similar to that in Germany in 1923 or Zimbabwe in the late 2000’s. The collapse in economic activity, hyperinflation, and increasing deterioration in the provision of public goods (health care, electricity, water, transportation, and security) as well as shortages of food at subsidized prices have resulted in large migration flows, which will lead to intensifying spillover effects on neighboring countries.
Hilariously – or not, depending on how you want to look at it – that may actually understate the severity of the hyperinflation problem.
According to the latest read on the above-mentioned Cafe Con Leche Index, a cup of coffee in Caracas now costs some 2,000,000 bolivars. That’s up from 1,400,000 bolivars last week and as Bloomberg notes, the three-month increase works out to an annualized rate of 1,227,638%.
The only way this could possibly get any worse is if Donald Trump were thinking about invading the country.
Oh, wait, he is.
