Wednesday 21 June 2017

Venezuela’s catastrophic collapse propelled by China’s non-concessionary loans


Yet another country bearing uncanny resemblances to erstwhile Soviet Union is heading towards financial collapse. The combined burden of accumulated debt, dictatorial socialist regime, and a benefactor ready to extend endless credit led to collapse to Venezuelan economy. Underscoring woes of countries like Sri Lanka, Tajikistan, Pakistan who sought infrastructure development loans from China to trigger growth, near collapse of Venezuela economy highlights the role played by Chinese cash. The OPEC country, wadding through severe financial crunches for the second year, sold its sovereign bonds, slashed the imports by 50% to struggling to pay off debts.  Plummeting oil prices, droughts, reduced hydro-electric power production exacerbated the crisis.

For over a decade, when oil prices skyrocketed, Venezuela proactively signed various infrastructure deals with China. With massive oil exports keeping the socialist regime afloat, it doled out numerous subsidies though unbridled expenditure, and state-owned companies began to drain the economy. The extravagant burden of debt travails of Venezula hardly created any ripples till the death of President of Hugo Chavez in 2013. Plummeting oil prices in 2014, markedly depleted cash inflows paralyzing debt repayment. Mounting debt trap began to ensnare the Latin American economy. The country was brought to its knees with major debt-defaulter is state-owed oil company, PDVSA (Petroleos de Venezuela), also the principal source for cash inflows started grappling for funds for repayment. The wealthiest country in South America and major oil supplier to Caribbean countries reeled under terminal loans.

Domestically, the cost of food imports began to shoot up. To keep up with rising prices, wages were increased and to sustain this cycle, more Bolivars are printed. This led to hyper-inflation reaching three- digit mark. To cater the poor, government stores sold food at subsidized prices. People queued up at these stores and resold them in black market. With many businesses closing shops, unemployment peaked. People slowly began reselling goods obtained from state stores to black marketers. Rampant black marketing, intense domestic unrest and turmoil prevailed. Embattled, President Nicolas Maduro’s government is finding it hard to survive until the Presidential elections of 2018.

Though there was no historical, cultural, or religious connect between China and Venezuela, Beijing’s unquenchable appetite for energy resources and grand ambitions, propelled it towards resource-rich countries in the American backyard. Ideological congruency and dislike for basic American tenets deepened their relations. Besides, China which was eyeing for a larger role in emerging geo-political realm, endeared to befriend Latin American countries, a majority of whom recognize Taiwan. China’s rendezvous with Venezuela began in 2001 under President Chavez wherein both countries entered “strategic development partnership” which was elevated to “comprehensive strategic partnership” in 2014. Subsequently bilateral trade grew exponentially from less than $100 million in 1999 to $5.7 billion in 2014. China which has been steadily rising and maturing into a global manufacturing giant signed over 600 investment projects and lent $63 billion till now. Over a period, China emerged as a key strategic player in Latin America and Caribbean region, effectively weakening influence of Taiwan in the region. In 2004, China obtained permanent observer status in the Organization of American States.

Venezuela’s largest resources of oil in the World had been China’s lucrative catch. Beijing’s overtures bespoke its logistical approach of clinching deals with resource-rich nations under the newly launched Resource for Infrastructure Swap (R4I), program a forerunner of OBOR. In the first decade of the millennium, China rolled out R4I contract forum in African countries making huge investment in infrastructure development in return for extracting/exploring the natural resources. China instinctively adopted similar doctrine for Venezuela. Venezuela began shipping crude oil to China in return for the huge infrastructure investment loans offered by National Bank of China and the Export-Import Bank of China. Invariably all the investment projects employed Chinese personnel who eventually dominated even the food and agriculture sector. Massive investments in infrastructure failed to kickstart economic growth. Instead country’s reliance on oil exports increased from 70% in 1998 to 98% in 2013 (1). This critical development reflected failure of Venezuelan leadership in diversifying development and exclusive use of oil in return for Chinese loans.

Sino-Venezuelan engagement which began with preferential market access, stretched to arms purchase, launching of satellites to guaranteed repayment through oil. This agreement worked well for both sides till 2014 when crude prices were over $100. Unlike other countries, Venezuelan crude is little heavier. Hence cost of extraction is high and not profitable unless value of crude in global markets of over $60. With the collapse of global oil prices, extraction of oil became less remunerative for Venezuela. As oil prices continue to sink, financial crisis aggravated. By 2016, Venezuela could make repayments to China only through crude oil deliveries as revenues dropped. Operational crisis, financial disputes, power outages critically reduced the functioning of state refineries of PDVSA. Crude output reduced and Venezuela struggled to make loan repayments in crude oil to both creditors China and Russia. As oil prices continued to decline, PDVSA stopped crude oil exports to India and US which could make payments in cash. In a desperate bid to meet requirements of crucial customers, Venezuela started importing oil from Mexico, Saudi Arabia and Iraq.

If Venezuela continues to renege on its pledged supplies to China and Russia, countries might eventually recover the loans in the form of assets. Already Sri Lanka, is facing similar ordeal and is on the verge of giving up 80% of share in Hambantota port to China. As of now, both Russia and China have been supportive and flexible but a prolonged evasion of loan payments is bound to have serious repercussions including losing control over the Citgo, US subsidiary of PDVSA (since 50% of its was pledged as collateral to Russia).

Reports indicate that China alone gave more loans to Venezuela than Inter-American Development Bank and World Bank put together. In 2006, World Bank President cautioned Venezuela of worrying debt levels. To greater dismay of Venezuelans, it is observed that majority of Chinese projects are incomplete and some haven’t started yet. Insiders, indicate that huge amounts of loans are siphoned off by corrupt socialist elites and the regime loyalists. Transparency International ranked Venezuela as the 10th most corrupt country in the world. No wonder, unofficial accounts puts that $11 billion was looted by cronies. Together, China under the guise of infrastructure development offered non- concessionary loans with interest rates on par with commercial banks. Interestingly, Beijing’s aspirations of expanding its global influence through financial diplomacy had robust engagements with dictatorial or authoritarian regimes (that had mild scrutiny and least checks/balances). China had thus far effectively sold the dreams of growth and development to emerging countries by way of infrastructure development regardless of long term economic viability of the projects. Moreover, the attached strings with OBOR like use of Chinese inputs, material, personnel had stunted the prospects of domestic employment.

With PDVSA failing to pay workers, there are mass uprising across Venezuela. Empty shelfs in stores, scarcity of medicines, absence of jobs is triggering protests and creating refugee crisis. As per IMF report, currently unemployment rate is 25%, economy has shrunk by 18% in last year and inflation is expected to reach 720% (2). Over the past two decades, China dominated domestic markets of Venezuela.  Now most of the stores are owned by Chinese, who also held high-profile jobs. Starved Venezuelans at started attacking and burning down Chinese owned stores. With the Latin American country sliding into financial abyss, Chinese government is evacuating its citizens. Approval ratings of President Maduro have declined significantly for quelling the simmering protests with an iron-hand. Street rioting, looting increased and clashes between protestors and security personnel intensified leaving 47 dead. US ambassador Nikki Haley, last week decried Venezuela “for rapidly deteriorating human rights situation” and implored that the country should withdraw from UN Human Rights Commission (UNHRC).  Maduro’s outdated and communist styled monetary policy is unlikely to stop the catastrophic collapse of Venezuelan economy unless foreign debt burden is restructured. Despite deepening recession, China offered $2.2 billion loan to Venezuela in November 2016. Telling stories of Venezuela should thus be a revelation for all the countries warming up to Beijing’s OBOR.

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