Venezuela’s woes are mounting as it turns the lights off
Venezuela's economic problems hit a new peak this week as rolling blackouts and a two-day working week were introduced to alleviate an energy crisis.
Venezuela's government announced earlier in the week that it was cutting public sector employees' working hours down to two days a week for at least two weeks in order to reduce electricity consumption.
The country's president, Nicolas Maduro, had already decided Venezuela's 2.8 million state workers would have Fridays off through April and May. Daily four-hour power cuts around the country were also planned to further save energy.
The plans are a response to a drought that has left the country's largest hydroelectric dam near its minimum operating level. But according to Michael Henderson, lead economist at risk consultancy Verisk Maplecroft, the plans indicate just how poorly the country is doing as a whole.
"Venezuela is in the final throes of a downward social and economic spiral borne out of a legacy of terribly misguided policymaking," he said in a note to CNBC. "The announcement of a two-day working week for public sector employees lays bare just how ill-equipped the economy is to deal with temporary supply shocks."
The country's oil-dependent economy was heavily affected by the collapse in global commodity prices. According to Henderson, Venezuela needs triple-digit oil prices in order to stay afloat.
"Venezuela's economy is in freefall. Output fell by 6 percent in 2015 and things are shaping up to be even worse this year," he said. "All in, we're probably talking about a 20 percent GDP contraction from peak to trough, which is akin to Greece post 2010."
Another problem for Venezuela is that its oil production is set to decline in the coming months as it owes almost $2 billion to oil service companies.
"Last week, two of the leading oil service companies in the world - Schlumberger and Halliburton - both announced that they will 'curtail' work in Venezuela as they are not getting paid," said Russ Dallen, managing partner at Latinvest, in a note.
"With the loss of those providers on top of the rolling four-hour blackouts that the country is enduring, we expect Venezuela's oil production to continue to fall."
In order to pay its way in the world, Venezuela has had to start burning through its gold and foreign currency reserves.
According to Dallen, Venezuela has spent $11.6 billion from its foreign reserves since March of 2015 and sold 60 metric tons of gold worth $2.24 billion to Switzerland in the first quarter of this year. This leaves the country with just $7.8 billion of gold reserves.
At this point, the risk of a sovereign debt default is looming over the country. A research briefing by Oxford Economics calculated the probability of a default at greater than 10 percent, and Henderson thinks a default is likely to occur in the next 12 to 18 months.
Most of the blame for Venezuela's problems has been pinned to the government and its mishandling of the economy, and that's unlikely to change any time soon.
"There's very little chance of a change of policy direction under Maduro," explained Henderson. "The opposition's new legislative powers have been systematically undermined by the executive, resulting in a stalemate which has stymied the prospects of meaningful reforms to get economy back on track."