COVID-19's infection spreads to the global markets

Since its inception in December 2019, the dreaded coronavirus has infected more than 106,000 worldwide with 3,500 reported fatalities. With its birth in Wuhan district of China, the virus has slowly penetrated the boundaries of Middle East, Asia and Europe with a heightened risk of a pandemic looming over the heads of individuals. On a destructive spree, the infection has also spread to the businesses and the financial markets. This post I try to dissect the business world to showcase the potential impacts the COVID 19 will have on their operations and the aspects the business leaders should focus their resources on to quell the dangers.

COVID-19 had its origination in the wet markets of Wuhan district of China where animals (dead and alive) are sold for meat. With live animals being butchered and sold, it was evident that the health standards would be awfully low. The virus has believed to have transferred from a bat into the human mechanism and has multiplied, having set its deadly presence in 80 countries. The disease is spread through air with the death rate to be approximately at 20-25%. That said, I am unaware of how long the health authorities would take to contain the virus completely. However, I do want to shed some light on how businesses and markets will face the brunt of this virus.

Some sectors; aviation, tourism and hospitality have observed a lost demand as the people have postponed their vacation plans till the threat subsides. With manufacturing at an all time low, the major manufacturing epicentres; Germany, Japan and China have stalled their factory operations to keep the employees safe. Furthermore, the consumer durables will also see a subsided demand. However, unlike tourism and hospitality sectors, the demand is expected to pick up in the subsequent quarters. The financial markets also have dived with a high investor concern regarding the safety of their equity investments (Refer to Table 1.0)

Figure 1.0: Equity markets snapshot

 The US reported strong employment and hiring numbers with addition of 273,000 jobs in the economy. However, even this failed to act as a strong support to the declining stocks. With rising risks in the markets, investors have switched their asset allocations to fixed income instruments which have, therefore, shown rapid decline in their yields. After the trading session ended on 8^th March 2020 in Wall Street, the 30-year Treasury yield plunged by 28 bps, which according to Bloomberg, is steepest declines since 2008-financial crisis. During such perilous situations, bond markets are closely monitored since they are determinants of future economic growth for the country and from looks of the current scenario, investors believe a decelerating economic future for the United States. To fix the economic repercussions, Fed slashed the interest rates by half bps. “For us what really matters is not the epidemiology, but the risk to the economy. So we saw a risk to the economy and we chose to act “said Fed Reserve chairman Jerome Powell, as per the article in Financial times. Furthermore, corporate is also expected to have lower earnings this quarter with disrupted supply chains and unfavourable macroeconomics.  

The businesses of today are supposed to inculcate a proactive approach to this problem. The primary focus of business leaders needs to be on employee health. Companies must maintain a mechanism for a prompt medical action if any employees are detected positive. The medical action should entail instant attention to the diseased and immediate checking for the spread of virus across the corporate premises. In case of pessimistic situations, companies need to have a contingency plan so as to not disrupt their operations completely. The most favourable method for implementing this is to develop a stress testing module (financial as well as operational) and develop use cases for different scenarios. Lastly, companies who have significant exposure to the deeply affected countries like China should discover alternate supply chains to minimize the risks. Eventually, this exploration can serve the long-term purpose of increasing and nurturing healthy collaborations.

Finally, to conclude I just want to put out my heartfelt message to the readers: Whatever happens to the investments, do make sure that virus doesn’t infect you.  


* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for * 

Under the Lens: Manufacturing industry – 2019

If the heart of India’s growth engine has to keep beating at its peak, it is necessary for the relevant authorities to work on the most important sector: manufacturing. Manufacturing industry has been the prime focus for Indian government who is keen on restructuring and reworking its systems in order to ignite it for a much-coveted take-off. This short post tries to look at the mentioned industry and state the key trends and opportunities which will fuel the industry towards progress.

Manufacturing, being the heart of Indian economic progress, has been a crucial turning point for the Modi Government to make India a manufacturing epicentre. The Government envisages employment opportunities in the sector to the record of 100 mn which currently running at ~30 mn. In order to make this vision a glaring reality, the manufacturing companies need to leverage on the existing trends and opportunities engulfing the economy. To reduce the current account deficit, India needs manufacturing ecosystem to provide a rapid push to the exports. With Industry 4.0 in sight, manufacturing behemoths should build up on their existing operations with the help of updated data analytical tools, statistical modelling and automation software. They should be ready to undergo rapid digital transformations across various verticals: procurement, logistics, sales and aftermarket industry. Currently, the manufacturing industry appears to be optimistic to chart their future outlook with a much broader brush. It has shown revival signs from its 2-year low in October and showing positive signs of progress. IHS Markit, an analytics firm in London, sends out a metric called as a Manufacturing Purchasing Managers Index (PMI) which represents manufacturing growth in the economy. The PMI for December 2018 in India stood at 52.7 as compared to 51.2 in November. To those unaware, the PMI below 50 represents a contraction of the industry whereas a figure about 50 points to a possible expansion. The ingredients which go into a manufacturing PMI include orders, output, job opportunities, supplier’s delivery time and stock of purchases. Apart from suppliers’ delivery time (which remained unchanged), rest all the numbers showed a modest growth rate. The core sector, which determines 40% of Index of Industrial Production (IIP), showcased deeper cuts with a 1.5% contraction.

The growth is mainly led by consumer durables segment which observed a 10% growth attributable to strong sales of cooling products following harsh summers. The growth trajectory can also be recreated in the 2020 as per the opinion of The Consumer Electronics and Appliances Manufacturers Association, President Kamal Nandi (CEAMA). It is debatable whether the growth will translate into robust numbers for consumer durables segment as well.  Meanwhile, the manufacturing giants are expected to beef up their production activity and create more employment opportunities in the sector. As per Pollyanna de Lima, the chief economist at IHS Markit, the manufacturing industry has observed higher input costs and higher output charges which combined with improved pricing power has generated heightened demand conditions. These demand conditions if sustained can help the industry progress in 2020 as well. However, repercussions by a broader economic conditions and global headwinds are subject to debate.

Having set the table, we should look at the few grey shades to this story. Land acquisition is a major hurdle for the foreign stalwarts to make active investments in India. It has discouraged the companies from initiating manufacturing corridors in the country. Apart from this, high borrowing costs and archaic labour laws add fuel to the fire. With NBFC crisis looming large, stressed sectors have drastically lesser access to loan books of the Indian banks. Ideally, the Government should bring in active land, labour and policy reforms in order to make development of manufacturing, a frictionless process. Since, India has jumped ranks in ease of doing business; the foreign trade is expected to flourish following development of the Indian port ecosystems. With exports asking for an upward push, it is necessary for the government to establish India as a manufacturing enclave in order to facilitate better exports. The government’s INR 102 crore in its infrastructure development plan coupled with a possible deal in US-China trade war may alleviate the likely distress in the manufacturing sector.

Low focus on profits and more on growth; WeWork is in a dire need of a ReWork

WeWork IPO has successfully hinted towards how IPO markets are not so favourable towards companies who focus lesser on profitability and more on scaling up. This post I try to look at WeWork as a company and how it has led to some serious loss of investor focus and decline in valuations.

To set the stage, let us look at what WeWork as a revenue model is. WeWork is a young company which leases properties in 100 cities (as of 2018 data) across the globe wherein there is a substantial demand from companies. The company then renovates the space to tailor it to suit the needs and desires of the millennial community and give it a young fresh look to attract GenZ and GenY class of population. When the rental income starts flowing in, the surplus is used to recover the renovation costs and remaining cash is used to generate economies of scale. The target clientele for the company are mature growth companies that are looking for short-term workspaces and also big behemoths who want to experiment with WeWork (The 527,000 memberships of WeWork represent global enterprises across multiple industries including 38% of the Global Fortune 500). On August 14, WeWork filed the paperwork for an initial public offering. Before the filing of the prospectus, the investor community was enthusiastic about the company. However, as the prospectus came under scrutiny, the zeal transformed into serious profitability concerns as WeWork delayed its IPO with stepping down of its CEO Adam Neumann. To be frank, business model does appear blunt and flawed at places. WeWork has dedicated substantial spaces to non revenue generating space like cubbyholes and chatrooms. Being in real estate segment, WeWork has also failed to create cash even in the best of economic scenarios.

 Apart from profitability issues, Neumann’s inappropriate corporate decorum added fuel to the fire. He was seen smoking weed on a private plane, had tequila party post laying off his employees and banned meat from the offices only to be seen consuming meat himself. The kind of behaviour does set the right wavelength chord with the investor lobby whose discontent plunged the valuations from USD 70 bn to USD 15 bn. Besides, WeWork has been constantly flirting with the line between being a technology company and being a real estate company. The leading banks that once extended loan support to help WeWork rise to the occasion have grown cautious with red flags popping up in its prospectus. JP Morgan Chase and Goldman Sachs arranged large fees and strict protections that reflected their growing averseness to company’s future prospects. As per the Wall Street Journal, even, Wells Fargo agreed to give monetary support in return of a bank executive’s promise to keep an eye on Mr Neumann’s activities as a CEO. Even few days before launch of its IPO, WeWork had considerable friction with the Securities and Exchange Commission (SEC) over a key financial metric called the contribution margin through which WeWork concealed its heavy losses. The SEC directed the company to erase the metric; however it still made its way in the prospectus only to be mentioned 100 times in the document.

With exit of Neumann and heavy debt of USD 47 billion categorized as distressed future liabilities to landlords, WeWork is all set to run its scissors across 15,000 jobs and sell its non -core investments in order to restructure and redefine its operations in its 90-day turnaround plan. The stage set for IPO hasn’t been much conducive in 2019 for much of the companies going public. WeWork’s fall has proven to be a reminder of Uber, Lyft, Slack and Pelotron that are trading much below their initial offer prices. The venture capitalists are inflating the market by focussing their capital on growing companies. However, profitability doesn’t seem to be the intellectual spine of their investment philosophies which has led to a serious IPO hype amongst young growing companies. Recently, Softbank has injected a package and took reins of control from Adam Neumann. With Mayoshi Son’s strong acumen and SoftBank’s strategic know-how, it is left for us to see how they look at the future of WeWork.

 * The opinions expressed in the article are personal and do not represent the opinions of the organization I work for * 

Shifting sands of Iran: 1979 to today

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ne country that has remained under the spotlight since a long time is Iran. Iran has been consistently having belligerent relationships with the United States since Donald Trump withdrew the US out of the Joint Comprehensive Plan of Action (JCPOA) and tightened the economic noose around Iran. Iran has been known to retaliate the action of US which had taken a rather catastrophic form of a drone attack on the Saudi Aramco facility in Saudi Arabia. This post tries to put the changing sands of Iran under the microscope, right from its foundation back in 1979 to present day.

On September 14 2019, two facilities of Saudi Aramco faced a nasty drone attack which wiped out half the company’s oil production. The attack was carried out by Yemen’s Houthi rebels who were allegedly being sponsored by Iran. The energy markets quickly reacted to this news and oil prices skyrocketed thereby facing a 30-year high. The question still remains: Did Iran have enough reasons to pull off something like this? Was it a move targeting USA’s decision to impose sanctions on nations importing oil on Iran? To analyze Iran’s relations with the USA and its growing power in the Middle East, let us go back into the 1970s when it all began.

In 1979, Iran remained at the brink of a massive upheaval following the protests of opponent groups against the USA- backed Mohammad Reza Pahlavi, the Supreme Rule of Iran. Pehalvi brought about massive transformations in the economy which was referred to as the White Revolution. The White Revolution helped redistribute the land to 2.5 million families, revamped the education system and also supported nationwide enfranchisement of women.  Despite supporting the economy through reforms, Pahlavi was accused by the opposition groups of irreligion and frequent subservience to the foreign powers. The White Revolution programme led to rapid westernization of economy; however its benefits did not reach all. His policies were seriously criticized when global financial stability and volatility in oil consumption seriously hurt Iranian economy from all sides. His exile paved way for Ayatollah Khomeini to make his place as the new Supreme leader and Iran was proclaimed on April 1, 1979. The Iranian Revolution badly poisoned the US-Iran relations whose ripples were felt immediately when US embassy was seized in 1979 by Iranian militants. The Khomeini supporters resented the US presence and its continuous interference in Iranian state of affairs. The US retaliated by its refusal to purchase oil from Iran and froze billions of dollars worth Iranian assets in the United States. Eventually, post the talks that were spread across two years, Iranian hostages were released in 1981, minutes after Ronald Reagan was sworn in as the President of the United States. In subsequent years, during the Iraq-Iran war, the United States extended its active support to the Iraqi leader Saddam Hussein which lead to the war being an unnecessary drag for 8 years claiming enormous lives. However July 3, 1988 was the date when US-Iran relations went under a sledgehammer whose aftershocks continue to be felt even today. A navy ship named Vincennes was patrolling the Persian Gulf when it shot down Iranian airplane Air Flight 655 which had 290 civilians onboard. The US states that Vincennes misunderstood the plane for an F-14 fighter jet. However Tehran still views this incident as purposeful and is one of major reasons for its antagonistic behavior towards the United States.

The final nail in the coffin was when the current President of the United States, Donald Trump pulled out of the Joint Comprehensive Plan of Action (JCPOA) furthering sanctions on Iranian economy. However, to understand about the JCPOA, first let us go back to the time when these seeds were first sown. In 1957, nuclear programme was first established under US Atoms for Peace initiative. Post which, in 1974, Mohammad Reza Pahlavi announced a target of 23,000 Mwe of nuclear capability in order to reduce the reliance on oil and gas exports. With this, 4 units were constructed in Bushehar and 2 units in Istehan in order to grow its nuclear prowess. Eventually, Iran started developing its own uranium enrichment capabilities which was heavily censured by United Nations citing no evident commercial end-use.  Iran’s overpowering nuclear arsenal was major cause of concern for many countries which led to sanctions on Iran.

Eventually, China, France, Russia, the UK, the United States, Germany and the European Union entered into an international agreement with Iran in order to trade the economic sanctions with Iran’s nuclear capacity. According to the JCPOA deal, Iran agreed to bring down the uranium enrichment capability to 3.67%. The 20,000 centrifuges, which were used for enrichment purposes, were significantly brought down to 6,104 older model centrifuges and the stockpile was also reduced to 300 kg from excessive 9000 kg. The deal also allowed foreign experts to inspect the nuclear sites in Iran any time without prior approval or paperwork. On hindsight, the deal was a best-fit for all the participants till the time when Trump pulled the US out of the nuclear deal. In 2017, he stated "The Iranian regime supports terrorism and exports violence, bloodshed and chaos across the Middle East. That is why we must put an end to Iran's continued aggression and nuclear ambitions. They have not lived up to the spirit of their agreement." However, he has still left the White House open for talks with Iran. With the US withdrawing the deal, the economic noose was tightened on Iran’s ability to export commercial aircrafts, carpets, petrochemicals, oil, food and precious materials to the US markets.

With last rounds of sanctions, Iran’s oil industry took the blow with the supplies taking a serious hit as the oil prices began to skyrocket. The reactions to the current state of affairs are ugly as Iran has allegedly sponsored Yemen's Houthi rebels to attack facilities of Saudi Aramco in Saudi Arabia. The US has also blamed Iran for mining of two oil tankers in Gulf of Oman apparently to exercise its influence in Strait of Hormuz. With this US-Iran relations taking a turn for the worse, especially for energy segment, the discussion seems to be the only way to affix on the long term solution ahead.

* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for * 

Review of the US Economy: Yield Curve Inversion, Trade-War and more

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he most preferred indicator of the world’s top economists and analysts: the yield curve has shown an inversion in the past few days. The dark clouds start to hover over the economy of the United States and the global financial markets as question looms in every investor’s mine: Are we approaching the moment of a recession? This post attempts to review the different facets of the US economy and whether or not it will add up to the recessionary pressure.

First, let me set the table by diving into the basics. The yield refers to the returns the investors will make over the bond on its maturity. The yield curve is a graphical representation of the bond returns at different points of time; its inversion is when the yields of long term bond fall below the short term bond yields. This phenomenon referred to as the yield curve inversion is the harbinger to evaluate the economic performance of the country. Investors flock to long term bonds in fear of a recession and push the bond prices upwards, thereby reflecting the investor sentiment. It has generally preceded all the recessions since 1950. As per leading investment bank, Credit Suisse, recession generally occurs post 14-34 months of the yield curve inversion. However, it cannot be refuted that not all yield curve inversions point towards a possible recession.

The claims of an impending recession cannot be neglected with overwhelming threat of the effects of the ongoing trade tussle with China which has pushed the commodity prices upwards and increased the inability of companies to make the right hiring decisions. The investor sentiment is very low with the Fed expected to go in for more rate cuts in order to simulate growth.  The orders for durable goods have declined by 2.1 % from the month of April and housing market too has suffered serious drop in market rates. The signs for recession are present. However, it is necessary to look at other economic indicators too. The US has reported robust GDP growth of 2.1 % in Q2 supported by strong economic indicators. The Gross Domestic Product is an aggregation of the government spending, consumption, exports and investment activity. The Government spending is increasing faster than expected as budget deficit is expected to hit $960 billion mark in 2019. With Trump’s belligerent stand on the amplifying trade war and increased government spending, United States of America is forced to borrow excessive sums of money. This ballooning deficit can be contained with the low jobless rate as per historical trends. However, deficit is expanding despite record economic expansion and low unemployment rate in past 50 years. The consumption data is robust with an increase in retail sales and consumer confidence. Personal income increased $83.6 billion (0.4 percent) in June according to the Bureau of Economic Analysis whereas the personal consumption expenditures (PCE) increased $41.0 billion (0.3 percent). However, with effects of trade war pushing prices upwards, consumer confidence is expected to develop cracks in the near future. The only force which can keep recession at bay is an increased consumption rate. Retail sales rose 0.4% last month supported by spending on motor vehicles, materials and healthcare. However, future numbers remain dubious given the current circumstances.  On the trade front, as per the revised estimates of the Census data, the trade deficit in goods and services decreased to $54.0 billion in July from $55.5 billion in June indicating a stronger export-driven growth.

Manufacturing sector in the United States is undergoing serious contractions in both the quarters of 2019. The uncertainties rising from the trade war is raising the costs of doing business for the corporate. The country’s manufacturing has been hit on multiple fronts by the Trump administration’s aggressive decisions on the trade war.  As quoted by Fed Chair Jerome Powell, trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.  However, despite some serious injuries to the American economic structure, the idea of recession still can be averted. Going back in time, in the case of 2008 sub-prime crisis, the loans increased by 8.6% with only 4.7% corresponding increase in liquid assets. The ratio of liquid assets against the loans was 23% before the Great Depression. Currently, this figure stands at 45% in 2019. This is a strong indication of the economy having an arsenal of shock absorbers to evade the recessionary forces. But at the end, it all boils down to see how the Federal Reserve will hit the targets with its next monetary policy meeting in order to curb the rapid slowdown. 

* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for * 

Economic Update 2019: The Sinking Ship Needs Desperate Saving

This post I decided to look at the economic machine of India and try to build a story around it. The growth of economic system in India is sluggish at the moment. The economists speculate the future trends, opposition parties play blame-game and the markets react to every bit of news that is thrown in the ring. As a disclaimer I would mention that the post neither aims to support any authority nor does point fingers at them. However, it does try to state what is in store for the economy and the investors for the current fiscal. 

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ndian economy is observing a sluggish period of growth. There is a serious distress in some of the well known sectors of the economy. The rural demand has taken a huge hit as consumer durable sales have reported 5.9% growth (10.3% lower than the figure reported in 2018). Automobile sector is observing a slowdown too with huge inventory levels after models transition to BS VI norms. The slowdown points to the direction of high GST rates, liquidity issues in NBFC sector and stagnant wages. The corporate earnings are not in best shape and the Union Budget has failed its expectations earning the wrath of the investor community. The mess is too deep to be sorted so easily and for this post, I will try to hit on few data points which need the most focus for the Indian economy to realise its $5 trillion mark.

One of the important parameters to push the economy upwards is trade. History has examples of countries who have stepped out of poverty zone by pushing up their exports. However, to hike the exports, India should have requisite strength in its manufacturing prowess. To put some numbers to make the picture clear, India’s trade deficit narrowed from $ 16.60 billion in June 2018 to $ 15.28 billion in June 2019. It is a strong sign for economic growth and is mainly related to the slump in global crude oil prices. However, if we dig deeper, exports have declined by 9.71% with majority of the problem emerging from the petroleum production and rice exports which collapsed by 32.85% and 28.05% respectively. Crude oil production has stagnated from the past decade and Government has pinned its hopes on the Hydrocarbon Exploration and Licensing Policy (HELP). HELP policy gives hydrocarbon explorers to select the exploration blocks without waiting for the Government’s auction. The Indian Government believes that the HELP will usher in more investment, thereby pumping up the production activity. Rice exports have declined due to a weak demand coming from the African countries. The slump in demand is primarily stocking of inventories in Africa and which has led to a big diversion of Indian rice demand in Myanmar and China. In terms of rice exports particularly, India needs to gain a competitive edge against Vietnam who is now expected to grab the opportunity and raise its rice exports.

Another essential pillar for India’s progress is agriculture. Being an agri-based country, India is one of major exporters of agricultural commodities as they have slowly diversified towards high value pulses, fruits, vegetables & livestock. The way I see it, I see tremendous opportunity for India in agricultural domain. Start-ups and technology firms have started to explore avenues to use technology to support agricultural growth. The Government has started to use Artificial Intelligence on pilot basis for crop cutting and yield estimation under its flagship scheme Pradhan Mantri Fasal Bima Yojana. One of main problems in traditional agriculture is its excessive dependency on monsoons. AI is expected to help farmers to choose right crop for the right weather conditions and thus minimize the risk. The Government has also promised to double the farmer’s income by 2022 which will require a significant policy support. With 80% of farmers residing in rural areas, Government should set its focus on bringing in food security and sustainability.

The corporate numbers are showing weak signals which are still leaving their imprints on stock market (The markets have reported losses worth $20 bn in July 2019). The net profit of 281 BSE companies grew at 8.49 % in Q2 2019 till now. Compared to Q2 2018 growth of 23.8% and previous quarter growth of 5.67%, the numbers are quite alarming. (Take a note that the sample of 281 BSE companies excludes banks, financial institutions and oil & gas companies who follow a different revenue structure.) Manufacturing sector is also suffering from anomalies when it comes down to numbers. Since, it contributes 16% to the GDP, it is imperative to put manufacturing under the magnifying glass to understand the decline in corporate profits. The April-June quarter , the core sectors ( namely electricity , steel, refinery products, crude oil, coal, cement, natural gas and fertilisers)  grew 3.5 % as compared to 5.5% in same quarter for 2018. The core sector contributes 40% to index of industrial production and does have a timely impact on manufacturing sector as a whole. Crude oil output declined by 6.8 % in the June quarter. Also, steel and electricity collapsed by 6.9% and 7.3% respectively. The coal output grew by 3.2 % which was much less compared to the 11.5% figure reported last year. Cement and natural gas productions also ended in red territory. The code red situation in the sector has also laid its icy hands on employment situation too. As per the National Sample Survey Organization, manufacturing jobs have declined from 474 million in 2011-12 to 465 million in 2017-18. The unemployment rate has increased from 2.2% in 2011-12 to 6.1 % in 2017-18. Of these, unemployment amongst youth has soared from 6.1% to 17.8% with huge contributions coming from educated dissatisfied youths. With job market turning adverse, the Government has to focus not just on the quantity of jobs but also enhance it qualitatively. The authorities should also revisit the National Manufacturing policy drafted in 2011 which never stretched its wings to take the required flight. The policy formulated a strategy to enhance manufacturing to 25% of GDP which should be the ideal scenario if sinking sheep needs to be saved.  
To boost growth, RBI has cut rates for fourth consecutive time with current repo rate at 5.4%. Majority of banks have promised to link their deposits to the repo rate rather than relying on the MCLR. After a slew of negative performances, it is expected that the rate cut will usher in the required growth in performances.

The Venezuelan Narrative: A Journey from Boon to Bane

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ince, its unstoppable progress after the discovery of oil to the burning of its economic framework to the ground, Venezuela has a moving yet an interesting story. Since its inception of the oil industry back in 1922, the country has made several mistakes to finally lead to a tremendous resource curse. This post tries to relook at the narrative of Venezuela and analyze its mistakes in the past.

 It was 1922 and the oil well was called Barossa 2.  The geyser shot up 130 feet in the air and 100,000 barrels of oils rained on the inhabitants for a week. This was the time when Venezuela realized that they had found the goose who lays golden eggs. It was game-changing event for the country. In 20^th century, Venezula predominantly relied on coffee and cocoa to fuel their exports and the discovery of oil led to a huge transformation of the economy as a whole. This was a utopian world for Venezuela when foreign companies started to take notice and expressed their interests to set their operations in Venezuela. In 1928, the de-facto ruler of Venezuela, Gen. Juan Vincent Gomez allowed 100 foreign companies to leverage the benefits of booming economy. Towards 1940s, oil behemoths like Exxon Mobil, BP, Chevron and ConocoPhillips started setting up their businesses in Venezuela. With this, oil infrastructure in the country transformed dramatically as country observed a huge inflow of investments across the frontiers. The country’s leadership passed laws that foreign entities should turn over half their profits to Venezuela. This step worked fine because companies were looking to explore different avenues in oil industry & Venezuela did provide them the required platform.

 By 1958, Romulo Betancourt, the man who engineered the Venezuelan democracy, took control of government machinery and military support and consolidated all the oil revenues in the hands of the government. The year 1973 was a very significant year for oil lobby. The embargo by OPEC countries on United States of America led to oil prices to quadruple. In 1971, President Nixon removed United States off the gold started as he halted the Bretton Woods agreement. This sudden decision eroded the value of dollar considerably and sent the gold prices skyrocketing. The depreciating value of dollar impacted OPEC countries as majorly all the oil transactions were dominated in the dollar terms. United States of America landed in bad books of the OPEC countries as USA extended its support to Israel against Egypt in 1973 Yom Kippur War. Although, the embargo ended in March 1974, Venezuela had observed tremendous capital inflow in the country and the economy boomed like never before. In 1975, Venezuelan President Carlos Andres Perez nationalized the oil industry and created a government-owned oil company Petroleos de Venezuela, S.A (PDVSA). The government then seeked 60 percent ownership in the oil projects from the foreign firms.

Eventually, the macroeconomic parameters tripped the running Venezuelan economy when the 1980 oil glut and reducing oil demand led to a sustained collapse in the oil prices. To stitch some numbers to the fact, oil production in 1985 fell below 2 million barrels per day, which was almost 50 percent lesser than the utopian era pre-nationalization era.  Perez took to a huge foreign debt (USD 33 billion to be exact) in order to fuel the slowing economic engine. The debts kept piling up to an extent that International Monetary Fund (IMF) had to impose austerity measures and grant a bailout in order to rescue the sinking ship. This entire mishap resulted in huge oil price fluctuations.

The populist leader Hugo Chavez, former lieutenant colonel in the army, was elected as President in the year 1998. He vowed to assuage Venezuela from its ballooning resource curse. However, his strategy did not hit the required targets and situation gradually went out of control. He wanted to exert Venezuelan influence over Cuba and hence provided subsidized oil to Cuba in return for its medical and academic professionals. He also sold oil to South American counterparts at rates below market prices. His agenda was to quell poverty, however he failed to decrease the dependence on oil which he promised to do. Chavez also deferred from spending on maintaining the oil production facilities and with this the oil production in Venezuela took a nosedive. Hugo Chavez passed a law that all the oil projects in Venezuela would be led by the PDVSA and not by an outside company. He played with PDVSA’s internal senior management by firing employees, who acted against his interests, by replacing them with the political hacks. PDVSA’s output collapsed as the discontented workers refused to pump oil, halting the company’s operations. The injury done to PDVSA was so magnified that it was estimated that PDVSA would need longer than a decade to rebuild its technical prowess.

Venezuela was a affluent country in mid-1990s. It produced more than 10 percent of world’s crude and was not far behind the global power, USA. Venezuela never had an outside threat. All the wounds came from the internal mismanagement and their inability to diversify. By end of 2015, oil from Venezuela was selling at 30 USD per barrel whereas the market rates were around 60. Venezuela, at this juncture, made 95 percent of its export revenues from oil and after its failure to diversify had absolutely no cards up its sleeve. Chavez’s successor Nicolas Maduro added the final nail to the coffin. He changed the political structure and established a dictatorial rule, averse to the discontent expressed by the United Nations. The economy has spiralled into a hyperinflation (about to reach 1,000,000 % mark) following years of mismanagement and ignorance. The country that once reaped rich benefits from the oil bonanza has to now turn to outside investment to secure the burning economy.

The solutions are pretty obvious and when the end is in sight, it is imperative to execute them faster. Venezuela needs a regime makeover. It needs a leadership who can make the right decisions at right time. The international community should collaborate with democratic forces in Venezuela to enable a smooth transition from the current toxic leadership. Venezuela should also allow investments from foreign companies. However, this will come at a sacrifice. Venezuela should give up its regulations of maximum ownership stake  and allow foreign companies to have the greater share of the pie. Lastly, Venezuela needs a reliable currency exchange rate with respect to dollar to get out of the hyper inflationary quagmire.