Spotlight on... Venezuela
- Fjona Krasniqi
- Jan 15, 2018
- 3 min read
Background: Continued Political and Economic Instability
Once one of South America’s richest countries, Venezuela is now on the verge of default due to mismanagement of public funds, corruption and overdependence on oil. The fall in international oil prices in 2014 has meant Nicolás Maduro’s Socialist government is unable to subsidise generous social welfare programmes that existed under Venezuela’s former President, Hugo Chávez. Oil accounts for 96% of Venezuela’s export revenue, where the government’s policies have damaged other industries and businesses. Venezuela continues to experience hyperinflation due to lower oil revenue and inflation is estimated at over 1,000 percent. This economic crisis is coupled with increasing political instability, the removal of the powers of the National Assembly by the Venezuelan Supreme Court, and President Nicolás Maduro threatening that opposition parties could be barred from the 2018 election. In response to human rights abuses and disproportionate force against protestors by the regime, the US placed economic sanctions restricting the purchase of sovereign bonds from the Venezuelan government.
Impact on Investors
Despite this economic crisis, Venezuela’s sovereign bonds and bonds issued by the state-owned oil company PDVSA have, since January 2015, increased in value by nearly 60%. Controversially, Goldman Sachs bought $2.8 billion in bonds from the state oil company PDVSA, at only 31 cents on the dollar and an estimated yield of 48 percent. Foreign investment has dropped but China, Russia and oil companies continue to provide ‘oil for cash’ contracts to ensure the Venezuelan government can pay its debts. Even if Venezuela defaults on its debt, the precedent set by Argentina’s 2002 debt default will mean bondholders will likely still get a return on their investment. But, Venezuela’s President Nicolás Maduro has proposed restructuring the country’s debt of $140 billion, worrying bondholders, though the ability to refinance Venezuela’s debt is limited by US sanctions.
The IMF has prepared for the collapse of Venezuela with a $30 billion annual package that could result in a bailout greater than the Greek bailouts. Venezuela, however, has not provided reliable statistics on its economy, so any loans from the IMF would be delayed. Any IMF bailout, must be requested from a national government and it is unlikely that Nicolás Maduro will resign or implement political reforms. As a petro-state, Venezuela has managed not to default on its sovereign debt as the country holds valuable property abroad, as well as Citgo, a refiner in the United States. Despite this, the pricing of Venezuela’s credit-default swaps corresponds to a 75% likelihood of a default within the next 12 months and a 99% chance in the next five years. Venezuela’s economic problems stem from political mismanagement and despite mass protests against his government, Nicolás Maduro has not improved living conditions or restructured the economy. Imports have decreased by 80 percent in five years due to a lack of foreign currency and this has led to shortages in food and medicine for ordinary people in Venezuela. For imports to increase and to boost consumption in Venezuela, it is estimated that $22 billion annually in balance of payment support is required. Venezuela must diversify the economy, improve conditions for private businesses and welcome political freedom if the country is to avert defaulting on its debt and the complete collapse of its economy.
About Fjona Krasniqi
Fjona graduated in 2017 with a BA in History and Politics from Queen Mary University of London and is studying a Master's Degree in Global Politics at the London School of Economics. She is currently working in the Publications subcommittee of the LSE Political Risk and Investment Society and writes for openDemocracy as well as the Huffington Post blog. Her focus is on assessing the political risk in the Balkans, as well as the political economy in developing countries.
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