Venezuela's economy runs on oil - and music

Venezuela's economy has long been heavily reliant on oil, and this dependence has shaped the country's financial landscape for decades. As the nation approaches a pivotal presidential election, the state of the economy has become a central issue. President Nicolás Maduro is attempting to persuade voters that the country is on the mend after enduring years of economic turmoil. His recent initiatives aimed at reducing the cost of living have led to a somewhat improved outlook. In February, Venezuela finally managed to eliminate the extreme hyperinflation that had plagued the nation, with prices soaring by over 400,000% in 2019. Currently, inflation remains high but has stabilized at around 50%. Mr. Maduro has taken credit for this decline, asserting that it reflects his effective policies. However, critics argue that these policies have failed to address the fundamental structural issues within the economy, particularly its historical reliance on oil, which has hindered the growth of other sectors. The US Council on Foreign Relations describes Venezuela's journey with oil as an exhilarating yet perilous boom-and-bust cycle since its discovery in the 1920s. As the election approaches, opponents of President Maduro are pinning their hopes for economic recovery on a change in leadership, looking to his electoral rival, Edmundo González. According to Jason Tuvey, deputy chief emerging markets economist at Capital Economics, an opposition victory could lead to a renewed opening of Venezuela's trade and financial relationships with the global community. This shift would also likely result in the lifting of US economic sanctions that were imposed following Mr. Maduro's controversial victory in the 2018 presidential election, which many deemed neither free nor fair. These sanctions have severely restricted the ability of the state-run oil company, PDVSA, to sell its crude oil internationally, forcing it to engage in black market transactions at significantly reduced prices. However, Tuvey cautions that reversing the economic decline of the past decade will be a formidable challenge, given the substantial investments required to boost oil production and the approaching peak oil demand. He emphasizes that Venezuela's economy cannot return to its former glory of 15 to 20 years ago, stating that it will essentially be starting from scratch. While prices continue to rise in Venezuela, the worst of hyperinflation appears to be over. The Bolivarian Revolution, initiated by the late President Hugo Chávez, promised numerous benefits but ultimately failed to create a diverse and robust economy. Instead of diversifying away from the oil sector, the administrations of Chávez and Maduro doubled down on the country's mineral wealth. They treated PDVSA as a cash cow, using its funds to finance social programs in housing, healthcare, and transportation, while neglecting to invest in maintaining oil production levels. This neglect has led to a significant decline in production in recent years, exacerbated by US sanctions. These issues were already apparent but have worsened under Mr. Maduro's leadership. Tuvey notes that during Chávez's tenure, Venezuela benefited from an oil boom until the global financial crisis struck. Fifteen to 20 years ago, Venezuela was a major oil producer, generating three-and-a-half million barrels a day, comparable to some smaller Gulf states. Today, however, the oil sector has been decimated, producing less than a million barrels a day. The country's GDP has plummeted by 70% since 2013. In response to falling oil prices, Mr. Maduro resorted to printing money to fund government spending, which resulted in the rampant inflation that the country has only recently managed to curb. The economic hardships have driven over 7. 7 million people to flee Venezuela in search of better opportunities, representing about a quarter of the population. For those who remain, there are signs of improvement. While the bolívar remains the official currency, an informal dollarization has taken place, with US dollars increasingly becoming the preferred method of payment in retail transactions, at least for those who can access them. This shift has helped stabilize the economy, but it has also created a social divide. In Caracas, residents now experience a two-tier economy. Those with US dollars can indulge in high-end shopping and dining, while those paid in bolívars feel increasingly marginalized. A recent event that highlighted this divide was the concert of Colombian reggaeton star Karol G in Caracas. Despite the scarcity of major artists performing in Venezuela, she sold out two nights at the 50,000-capacity Estadio Monumental, with ticket prices ranging from $30 to $500. Meanwhile, around 65% of Venezuelans earn less than $100 a month, and only eight or nine million of the country's 28 million people can be considered consumers with real purchasing power. Those closely connected to the regime or PDVSA have largely escaped the economic struggles faced by the majority. In addition to the need to improve living standards and reduce inequality, Venezuela faces another significant challenge: its massive foreign debt. The country owes an estimated $150 billion to bondholders and other foreign creditors and has been in partial default since 2017. Although Mr. Maduro has made promises regarding debt repayment, no substantial actions have been taken. The situation is further complicated by the fact that some bonds were issued by PDVSA, using the company's US refiner, Citgo, as collateral. This has allowed bondholders to pursue claims through New York courts. Bruno Gennari, an emerging markets strategist at KNG Securities, explains that the US does not recognize Mr. Maduro as president following the 2018 election, leading to a legitimacy crisis for Venezuela. This means that whoever wins the upcoming election must be acceptable to Washington if a US-approved debt restructuring is to occur. Gennari does not rule out the possibility that the US could overlook Maduro's victory under questionable circumstances, but he believes it is unlikely. He emphasizes that this election will significantly impact Venezuela's future. If debt restructuring can proceed, it could mark the beginning of a complex recovery process. Once the wealthiest country in South America, Venezuela now faces a potential path toward stability, but regardless of the outcome, its days of economic prosperity are firmly in the past.