I'd like to ask for the main causes Venezuela has sank economically so abruptly, I mean not too long ago it was considered a rich country (well not a world power but a country that could provide some nice standards for living) and now if it continues this way it's gonna get insanely poor. (That's the look that I get from the news).

I've read some things but I'd like a more global explanation of what has happened and I feel that some of those things were biased, some of them maybe a lot, I think here I'll find a more objective answer.

I'm not asking for a detailed description of what has happened as that would be something that could take an entire thesis, but I'd like to know in a brief manner the principal aspects that have caused that.


1 Answer 1


Very interesting question, I'll try to summarize some aspects and I probably won't be exhaustive !

Venezuela has long been a country relying on oil (95% of their exports). Certain experts have estimated that Venezuela holds just shy of 25% of worldwide oil reserves, but the oil extracted in Venezuela is very heavy and hard to refine and then sell to other countries, which makes it more expensive than oil coming for example from Saudi Arabia. When prices boomed, the former President Hugo Chávez, who died in 2013, used oil exports to quadruple the foreign debt. He also led a some nationalisations. The main factor for Venezuela's current crisis is therefore the counter-shock on oil prices which lowered exports. This quote comes from an FT article

If oil prices remain at January’s average levels, exports in 2016 will be less than USD 18bn, while servicing the debt will cost over USD 10bn. This leaves less than USD 8bn of current income to pay for imports, a fraction of the USD 37bn imported in 2015

One of the direct consequences of that is that the country is relying on its dollar reserves to pay its imported goods. The country's foreign reserves are already withering at 12-year lows. Venezuela has even paid Switzerland with gold! But the problem is that on the land the demand was still the same and the supply could not follow, which led to a massive inflation. Inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF.

The huge outstanding debt is also worrying investors.Creditors are now demanding a high premium for their trust in that promise. The yield on Venezeula’s dollar bond that matures in 2020 is 37% (an investment mainly made by hedge fund). This is the more financial aspect of the question: it's hard or costly for Venezuela to get financial help from investors right now. For this aspects, I encourage you to take a look at this article by The Economist:

About half of Venezuela’s foreign debt is explicitly owed by the sovereign; the rest is owed by PDVSA. There are important differences. Most of the sovereign-debt contracts have collective-action clauses (CACs), under which a restructuring, if accepted by holders of an agreed proportion of debt, can be imposed on all of them. PDVSA, Venezuela’s main source of foreign exchange, would have a harder time restructuring its debt. Its bond contracts do not have CACs

  • $\begingroup$ Feel free to add points in comments so that I can edit my answer ! $\endgroup$
    – Alexis L.
    May 26, 2016 at 0:00
  • $\begingroup$ The oil resource estimates include useless heavy oil $\endgroup$
    – D J Sims
    May 26, 2016 at 6:46

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