Driving Us Caracas

These are difficult times for Venezuela. The aftermath of President Nicolás Maduro’s January inauguration for a second term followed a re-election that was disputed by many. It saw opposition leader Juan Guaidó declare himself as Venezuela’s interim president, creating a wave of new uncertainty in the country and raising wider regional and global geopolitical concerns. With Venezuela now in a state of flux, it is not 100 per cent clear who will be its president – even within the next week or two.

For his part, Maduro has so far resisted calls to hold fresh elections. The issue of allowing aid into the country seems to have precipitated a standoff. It is difficult to cast yourself as a man of the people and yet deny the people badly needed aid while citing outside interferences. It is also an emotive issue for the army, who will know people or have family who are suffering greatly for want of basic goods. Conversely, Guaidó’s declaration that he will let aid enter the country could on one level be construed as supportive of the regime he is trying to delegitimize by providing a temporary fix for the regime’s addiction to US dollars. It would certainly help to ease some of the desperation which has taken the regime to the brink of collapse.

Fragmented Opposition

It is worth noting that Guaidó was almost unknown on the international stage until a few weeks ago, although he is clearly now making a determined move for the presidency. However, should Maduro leave the picture, the opposition to the current government is not unified. There will be fragmentation of the current opposition, and a divergence in their goals and aims, so the issue remains far from settled.

Two much more recognizable opposition figures also remain close at hand and could well make a future play for power. Henrique Capriles was seen as the leader of the opposition until he was banned from politics for 15 years in April 2017. There is also Leopoldo López, a former colleague of Capriles, but he has been under house arrest since August 2017. Meanwhile, a number of countries, including the US, the UK, France, Germany and Spain have now moved to officially recognize Guaidó as interim president of Venezuela, while other countries, most notably Russia and China, have opposed this.

US President Donald Trump’s immediate decision to recognize Guaidó as the new Venezuelan president appears to indicate a desire for the US to assert more influence over the Latin American region, where in recent years China especially and (certainly in the case of Venezuela) Russia have gained greater influence both as financial lenders and trading partners. As a result of the crisis, together with the precipitous decline in production by the leading state-owned oil and gas company Petróleos de Venezuela, S.A. (PDVSA), some sort of emergency and humanitarian aid may be required in the near future. Attempted collectivization of farms and the redistribution of farmland mean Venezuela no longer produces enough food to feed itself, and there are also growing shortages of other crucial basics such as medicines. In addition to this, the Venezuelan currency is now effectively worthless, and the country will need access to US dollars to buy some of the basics and other goods that the country does not manufacture itself.

IMF Concerns

I have been told by former International Monetary Fund (IMF) employees that it would take at least two years for any IMF program to be implemented in Venezuela as the IMF has not had a presence in the country for over a decade. The country does have a few loans outstanding from the Inter-American Development Bank, so does have some multilateral assistance, but the bulk of its recent borrowing has been bilateral in nature, from China and Russia, as a number of markets have been closed to it. Whether Maduro should cling to power or we have a new non-Chavismo president, we believe the potential knock-on effects are as follows:

• The market will be likely to receive greater clarity as to how bilateral debt is treated compared to traditionally issued debt.

• It is likely that China will expect seniority in debt payments (especially from Maduro), and it has already allegedly been in contact with Guaidó. News of how much China has been lending to an unsustainable regime in Venezuela (estimated to be about US$50bn) has also been poorly received back home.

• Holders of defaulted bonds would expect ‘pari-passu’ treatment across the gamut of government obligations. This may, however, shed more light on the nature of opaque Chinese lending to the country.

The other consequences of this could be a revision in Chinese policy and lending across the rest of Latin America and perhaps other parts of the world such as Africa. Either way, Venezuela looks set to endure more political turbulence in the days and weeks ahead, and there are potentially far-reaching geopolitical consequences on their way for both its domestic market and the wider Latin American region.

Authors

Carl Shepherd

Portfolio manager, Fixed Income team