THE DEVIL IN THE ECONOMIC DETAILS
Much of the assessment of the sustainability of Venezuela’s debt stock hinges on estimating sustainability metrics that are at the very least subject to a large degree of uncertainty, especially given the high level of opacity in government figures. In our estimate (see Venezuela Red Book, 3Q2017), the country’s external public sector debt external debt will reach $143bn as of the end of 2017. In contrast, WC cite a much larger number of $196bn, taken from Hausmann and co-authors.
At least some of the difference between these figures appears to refer to the treatment of domestic liabilities. We follow the IMF External Debt definition in classifying local bond holdings as internal rather than external debt, whereas Hausmann and co-authors appear to treat all foreign-currency denominated bonds – even those in the hands of the public sector – as external debt. Similarly, they appear to include authorizations to purchase foreign exchange under the currency controls system as external debt, despite the fact that the legal status of these as liabilities is unclear according to Venezuelan jurisprudence (and that they should in any case be classified as internal debt).4
But perhaps a more fundamental issue refers to the level of GDP that should be used for the purposes of debt sustainability analysis. Current GDP – which we estimate at $121bn, similar to the figure given by Hausmann – could be very far from even from the short-run equilibrium under a different policy regime. This is because the lack of international financial market access forces Venezuela to run a current accounts surplus, bringing down imports and thus dollar GDP.5 This phenomenon should be quickly reverted if the economy enacts policy reforms, reestablishes market access and begins running a current account deficit. In fact, it is difficult to imagine a regime change with enactment of policy reforms that would not be followed by a rapid appreciation of the average real exchange rate across all transactions (including parallel market) – if anything because the demand for dollars in the parallel market should decline immediately, which should lead to an immediate increase in GDP measured in US dollars. The bottom line is that a debt-to-GDP ratio calculated at the current level of GDP may be a good measure of the economy’s sustainability under the Maduro administration but a very poor guide to debt sustainability under a new administration committed to undertaking economic reforms.
