Venezuela has more oil than Saudi Arabia and more poverty than Brazil. Its previous leader, the late Hugo Chavez, sought to use the country’s reserves to light a leftist path to prosperity for Latin America’s poor. Under his protege and successor, Nicolas Maduro, Venezuela hasn’t always been able to keep the power on, and with U.S. sanctions biting, the country faces possible default on its debt. With reduced oil prices, the country, once one of Latin America’s richest, is plagued with shortages of everything from toilet paper to antibiotics and food. And that’s on top of triple-digit inflation, widespread violent crime and corruption allegations.
Maduro in November 2017 made official what the bond market had long anticipated: Economic mismanagement, low oil prices and U.S. sanctions are forcing Venezuela to seek debt relief from creditors. Maduro allowed a $1.1 billion principal payment on bonds from the state-run oil company but warned it could be the last. It isn't clear whether upcoming negotiations will be for a debt restructuring, in which creditors are forced to accept losses -- technically a default -- or something more market-friendly. Either way, current U.S. sanctions would probably prevent American investors from participating in whatever Maduro has up his sleeve. The news drove some of the oil company's bonds to trade as low as 18 cents on the dollar. Maduro, meanwhile, continues to crack down on dissent while consolidating power, having been emboldened after a year of opposition efforts to thwart him largely failed. In July 2017, he forced the formation of a constituent assembly to consider changes to Venezuela’s constitution, which brought U.S. sanctions against him personally. While Maduro says the goal is to give the justice system new tools to fight corruption, terrorism and treason, opponents say he's moving further toward Cuba-style authoritarianism. Maduro named longtime party operative Tareck El Aissami as his new vice president and gave him widespread powers, including head of debt-relief talks. The U.S. has designated El Aissami a drug kingpin, making him one of the most senior government leaders of any country to be sanctioned this way. Gross domestic product plummeted a staggering 10 percent in 2016, according to the International Monetary Fund. With the country short on cash for imports, citizens wait in long lines to find scarce household items. Signs of hyperinflation are appearing; the IMF estimated that prices surged almost 500 percent in 2016. With the country’s currency becoming increasingly worthless, some stores have taken to weighing bills instead of counting them.
Chavez, a former paratrooper jailed for two years after leading a failed coup in 1992, was elected president in 1998 and revolutionized Venezuelan politics with fiery anti-U.S. rhetoric. He nationalized thousands of companies or their assets, reducing the economy’s capacity to produce anything but oil. He channeled revenue to the poor and expanded Venezuela’s influence in the region by doling out $8 billion a year of cheap oil. He used widespread electoral support to transform a pluralistic democracy into a largely authoritarian system. Unlike Chavez, Maduro has struggled for popularity. Well before oil prices began to fall, he faced high inflation, which has pushed millions back into poverty, and a homicide rate second only to Honduras.
Maduro’s critics argue that he’s so thoroughly bungled management of the country, he has no political or moral right to remain in office. Those who are skeptical of the opposition point out that it’s made up of more than a dozen parties, ranging from Marxist to center right, and that it has yet to present a concrete plan for the country's future. After drawing 7.5 million supporters in an unofficial July referendum to reject Maduro's plan to change the constitution, the opposition appeared to be gaining momentum but it doesn't necessarily have a mandate to unwind the Chavismo revolution. A majority of those who voted in the 2015 election disapproved of Maduro’s performance, but in a poll, 57 percent of respondents said they still hold Chavez in high regard. Even if Maduro convinces creditors to award debt relief, analysts increasingly question whether Venezuela should continue to service its foreign debt, on which it owes almost $90 billion over the next 10 years, or if it should use the funds for medicine and food.
The Reference Shelf
- QuickTake explainers on Venezuela's need for debt relief and its so-called hunger bonds, Maduro’s call for a constituent assembly to amend the constitution, and the likely effects of a ban on oil imports.
- A Council of Foreign Relations backgrounder.
- A New Yorker article describes Venezuela as a failing state.
- A report on Venezuela’s recent travails from the Congressional Research Service.
- “Commandante,” a book by the journalist Rory Carroll, portrays Chavismo as a blend of “the lyricism and strangeness of magical realism with the brutal, ugly truth of authoritarianism.”
- Opposition scholars blog about Venezuela’s problems at Caracas Chronicles.
- Harvard University economist Ricardo Hausmann writes on the Venezuelan government’s plan to prosecute him.
First published Jan. 29, 2015
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