After failing to pay $200 million in coupon payments earlier this week, Venezuela was declared to have fallen into a selective default, basically meaning that they've gone bankrupt. However, the major issue is the $60 billion dollars that this former world leading oil exporter owes international creditors.
Chances are that you’ve heard about the economic and political crisis that is currently going on in the South American country of Venezuela. The situation has been creating headlines across the globe over the last few years. We are not planning on tackling the political situation in the country since it is an extremely complicated topic. Nevertheless, we are determined to give you a rundown of what is happening with the country’s economy.
The current situation started back in 2009 when socialist political leader Nicolás Maduro was elected president. The new government started changing the economic system in the country but was never able to fully introduce a working economic reform. The lack of a reform eventually forced them to take huge loans from international creditors in order to cover the country’s expenses. This eventually lead to the population running out of money and taking to the streets in protest. After that, it didn’t take long before the United States and other Western countries started implementing sanctions against Venezuela and its leaders.
The sanctions hit Venezuela, and especially their oil production, hard with devastating consequences.
For a long time, Venezuela has been one of the biggest oil exporters in the world, and they have the single largest proven oil reserve in the world. However, due to the recent economic crisis and the sanctions put on the country and its oil producers, it has gotten difficult for the country to export its crude oil. A part of the issue is also that the crude oil extracted in Venezuela is hard oil that needs to be refined before it can be used for fuel production. A lot of the refining was done in the United States but thanks to the sanctions that production has stopped.
For these reasons, the oil production has declined, resulting in the economic situation spiraling out of control. What used to be a really bad situation is now an even worse situation. In October of this year, the nation’s oil production hit a new low after dropping to under 2 million barrels a day – the lowest numbers in over 40 years.
In our opinion, Venezuela’s main problem now is to find someone who’s willing to import their crude oil since American companies have already turned elsewhere. This has to be done at the same time as international creditors such as China and Russia are looking to get their loans back.
However, the situation isn’t completely hopeless. After Venezuela went bankrupt earlier this week, President Maduro started talks with the country’s creditors in an attempt to find a solution. The good news arising from those meetings is that Russia already decided to give Maduro a bit of breathing room by restructuring the loan and Chinese officials say that they are confident about Venezuela’s ability to repay.
So how does this affect everyone else in the world? Firstly, the declining oil production can, of course, lead to higher fuel prices. Though more importantly, the situation is creating investment opportunities. After Russia and China announced that they are confident about the country’s future, we have seen a movement of international investors looking for opportunities in Venezuela. The situation has also created chances for the day trading community to bet against South American oil production, at least in the short term.
Image cred: CNNMoney