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Ecuador has declared a state of emergency in three northern states after a large influx of migrants from crisis-ridden Venezuela entered the country via Colombia.

The move is intended to help establish the infrastructure to support the new arrivals, who do not have humanitarian refugee status in Ecuador, as they do in some other Latin American countries.

The Ministry of Foreign Affairs and Human Mobility said in a statement on Wednesday that in recent days, the number of Venezuelans arriving daily had risen to 4,200 and a contingency plan is needed to assist them.

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Santiago Chavez, the vice minister of human mobility, said the plan would “give an effective and forceful response in benefit of the preservation of those entering Ecuadorian territory”.

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As part of the contingency plan, extra immigration officials will be hired and more doctors, social workers and psychologists will be sent to the Carchi, Pinchincha and El Oro provinces along Ecuador’s border with Colombia, to assist sick and vulnerable migrants.

International aid organisations will also assist in the efforts by providing tents, water and food.

This is the first time a state of emergency has been declared in these provinces. It will stay in place until at least the end of August.

Special measures

A number of Latin American countries are introducing special measures to cope with migration from Venezuela, which is led by President Nicolas Maduro and is suffering from ongoing political, social and economic crises.

In August, former Colombian President Juan Manuel Santos, granted 440,000 Venezuelan refugees temporary residency permits, which allow them to study, work and get medical care in Colombia.

Brazil declared a state of emergency in May and briefly closed its northern border with Venezuela on Tuesday.

Argentina has taken in some 31,167 Venezuelans under a law that allows foreign nationals to remain in the country “when there are exceptional reasons of a humanitarian nature”.

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Uncertainty in the country

Meanwhile, Venezuela’s pro-Maduro Constituent Assembly revoked the immunity of opposition lawmakers Julio Borges and Juan Requesens for allegedly masterminding what the president called an assassination attempt against him.

Requesens was seized by intelligence officers overnight, while Venezuela’s Supreme Court ordered Borges’ arrest.

Maduro said in a broadcast that Borges was living in neighbouring Colombia.

A drone loaded with explosives on Saturday detonated near a military event where Maduro was giving a speech. The president escaped unharmed but seven people were wounded.

Attorney General Tarek William Saab said moves were being made to put Requesens on trial, while Maduro is pressing Colombia and the US to extradite opposition figures, including Borges.

Borges, who on Tuesday attended the swearing-in of Colombia’s new president, Ivan Duque, called Maduro’s accusation against him “a farce.”

Translation: Nicolas Maduro you have accused me of the economic war, of the cash crisis, of the hyperinflation, of the generalised scarcity.. And now of the farce of the attack? You do not cheat anyone. You are the only one to blame for the tragedy of the country, Borges wrote in Twitter.

These events came as Venezuela’s economy continue to struggle, the International Monetary Fund projects inflation could top 1 million percent this year.

The currency has fallen 99.99 percent against the US dollar on the black market since Maduro came to power in April 2013.

Many Venezuelans are choosing to leave their country as the collapse of the socialist economy is now entering its fifth year.

Maduro blames the crisis on an economic war led by opposition leaders with the help of Washington, which last year levied several rounds of sanctions against his administration.

So what caused this crisis? Forbes enlightens us with the below explanation.

It’s hard to imagine daily life with an annual inflation rate of 1,000,000%.

At that rate, the price of a cup of coffee doubles between your weekly paychecks. That is what the citizens of Venezuela are facing, according to a recent report from the IMF. The story of how the country went from relative stability to hyperinflation involves more than economics; it’s a tale of corruption, social unrest, self-serving politics, capital controls, price-fixing, and a global commodity bust.

It’s hard to believe, but Venezuela’s economy was once the envy of South America. Blessed with the largest oil reserves in the world, the country had a steady stream of USD revenue and immense per-capita wealth. Then Hugo Chavez came into power in 1998. The near decade-long rise in oil prices that followed improved government finances and allowed the socialist regime to increase both spending and borrowing. Their agenda was interrupted by a 2003 labor strike at PDVSA, the state-owned oil company. The strike severely impacted oil production and crippled the economy, with GDP falling 27% during the first four months of 2003. After the strike, Chavez instituted a series of measures to stop the slide in the Bolivar, the Venezuelan currency, and seek revenge on those responsible. The introduction of a currency peg, installation of import controls, the nationalization of other industries, and the establishment of subsidies for food and consumer goods all followed the strike. These actions sowed the seeds for the future inflation crisis.

Oil accounts for 96% of Venezuela’s exports, so when the price of crude collapsed in 2014, the economy took another major hit. According to the IMF, the Venezuelan economy shrank by 30% from 2013 through 2017, and the IMF is forecasting a fall in real GDP of 18 percent in 2018 alone. Government revenues have plummeted along with oil prices, and with fewer US dollars to spend on imports, there is a scarcity of many products. But compared to 2003, the impact is more profound. Reliance on food and consumer goods imports increased during the oil price boom. Domestic production decreased after years of added regulations (price controls, for example) and inefficient operations of nationalized businesses. In addition, there is a greater reliance today on the government for the distribution of goods and services. Store shelves are bare and the black market prices for many basic items have soared.

A shrinking economy is causing large fiscal deficits (Much like Illinois), which the World Bank estimates to be greater than 20 percent as of 2015. The situation has gotten materially worse since then. Having run down its foreign reserves from $30 billion in 2013 to less than $10 billion today, and with foreign direct investment from the US steadily declining from $600 billion per year in 2011 to below zero today, the only option for the government to raise money is to issue local currency debt. Sanctions announced in May from the Trump administration compounded the difficulty in accessing foreign currency by restricting Venezuela from selling debt in the US. The more money it prints to fund imports, the more the currency depreciates.

The price of a cup of coffee, measured using Bloomberg’s Café Con Leche Index, is now more than 2,000,000 bolivars. That is up from 1,400,000 bolivars last week and 190,000 in April. The 3-month annualized inflation rate is over 1,200,000%. That is hyperinflation not seen in the world since Germany in the 1920s or Zimbabwe in 2008.

It is very difficult to arrest hyperinflation once it starts. Even though the government has raised the minimum wage four times this year, the average person cannot afford to live. And the country’s finances are only going to get worse. Any tax receipts collected will be essentially worthless by the time they are received. The only solution was to print even more money.

And that’s where Venezuela stands today: it’s almost run out of foreign reserves, it has lost access to foreign debt markets, it is out of favor with other governments (except Iran) due to political corruption, its nationalized economy is horribly inefficient, and its people are literally starving in the streets.

The biggest fear for any investor is the loss of real savings due to hyperinflation. Some people argue that the inflation rate in the US is about to accelerate, wreaking havoc on the economy and the standard of living. The good news is that there is a massive difference between a moderate rise in inflation and hyperinflation. To go from one to the other, using Venezuela as an example, requires a mix of government mismanagement and corruption, an undiversified nationalized economy, a reliance on imports for living essentials, no independent central bank and some sort of exogenous shock.

Could a situation like this ever happen in the United States?

Right now, there is very little domestic inflation concern. Nor are all the ingredients present for what little inflation there is to spiral out of control. Economists track US GDP inflation numbers to the fourth decimal place and financial markets direct the data to figure out whether the CPI number is rounded up or down. Maybe we should start to worry when we round to the nearest the whole number, but not now. The US has to experience accelerating inflation before it could transition to hyperinflation. Let’s keep things in perspective when the next CPI number is published.

Information on my new book, Bite the Ass Off a Bear- Getting In and Standing Out on a Hedge Fund Trading Floor, can be found on my website: www.garthfriesen.com/the-book.

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James E Windsor, Overpasses News Desk
August 9th, 2018

 

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