41: Venezuela Is at a Breaking Point

Bloomberg News in San Francisco. Today, Tori is still traveling with Treasury Secretary Jack lou but I'm joined by Bloomberg Data editor Katerina Suriva in d C. Hey, Katerina HIJACKI, Hey, do you want to tell everyone why your voice sounds so familiar? Well, as you can recall, I was the star of Benchmark podcast episode six, in which I talked about how I use the low euro dollar exchange right

to my advantage when planning my wedding in Europe. Amazing. Well, my mom has asked me over and over again the next time we're going to have you on the show. I think she really likes the sound of your voice, said she. You have like a real radio voice. Oh,

thank you, Mrs Eto. Well, Karina, welcome back. Today. We're going to be talking all about Venezuela, which has been in a terrible economic crisis that only seems to be getting worse by the day, everything from a deep, deep recession, to hyper inflation, to a complete plunge in its currency, and even the possibility of a sovereign default. And that's how huge and tragic and and very real consequences for everyone living there. So I have a few incredible stats here,

based on quarterly surveys that I do on Venezuela. The economists survey, these are private sector economists, expect consumer prices to rise by more than two hundred and fifty this year. That's more than triple, and they expect the economy itself to contract seven point eight percent this year. Um. I mean, these are numbers so bad you rarely see them in a modern economy. And I mean, I've been an economics journalist for seven years, and even for me, I see

these numbers and my eyes just completely pop out. For context, in the US banking crash, the worst annual contraction we saw then was two point eight percent. And you know, Katerina, would you say the situation Venezuela's worse than maybe Greece in the recent years. Yeah, I would think so. I mean Greece even during the worst of it when it did have a pretty significant economic contraction. I mean, it was still a developed country and you didn't see inflation

like this. I mean, this is just really scary, scary price inflation. Yeah, definitely. So what people might not remember was that the Venezuela Ina enemy did pretty well in the two thousand's. You had the price of oil really skyrocketing up until two thousand and eight when it hit about a barrel, and Venezuela has the world's largest reserve of oil, so it really should be doing pretty well. But after two thousand eight, we saw the price of oil come down, and the Venezuelan economy just kind of

came down with it. Wow. Well, you know, I really think it's a fascinating story. Uh, not just about an economy and complete crisis, but how a country kind of squandered its opportunity with this incredible wealth and natural resources. So to help us get a better understanding of what's actually going on behind the scenes in Venezuela, we have our Caracas Beer Chief Nathan Crux joining us. Hi Nathan. Hey,

how's it going? Hi Nathan. So we wanted to get a look into how all of this started and what's next for Venezuela. But first, would you tell us just a little bit about you. Um, Are you from Venezuela originally? Oh? No, I'm from the US. I'm from Pennsylvania. I studied here in Venezuela as an exchange student after high school back in two thousand one and two thousand two. And that's a year when there was a lot of protests and there was a coup and a counter coup that year.

So I was here as as a high school student and saw a lot of of crazy action. Uh. And you know, then I went to I went to university in Canada, and and then my first job out of college, I was in in Chile and Santiago and was there five years. And and then yeah, I end up back in Venezuela. And I've been back here now just about five years. Wow, five years. So you've you've seen this whole thing, this whole crisis, from pretty much the very beginning. Yeah,

and when I got here. Uh. And it's kind of interesting if you think about because at least in the past decade. You know, Venezuela has not been viewed as as an easy place. Even before the economy start it to tank there there were serious problems with really really high crime rates. Uh and and it's never been kind of an easy place to live. But I got here the second time around right in two thousand and eleven, and that was right after it had been announced that

chavez As cancer had returned. And and so my coverage here started kind of just with the end of Chat the air of Hugo Chavez and his death, the and the election of the current president, Nicolas Maduro, and and and kind of economic decline. Since when you moved to Venezuela, do you think you'd be covering this, you know, kind of once in a generation economic crisis. I don't think

I ever thought it would get so bad. I knew that it was a tough country, you know, I've been here before and had a kind of a crazy here in terms of the political situation then, so I knew that I was kind of coming to a volatile environment. But I don't inc I ever expected to just find myself one worrying about my personal personal security so much, and to not being able to to find just really basic things. So uh, deoda in shampoo, you name it.

It's it's really hard to find. And uh, you know, now, whenever I go back to the US, to Miami or Pennsylvania or New York or wherever, I always stop at the pharmacy the night before I fly back, and I literally fill an entire suitcase of of goods. And I just remember I was in Miami a couple of months and in the drug store and coming back, and you know, you kind of ask yourself, am I really doing this? Like?

Am I really filling an entire suitcase of of toiletries and laundry detergent and and and then yes, yes, I'm doing it. I have to go back. Wow. So even for someone like you, kind of like an urban professional, it is very difficult to find a lot of these basics. Oh It's it's near impossible here, except you know, I'm one of the lucky few. I I mean, I I'm I can travel, I can get out, I can buy these things. I have the hard currency to kind of

acquire these things abroad. I mean, most Venezuelans can't do that. So I mean, as as kind of annoying as it is for me, it's it's not impossible. Most Venezuelans simply cannot find this stuff. And what's it like day to day, like buying groceries. I mean, have things been changing in the past couple of months. Well, I'd say things have been changing progressively over the past couple of years. You know, when I first got here, I would shop at a grocery,

just at a regular grocery store in my neighborhood. You know, it was more convenient to go to the grocery stores. And and I guess it's maybe been now about two years when the grocery stores have have started to distribute these regulated goods. And I think if you look at Venezuelan, if you ask yourself, what is the the one kind of fundamental problem that is at the root of all of this wacky stuff going on, And it's the exchange

rate system. You have three different exchange rates right now. Uh, the official rate of ten bull of ours per dollar. It's that's been devalued. When I first got here, it was four point three, then it was six point three, and now it's ten. Then we have kind of a secondary exchange rate which has also been devalued since I was here. First it was twelve, and then it was something like fifty, and and then it went to two hundred,

and now it's at about five hundred and fifty. And then we have a black market rate, which in Venezuela it's it's illegal to give out that information, but you can look it up there in New York and San Francisco and Washington and uh and see that for yourself.

But um, so you have. What that's done is it's made it It's made it cheaper for Venezuela to import goods because companies try to get these preferential dollars at the official rate of ten bull of ours per dollar versus kind of the media the middle rate of five and five people of ours per dollar, and so it's much cheaper to import goods than it is to produce locally. And but then all of a sudden, Venezuela ran out of money and they couldn't import the goods and their

local economy had been kind of decimated. So there's these regulated goods staples, corn, flour, milk, sugar, kind of the basic items of of the Venezuelan diet. And then personal hygiene items are are sold at these preferential rates, and they were distributed in grocery stores, and they started to run out of them because they're artificially cheap, and you've

got a whole black market for them. And and so then what happened is, uh, they tried to restrict first the number of items you could buy at the grocery store, and then they restricted the days that you could shop in the grocery stores by by your I D number. And and so now it's to the point these grocery stores have just become kind of centers where where these cheap goods are being just ttributed because that's all most Venezuelans can afford. So now if you walk around Caracas,

you will just see lines everywhere. And and so, you know, you asked me how my my life has changed. I don't really, you know, I don't shop at at the grocery stores anymore, just because it's it takes too long. I you know, I don't have time to to wait six hours in the line. And that's what you have to do if you go there. Six hours? Is that? How long? Is that? How long? The lines are? Oh they're huge, I mean people are in line all day long.

Some people we did a story a couple of weeks ago on they call them bats and those are the people who buy goods by the regulated goods and then resell them. So and and some of the people in the lines are the batri caros, and some are just normal Venezuelans. But the point is, now, you know, I find most of my goods and kind of just local neighborhood shops or there's other stores kind of that focus on specialty imported items, and uh, you know, that's not

some thing that your average Venezuelan can necessarily afford. But there there is food here if you have if you can afford it, but most people can't afford it because they've seen there. Uh you know, we talk about currency being at the center of all the issues. The minimum wage right now is about thirty thousand boulevards a month. So if you look at the official rate, it's that

sounds like three thousand dollars a month. That sounds like pretty high for a minimum wage, but when you look at the medium rate, it's about sixty dollars a month and much less at the black market rate. So and you go to one of these non regulated stores, and kilogram of like two pounds of chicken will cost about a third of a monthly salary, So people can't afford to shop in in the stores where there are the products that there are only choices to kind of wait

for our listeners. I was going to say that that black market exchange rate that Nathan keeps mentioning but can't legally say what it is, that's a thousand bowl of oars to the dollar. Amazing. You know, Nathan, clearly all of this has had very real human consequences. Is there like one thing that you can think of that has maybe made you the angriest or maybe has been the

most heartbreaking for you? You know, there's there's a couple, uh you know, I remember, right when I moved here, kind of before the current economic crisis started, my my landlord's husband was was murdered. Uh and they have four young kids. So, you know, I think everyone who who spends a certain amount of time here you hear all these stories and you think, oh, well, that's happening to someone else. But the more time you start to spend here, you will you start meeting people that get end up

being killed or kidnapped. You start to hear really horror stories and kind of the current environment. I think you hear tons of really big problems at the hospitals, people that cannot get the medicine they need, people who are are dying of cancer because they just are not getting the right treatment. Here there's there's no medicine. So you hear all these stories. But I think kind of another another theme that I think about a lot is is

just the loss of of potential. Uh, you know, I think one one of the whole interesting things of this Venezuelan crisis. And and you look at the stats and you think, why isn't it worse, you know, why aren't people starving on the streets. And for me, it's most Venezuelans uh own their residents, or they live with their parents, or they're in some kind of government housing. So most people are not worrying about paying rent or a mortgage.

So all the money they get they're spending on food, but they're not facing kind of that that imminent risk of you know, losing their home that you see in other countries. But at the same time, if you're kind of a recent college grad or or maybe you graduated five years ago and are looking to start your career. There's not a whole lot of opportunities. Uh, you're gonna get a job that's probably gonna pay maybe two minimum wages,

you know, if you're lucky. So you're looking at like a hundred dollars a month, and that that's not anywhere near enough to kind of start your life. New apartments kind of in the nice part of town, they're all being rented in dollars. If you want to buy something, it's all dollars. If you want to buy a car, it's all dollars. And you know, things kind of are all being bought and sold in dollars. But the people are making boulevards. So there's just not a lot of

opportunity here. I was at the you know, I went to the gym the other day, and the lady behind the counter, you know, said goodbye. I'm I'm getting ready to leave the country. And I said, oh, that's too bad, and and she she broke down crying. She goes, I'm twenty seven years old. What am I supposed to do? There's nothing for me here? And and so I think that's Uh, you know, the longer time you spend here, the more people you see go and you know you can.

You can you live in kind of the expat bubble here if you want, and and it's you know, it can be very fancy. There's fancy parties, there's fancy restaurants, there's stuff to do here, and you can kind of get lost in that bubble. But the more you get out of it and really start asking, you know, Venezuelans, how they're doing it, They're they're really struggling. I've seen, especially in this past two years. And this once again

all goes back to the currency. You've just seen real wages declined so much, and and you've seen kind of white collar professionals who two years had what they thought were good jobs. They were making money, they could travel, they they could buy goods on Amazon and have it shipped here, and you know, it was kind of a very standard middle class life to vacations a year, they'd go to Miami and shopping trips. But now they're they're

finding themselves entering poverty. And you're seeing people like this who you kind of identify with, and and they're they're worried, worried about where they're gonna get their their next meal from. It's kind of a staggering shift. So Nathan, Um, could you take us back a little bit to how all of this started. Um, take us back to the years of Javis. Sure, well, you first saw Jovis come to power, first elected in ninety eight and came to power. It

was complicated, He was controversial. I think he really became radicalized in two thousand two and afterwards when there was a brief coup that that removed him from from power, and then he came back. There was a big strike. But then oil the price of oil rose and there was money everywhere. So so they had these currency controls and these policies that that privileged imports versus domestic production, and they nationalized things, and there was a lot of rhetoric,

but they had they had the money. So so the these high oil prices really covered up a lot of things. Like if you look at everything now, nothing that's going on is really new. I mean, this is policies that the country has been doing for the past a decade. They've doubled down on some of them and and things have gotten worse. But this, you know, everything that's going on now was started with Chaves. The only difference between

Chaves and Moduto was well one. Chaves was a little better liked by his supporters and maybe had a little more personality. But the current president, Nicolas Madutro, just doesn't have the money to cover up the problems that Chaves had, Right, Nathan, I wonder if you think, you know, in some ways Venezuela kind of squandered this opportunity when it had all

these rich natural resources. You know, could have saved it up the way that maybe like a country like Norway does, but instead it ended up, uh you know, creating these big subsidies, ended up spending all that money instead of storing it for rainier days. Yeah. I think that's one of the thing why people and anyone who spent any time in Venezuela or covered Venezuela, you you really get almost addicted to the place. And I think one of the reasons for that is everywhere you look, you see

just potential that you don't see anywhere else. I mean, besides the largest oil reserves in the world, this place. They have big mining resources, diamonds, gold minerals. It has the biggest Caribbean coastline in the world. You know, famous tourist destinations like case in the Caribbean and Angel Falls, the highest waterfall in the world, and and it's beautiful. And Caracas is a really pretty city. And you know, every day of the year the weather is about the same.

It's high of seventy five and a low of sixty five. The weather is perfect. It's I mean, this place could could really be paradise, but it's obviously not. And it's kind of maddening to just look around and just see them. And it's only three hour flight from Miami. Geopolitically, it's in a very interesting place. So uh, you know, you really see just all this potential everywhere and and then you look at what's happening and it's kind of maddening.

So Chavas died from his cancer and Mahuto, who was kind of his seen as his successor for a while, right, he came to power, and of course we've had the problems with the oil price which have exposed all of these issues. Now with the government policies, what is the future?

I mean in December, the opposition one a majority in Congress, but they haven't been able to do too much with that, right, Yeah, we've seen after they won, Uh, they even got a two thirds majority, which they did better than they were expected, but they saw their majority kind of reduced by the Supreme Court. Right right after that election, Maduro put some more justices on the Supreme Court, they stacked it in his favor, and and and so one the Supreme Court,

the National Assembly had its majority reduced. And then we've seen every initiative that they have passed has just been overturned by the Supreme Court. So they've really had their their hands tied. And in fact, recently the government has has said they're suing the Supreme Court or the National Assembly president for for trying to do too much, and and so they've really been under attack. We were starting to see the opposition demand a recall referendum on Maduro.

That's kind of been the current focal point of activity. Uh. You know, right now, for instance, in Karakas, they're they're holding a big march and they're the government is shooting tear gas at the protesters. So um. But but that's what the opposition is calling for, is a recall referendum. Do you think there's going to be a coup? Um?

You know, I don't think that's for me to to say um, you know, I think that that certainly is a heated word that that you see thrown around in Venezuela a lot that Maduro always accuses his his opponents of of plotting coups. I mean, the number of times I've seen Maduro on TV say there's a coup plot against me, I mean, it's it's it's in you know,

many many hands to count that number. But you know, I think if you look at what a coup is, I mean, normally a coup comes from the military, and in Venezuela, the government is pretty much controls the military, and we've we've not seen a whole lot of signs that the military wasn't completely with the government. There's there's rumors, and there's some ex generals who come out and and say things, but overall it still looks like the military

supports the government for now. But you know, that said, there have been lots of coups here in the past, so I don't think it would surprise anyone. But we we've seen the opposition come out and say that they don't want a coup, that that they want this recall referendum. They want they want the people to have a chance to express their will through democracy. So no one at least publicly in the opposition that you see, is advocating

for a coup. But we will see what happens, right, And you know, Nathan, on top of all this, Venezuela is quite a bit of money to foreign countries, and there's been some nervousness about possibility of Venezuela defaulting on that debt. What's that situation looking like? Now, well, that's another really interesting question. And and you know, one it all goes back, I think to another reason why there's there's so much interest in Venezuela, and it's because of

the debt. It's because of these bonds, and a lot of them are are traded on Wall Street so and and owned by by US funds. And and if you look at at the bonds, I mean by Petavisa, which is the state oil company or the sovereign these are bonds kind of backed in a way by the country's oil reserves at one point, which are the largest in the world. And these bonds are dollar bonds, and they yield like twenty to thirty percent a year. So you're not going to find that investment anywhere else except now

they're trading at thirty forty cents on the dollar. I think credit default swaps show about a seventy percent risk of default in the next twelve months and uh like a chance in the in the next five years. So people, really the market doesn't seem to think that they're gonna make it much longer. But the government, they've said over and over and over again, we will pay the bonds. We're paying the bonds. They've paid everything so far, they've

never even hinted that they might not pay. But to do that, they've had to reduce imports and at this time of you know, lower oil revenue. And this gets back to the whole current problem with shortages is they're they're using the money they do have to pay their debt instead of importing goods that Venezuelan's needs. So you know that and as things get worse here, I think people are going to have to start looking at the question do we pay the bond holders or do we

import food? And and that's kind of a tough question. So, uh, if the situation starts to really deteriorate, deteriorate here, you're you're going to see the government being forced to answer that. Yeah, gosh, that's totally riveting. I guess we're gonna keep a really close eye on this situation. Nathan, thank you so much for joining us today. Thank you anytime. Benchmark will be back next week and until then, you can find us on the Bloomberg Terminal and Bloomberg dot com, as well

as on iTunes, pocket Cast, and Stitcher. Take a minute to rate and review the show so more listeners can find us and let us know what you thought of the show. You can talk to us and follow us on Twitter at Ako seven and at Katarina Surviva and n M Crooks for Nathan our guests. See you next week. M.