Venezuela, The Next Domino to Fall

My most recent article about Brasil was published just before President Dilma Rousseff was removed from office and replaced by a politician whose past is riddled with similar implications of corruption. While this was not much of a surprise, what I could not foresee was that Venezuela, the last remaining holdout of macro-socialism in South America, would be on the brink of a fall.

To start our story, we have to go back, way back to 2014. The axis of South American socialist leadership (Cristina Fernández de Kirchner in Argentina, Dilma Rousseff in Brasil and Nicolás Maduro in Venezuela) stood teetering, but still in positions of relative strength with their economies accounting for $3.3T of the global GDP. And then a commodities crisis happened. When global oil prices fall from $100 a barrel to “can’t-give-it-away” prices, this is bound to create chaos in countries that rely so heavily on commodities without the wholesale diversification of goods and services. In the case of Venezuela, where oil production accounts for 80% of the country’s revenue, the results can be devastating. The most recent headlines have brought stories of underfunded hospitals, military control of basic goods and necessities, and hunger in the streets.

Venezuela, in large part because of its oil reserves, is the fourth largest economy in South America and the fifth largest south of Texas. The country’s close proximity to Colombia, Central America, Mexico and Miami could make it a force to be reckoned with once deregulation starts to take form.

While the Chavez revolution took root in the late 1990s as a means to correct corruption brought about by oil wealth distribution (a noble cause), today’s Millennials only see the byproduct of the mismanagement of this revolution. Venezuela’s citizenry is young, educated and hungry for the economic freedom found in other countries throughout the Western Hemisphere and it’s common to see Venezuelan students traveling abroad to earn post-graduate or medical degrees in North America or Europe.

While U.S. business is salivating over Cuba, the real prize is Venezuela. A look at some basic statistics provides the appropriate contrast:

Cuba:

11.4M people, $77B GDP

16% of the population is 14 years old or younger.

13% of the population is between 15–24 years old.

U.S. trade to Cuba: restrictions for business due to U.S. and local policies.

Venezuela:

31M people, $381B GDP

28% of the population is 14 years old or younger.

19% of the population is between 15–24 years old.

U.S. trade to Venezuela: U.S. is the largest trading partner with few restrictions from U.S. government to do business, but not without local risk.

(Population and exporting data: CIA World Factbook)

Cuba, while only being a stones throw away from Florida, is not a high growth market nor will it be competitive once the initial surge of U.S. based multinationals descend upon the island nation. By contrast, Venezuela has a growing population (which is widely considered an indicator of future economic growth) and societal interest in widespread economic change. The United States is already a major trade partner to Venezuela and over 500 U.S. based companies currently operate in the country.

However, the foreign investor needs to be very cautious and patient before investing in Venezuela as regulatory conditions will have to change before the market opens a bit more for foreign investment. While it may take time for market conditions to change, this time should be spent learning about the country and its people. Conversing with Venezuelans who have emigrated to the U.S. is a great way to learn about its challenges, but also the hope for a better future.

Stephen D. Marks is the principal partner of Emmersion, an international business development company with operations in both North and South America. -@stephendmarks

(All statistics, unless indicated otherwise, are from 2013 or 2014 figures from the World Bank. GDP for the purpose of this article is measured by PPP.)