Why the Current Crisis in Venezuela Matters to Traders – Introduction
Last week, one of the biggest stories in the market was about Venezuela. The news came a week after the country’s president, Nicholas Maduro was sworn in to start his second term. The country’s opposition leader announced that he was the duly elected president. Shortly afterwards, countries in Latin America announced that they would recognize him as president. This was followed by the acceptance of the United States and a number of Western countries. Other countries like Russia, China, and Turkey announced that they would continue to recognize Maduro as the leader. This article will give a brief background of the crisis and why it should matter to you as a trader.
For decades, Venezuela was ruled by Hugo Chavez, who was a really liked leader. He was loved because of his socialist policies that invested heavily in providing free things like education and health. He even had a lottery where he gave out money to the population for free. His influence was so much that even today, his images are plastered all over the country. These policies were supported by crude oil, whose price was constantly rising.
When he died, he left the country to Nicholas Maduro, a long-term associate. Maduro vowed to continue with the policies that were advocated by Chavez. However, things changed when the price of crude oil continued to decline. As a result, the country lacked the necessary resources to maintain the past policies. As dissatisfaction among the public rose, Maduro saw the risk to his presidency so he decided to reshape the judiciary and the election team. This led to him winning the election by a large margin. International observers rejected the results of the election, which led to sanctions being put in place by a number of countries.
Venezuela is an important country for investors for the simple reason that it has the biggest oil reserves in the world. It has more oil reserves than Saudi Arabia, Russia, and the United States, which are currently the biggest oil exporters. The country has suffered through what is known as the Dutch disease. In this, a resource boom usually attracts a lot of foreign capital as investors position themselves for the benefits. This leads to the appreciation of the local currency and a boost of cheaper imports. This then sucks capital and labor from the other industries like agriculture and manufacturing. The countries then tend to ignore the previous industries that supported the economies. In addition, governance is foregone as the countries focus on exports instead of taxes.
In Venezuela, oil revenues account for 99% of export earnings even as output shrinks. The country has seen its GDP decline by double digits even as its debt soar. In fact, the country defaulted on its debt in 2017. This led to the central bank’s decision to print money, which saw the inflation reach more than 80,000%.
Therefore, if the Maduro regime survives the current onslaught, it will mean that the sanctions put in place will remain. This will lead to supply cuts. If the opposition leader finally takes power, it will mean that sanctions will be removed. This will lead to increased oil output, which will lead to lower prices.