Venezuela’s politically induced debt problems still perplex experts

By:
Jeremy Weltman
Published on:

Venezuela’s political and economic future hangs in the balance as analysts mull President Hugo Chavez’s October re-election prospects.

Venezuela – on a score of 34.5, down one point since Q2 2012, and rated B+ (negative) by Fitch, B1 (stable) by Moody’s, but unrated by S&P – has slipped below Bolivia in ECR’s global rankings into 111th place.

The troubled Latin America sovereign has fallen 19 places in the rankings during the past two years under the continued leadership of Hugo Chávez, who has been in power since 1999. Out of 20 countries in the region, only Ecuador (112th), Nicaragua (123rd) and Guyana (132nd) are lower.

 
 Source: ECR

All five of Venezuela’s economic indicators have been collectively downgraded by ECR’s experts, along with four of the six political risk sub-factors. And with all six political indicators scoring below four out of 10, the upcoming presidential election on October 7 remains a key risk factor.

Victory for the opposition candidate Henrique Capriles Radonski could deliver the structural reforms necessary to reinvigorate the economy. One of ECR’s country risk experts, Elvis De Oliveira, at a Venezuelan research institute, Edoecca, believes that although “in recent weeks Venezuela's country risk ratios have experienced a steady decline, the new government will be characterized by fiscal control and a new budget structure, which is based on a gradual adjustment in debt levels and will stabilize economic ratios”.

However, investors remain fearful of Chávez being re-elected for another six-year term. There is particular concern for the country’s rising stock of debt, worth $111 billion, and for the $4.3 billion of external debt repayments due between August and December 2013. Given the backdrop of nationalization, a government budget deficit of almost 12% of GDP, and falls in foreign-exchange reserves and oil production, the country is highly vulnerable to waning oil prices and a debt default.

According to Jaime Martinez Estévez, a partner at the Caracas-based Rodner, Martinez & Asociados and another of ECR’s experts: “The government has increased public expending en route to the elections. It has increased the public debt in various forms. Partly the government has tried to gain sympathies by modifying legislation that increases workers’ rights and thereby further increased the public debt. It has made many more promises, which are hardly to be met, given the government’s record, and that may lead to conflict with interested groups. Protests occur daily.

“Transparency has not been a virtue of the current administration. The actual size of the public debt and the reliability of the oil-associated income may be a surprise in the months to come. Expropriation-related arbitration awards against the state are expected at any time.

“Many investment plans and contracting have been put on hold waiting for the results of the election. It is foreseeable that they will remain on standby until at least the end of the first quarter of 2013.”

Martinez adds: “The lack of timely maintenance investments has caused major infrastructure failures. The events are likely to be repeated in the time to come. Many public projects show significant execution delays. The time and cost of transportation will increase.

“If the results of the election are close, additional social unrest is likely. The government has used some polls as an instrument of propaganda and it is possible they may serve as a justification of vote-counting manipulation. The opposition has contended that the rallies for Capriles are evidence of the false data of some of the polls.”

He concludes: “The availability of foreign currency is further restricted. The new Sitme (alternative exchange-rate) system, in effect since 2010, does not work well and has not been a sufficient response. It is expected that a new devaluation will occur early next year.”

This article was originally published by Euromoney Country Risk