Venezuela’s collapse has nothing to do with falling oil prices por Francisco Toro – Financial Times – 9 de febrero 2015

As stories proliferate of Venezuelans waiting in line for hours for basic staples and people paying $755 for a pack of condoms, it’s been been easy – too easy – to fit Venezuela’s economic collapse into the “falling oil prices” narrative. After all, when 95 per cent of your export earnings come from one commodity and its price drops by more than half, you’d expect a bit of turbulence, wouldn’t you?

Well yes, but only if you’re not prepared. The oil market’s volatility is nothing new: wild boom and bust episodes have been with us since the 1970s. Which is why smart oil-dependent countries realized long ago they’d better save up during boomtime, so they could have some sort of cushion during the busts. Smart oil-dependent countries such as…Venezuela.

Way back in 1998, before the late Hugo Chávez was first elected, Venezuela adopted a far-seeing reform to make sure it wouldn’t end up in the kind of situation it’s in now. As influential Venezuelan blogger Daniel Pratt explains it, “the way out of this problem is one we had already invented. It was called FIEM and it was a savings fund to protect the economy from a drop in oil prices.”

The unromantically named Investment Fund for Macroeconomic Stabilization (FIEM in its Spanish acronym), bound Venezuela to a disarmingly simple rule.
First, you calculate the average price of a barrel of oil for the preceding five year period.
Then, you check the day’s oil price.
If the price today is higher than the average for the last five years, take the difference and put it in a savings account.
If today’s price is lower than the five-year average, make up the shortfall from the money the savings account.
That’s it!

FIEM’s genius was its simplicity: you can explain the gist of it to a moderately bright nine-year-old (in fact there were some operational complications but they don’t affect the headline concept).

The system took the two key things everybody already knew about the Venezuelan economy – that it’s wildly dependent on oil revenues, and that oil revenues are volatile – and wove them together into a neat, elegant solution.

Of course, FIEM was a drag for politicians when oil prices were on the rise. As oil revenues started to pour into Venezuelan state coffers the early 2000s following their rock-bottom lows of the late 90s, the incoming Chávez administration couldn’t see the point of it. So under Chávez, FIEM was first ignored, then gutted, and ultimately more or less forgotten. (It was never formally abolished, though, and still exists in undead form, holding a mere $3m.)

But what if? What if the Bolivarian Revolution had had the foresight to actually follow the simple rule FIEM put forward?

Starting in June 1999, just five months into Chávez’s tenure, spot prices rose above the five year rolling average and for the most part stayed above that average for most of the next fifteen years . Except for a few brief periods (the only significant one came right after the 2009 financial crisis), FIEM should have been accumulating contributions virtually the whole time.


Using historic Venezuelan export quantities, it’s relatively straightforward to calculate how much should have been deposited. All told, had the FIEM rule been followed, Venezuela would have contributed $146bn to its rainy day fund between 1999 and 2014.

But that’s only part of the story. As a growing pile of cash accumulated in FIEM, Venezuela would have had to invest it in a Sovereign Wealth Fund, and those investments would have earned income.

For estimation’s sake, we use the quarterly investment returns of Norway’s Government Pension Fund Global. This leading Sovereign Wealth Fund followed a conservative, by-the-book investment strategy, so using its investment returns gives us a fair idea of where Venezuela could be today if it had done something similar.

If Venezuela had just copied Norway’s investment strategy, it would have earned another $82bn in investment income, on top of the $146bn it contributed. The country would have withdrawn a few billion in 2009, when the global financial meltdown caused a brief collapse in oil prices, but even then, it would’ve started 2015 sitting on a mountain of cash: $223bn. More than enough to face up to its financial problems today.

unnamedSource: author’s calculations

To put that number in perspective, consider that the public sector’s total foreign debt at the end of 2014 was $108bn.
If Venezuela had followed the original FIEM rule, it could pay off its entire public sector debt and still have $115bn in change.

Instead, Venezuela’s net foreign asset position today is, according to the most generous estimates, around $70bn.
The demise of FIEM has left the country some $150bn short of where it ought to be.

The chaos on the streets, the near collapse of the food distribution chain, the violence that breaks out in supermarkets when a new shipment of milk arrives, the out-of-control inflation, all of the economic chaos that’s been set off by the fear of government insolvency, all of it is over a debt that’s less than half of what Venezuela would have saved up if its government had just followed the macro-prudential rules it inherited when it took office.

So let’s be clear: what Venezuela is going through now has relatively little to do with the vagaries of world oil markets, and everything to do with the the Chávez era destruction of its economic governance institutions. If wasn’t just foreseeable that a fall in oil prices could cause huge economic disruption, it was, in fact, foreseen. And it wasn’t foreseen in some vague, academic sense: the foresight had been baked right into Venezuelan fiscal policy.

Plenty of other oil-dependent states have emerged from this recent commodity bust relatively unscathed. We’re not just talking about the usual suspects, about Middle Eastern petro-plutocracies or the fjord-bound Norwegian technocracy. Even fellow a South American hard-left regime like Evo Morales’s in Bolivia had the foresight to set aside part of its resource boom in central bank reserves. Other South American left-wingers, like Ecuador’s Rafael Correa, at least kept the fiscal accounts in decent enough shape that the recent collapse in oil prices forced a difficult adjustment, not an outright collapse.

You’ll notice a distinct absence of stories about riots and chaos in Bolivia and Ecuador these days.

So don’t let anyone tell you that falling oil prices are to blame for Venezuela’s startling collapse. It’s not low oil prices that have brought chaos to Venezuela. It’s not even a lack of the foresight needed to introduce policies to prepare for low oil prices. It’s that the government inherited the mechanisms that would have prevented this catastrophe, but vandalized them for sport.