HOME >  Media Focus
Wang Cong: Crisis in Venezuela May Have an Impact on South America
Release time:2019-04-18Views:
The deterioration of the relationship between Venezuela and the United States will make Venezuela’s economic pressure even heavier. On the afternoon of January 23th, local time in Venezuela, the President of Venezuela, Nicolas Maduro announced the suspension of diplomatic and political relations with the United States. Some analysts point out that the US may further increase its economic and trade sanctions against Venezuela. Prof. Wang Cong, Associate Director of Shenzhen Finance Institute and professor of The Chinese University of Hong Kong, Shenzhen, believes that Venezuela needs a fundamental reform. The continuous economic downturn may have a huge impact on South America. 



Prof. Wang Cong pointed out that the sustained economic crisis of Venezuela   mainly originates from the following reasons. Firstly, the proven oil reserves in Venezuela are recognized as the largest in the world, most of which is heavy crude oil. However, compared with light petroleum produced in Saudi Arabia, heavy crude oil needs higher mining costs, smelting costs, and higher technical requirements for smelting. Domestic enterprises in Venezuela are less efficient in technology and operations, who can only export mined crude oil but cannot smelt heavy oil. Venezuela does not maintain a friendly relationship with its major oil trading partners. The deterioration of the relationship between Venezuela and the United States, especially in the case of sanctions on the oil trade, will have a huge impact on Venezuela’s exports and economy. Secondly, the Chavez government implemented the nationalization of the private economy but did not establish effective incentives or supervision mechanisms, which led to corruption and inefficiency in the state-owned enterprises. In addition, the freezing of prices in the market through administrative means caused that enterprises had no motivation to produce, resulting in shortage of supplies and serious inflation. Thirdly, the two presidents of Venezuela, Chavez and Maduro have implemented a high-welfare policy in order to win the support of the voters. This kind of high-welfare policy has led to a high foreign debt of the country and a worrying financial situation; It also has magnified the laziness and selfishness of the people, resulting in low vitality and innovation ability of the whole society. In addition, the recent economic, financial and trade sanctions imposed on Venezuela by European and American countries in the name of human rights and democracy have made the economic situation worse.

External financial sanctions intensified and the domestic currency also devalued. Venezuela, which is in dire straits, has turned its attention to digital currency, launched petroleum coins, and sought to driving economic growth and avoiding crisis.

Prof. Wang Cong is skeptical about petroleum coins. First of all, petroleum coins are not decentralized and are still issued by the government, unlike Bitcoin. The second point is that there is no limit on the issuance of petroleum coins and it’s entirely decided by the president, which lacks scarcity. The third point is that although the price of petroleum coins is linked to the price of oil, it is only a nominal link and cannot be exchanged for oil. The last point is that petroleum coins are shielded and sanctioned by European and American countries. The United States bans the use of petroleum coins and some large trading institutions around the world do not have so-called market makers to make coins for the market, so petroleum coins lack liquidity. These above defects essentially caused the coin to be a less mature digital currency from the beginning.

In response to the economic downturn in Venezuela, Prof. Wang Cong assumed that is urgent for Venezuela to carry out the reform of the entire economic and political system. The economic structure of Venezuela is relatively simple. Venezuela can learn from the reform experience of Russia and Saudi Arabia. For example, by lowering interest rates, Russia tends to expand its investment and to expand exports and sales of agricultural products. While Saudi Arabia launched a “Vision 2030” program to break the singularity of the economic structure, seeking diversified development and increasing the proportion of private enterprises in the entire economic structure; encourage women to work and expand the supply of labor; invest in high value-added industries; invest more in education and cultivate talents, etc. For both of Venezuela’s political system and economic system, fundamental changes are needed. Venezuela should increase the government’s creditability and transparency, attract the foreign capital and encourage the development of private enterprises. At the same time, Venezuela should also consider whether to insist on the policy of high welfare.

From the perspective of the Venezuela-US trade, the heavy oil produced in Venezuela is basically transported to the Gulf Coast region of the United States for smelting. The data shows that half of the heavy oil exports produced by Venezuela in 2017 were sold to the United States. Prof. Wang Cong believes that once the United States imposes oil trade sanctions on Venezuela, it will have a huge impact on the oil mining enterprises in Venezuela. On the other side, Venezuela doesn’t have refined light oil or gasoline products, so it needs to import these from the US. Once the US imposes trade sanctions, the shortage of resources in local Venezuela will be worse. If the sanctions really happen, the oil industry in Southern United States will also be subject to some negative impacts. Since the refinery equipment and technology in this area can only smelt heavy oil but not shale oil, the oil industry in Southern United States will continue to import some heavy crude oil from Venezuela. However, the US exports of light oil and gasoline products to Venezuela are relatively few (about 2 billion US dollars per year). Therefore, the impact on US exports of crude is not particularly large.

In Prof. Wang Cong’s opinion, if the Venezuelan economy continues to decline in 2019, it may have a huge impact on South America. South American countries are traditionally dominated by left-wing parties, advocating attention to the poor, social equality, and implementing high welfare policies. However, the effect of policy implementation is not particularly good, with high external debt, high prices, shortage of supplies and rising inflation. In recent years, right-wing parties in Ecuador, Argentina, Peru, and Brazil have come to power. If the Venezuelan economy collapses further, leading the downfall of the government, it will basically change the political situation dominated by the left-wing in South America.

In 2017, the dollar value of China’s crude oil imports from Venezuela was about six billion US dollars. Many Chinese oil companies also had investment in Venezuela. From the perspective of the China-Venezuela relationship, the instability of the Venezuela political situation will also cause uncertainty on the China-Venezuela oil trade and Chinese investment in Venezuela. In Prof. Wang Cong’s point, China should contact and communicate with both the ins and outs to guarantee the investment and oil assets of Chinese companies in Venezuela no matter which party is in power.