Venezuela: Ricardo Hausmann versus Nicolas Maduro

Prof. Ricardo Hausmann, a native of Venezuela and professor at Harvard, concluded in a Financial Times op-ed last week that Venezuela will go down the tubes. Indeed, Hausmann wrote that “It is probably too late to avoid a Venezuelan catastrophe altogether. But to reduce its length and intensity, the country needs to adopt a sound economic plan that can garner ample international financial support. This is unlikely to happen while Mr. Maduro remains in power.”

The nub of Hausmann’s diagnosis of the infirmed patient is clear:

As bad as these numbers are, 2016 looks dramatically worse. Imports, which had already been compressed by 20 percent in 2015 to $37bn, would have to fall by over 40 percent, even if the country stopped servicing its debt. Why? If oil prices remain at January’s average levels, exports in 2016 will be less than $18bn, while servicing the debt will cost over $10bn. This leaves less than $8bn of current income to pay for imports, a fraction of the $37bn imported in 2015. Net reserves are less than $10bn and the country, trading as the riskiest in the world, has no access to financial markets.

There’s no doubt that Hausmann’s arithmetic is correct. Add to that the fact that Venezuela’s implied monthly inflation rate is 21%, according to my estimates, and its implied annual inflation rate is 442%. Not a pretty picture.

And that’s not all. As I observe the socialist destruction of Venezuela that has ensued under the reign of Hugo Chavez and now Nicolas Maduro, it is clear that Maduro has no economic strategy. Indeed, I doubt if Maduro knows what the word “strategy” means.

Venezuela is going down the tubes.