Venezuela Nears End Game

Aside from some sovereign bonds few international investors now have direct exposure to Venezuela. Yet as Latin America’s fifth-biggest economy and home to the world’s largest oil reserves its plight remains important for investors. Many will be hoping to catch the bottom and while ‘catching a falling knife’ is a dangerous game for investors, there’s no doubt that Venezuela’s descent is accelerating.

First, the good news: the victory of the opposition coalition in the December elections for Congress, gives them control of the country’s legislature. Moreover it showed that despite Venezuela’s poor human rights record the country still respects elections. It also demonstrated that the public is disillusioned with the Chavista regime and surely sounds the death knell for President Nicolás Maduro. But while the Congress has the power to veto any government measure, it is unable to tackle the economic crisis on its own. The central bank governor and the finance minister are government appointees, meaning that it still controls economic policy. That looks likely to lead to a gridlock until presidential elections in 2019.

there’s no doubt that Venezuela’s descent is accelerating...

But given the scale of the economic crisis it seems likely that the public won’t wait that long. The Venezuelan economy is contracting by about 10% per year, while annual inflation stands at 720%. People in the poor neighbourhoods of Venezuela, that have traditionally provided the support base for the Chavista regime, may not know all of the latest economic indicators but they’re acutely aware of the major shortage of basic foodstuffs and daily necessities. Their support was won by generous welfare schemes during the era of high oil prices. At $30 a barrel the Venezuelan government can no longer afford such largesse, meaning its support is gradually ebbing away.In theory the opposition could use its two-thirds super majority to demand a recall referendum that would give the electorate the chance to oust Maduro. Another option would be to take to the streets and rock the government with large-scale protests, like those we saw in 2014. Maduro’s government is unlikely to leave power without putting up a fight. So things may well get worse before they get better.So far Venezuela has managed to fulfil its repayment obligations to international creditors. However, a large tranche of scheduled debt repayments in October and November may prove challenging.