Category Risk Management

Venezuela: The crisis worsens

22 August 2017 Coface

On July 30, Venezuela held elections to vote for the members of the National Constitutional Assembly (ANC) called by President Nicolas Maduro. The move was sharply condemned by his increasing number of opponents in the country, as well as the international community.

The ANC aims to gather even more power to Maduro´s base, as this makes it possible to rewrite the entire constitution as well as to limit the power of the National Assembly controlled by opposition coalition MUD (Democratic Unity Roundtable).

According to official turnout, 8.1 million voters went to the polls, 41.5 % of total voters. But according to a US-based investment bank together with a Venezuelan research company, 3.6 million people only showed up. Moreover the Venezuelan Smartmatic, the company that manufactures the voting machines used in the country, claimed that the number was inflated at very least by one million votes.

After a meeting on August 5th, the Mercosur announced the suspension of Venezuela from the bloc due to this. Finally, the black market US dollar has soared 83% since the ANC elections. The rate is now 6.3 times higher than the official Dicom rate of VEF 2,970 per USD.

Since April 2017, massive protests against President Nicolas Maduro’s government have gained intensity across Venezuela. The death toll has already reached over 125 people and hundreds have been arrested during clashes between Maduro´s opponents, his supporters and local security forces. This conflict was triggered by the Venezuelan Supreme Court’s decision (linked to the incumbent government) to dissolve the country´s National Assembly on March 29. Following three days of widespread international outcry, over what was considered as a state coup, the Supreme Court overturned part of its decision.

Nevertheless, civil unrest in the country didn´t cease and Maduro decided then to call for the rewrite of a new constitution in early May 2017. In response to that announcement, the opposition organised an unofficial referendum to heap pressure on the president. On July 16 more than 7.1 million Venezuelans went to the polls and 98% voted against the ANC and in favour of calling for general elections.

The large attendance observed in the unofficial vote gives a clear sign of the country’s discontent against deepening anti-democracy and the escalating economic crisis. The economy is heading towards its fourth consecutive year of recession. This year is unlikely to buck the trend. The combination of collapsing oil prices and reckless economic measures have led the country to this chronic situation. Moreover, in the past, oil revenues represented approximately 95% of the country’s export earnings.

A lack of foreign exchange reserves has therefore also become a crucial issue, leading the country to curb imports (in the absence of exchange rate flexibility). Imports plunged to 18 billion USD in 2016, down from a record of 66 billion USD in 2012.

In turn, the sharp decline in imports has fuelled the country’s shortage of basic goods and skyrocketing inflation. According to an unofficial inflation index created by the National Assembly, consumer prices rose by 18.3% m/m in May this year, accumulating a year-to-date growth of 127.8% until the same month. Moreover, according to Chamber of Trade in Caracas, 80% of Venezuelans are now in poverty.


The way back to democracy is not yet visible and the idea that the ANC would further increase its repression, soon prove it right. A day after elections, agents of the state security Sebin hauled Venezuelan opposition leaders Antonio Ledezma (former mayor of Caracas) and Leopoldo Lopez from their houses. Both were serving house arrest, the latter since last July.

After a few days of worldwide outrage both were sent back home. Moreover, the new Venezuela´s National Assembly already issued its first order of business: the removal of attorney general Luisa Ortega Diaz, a dissident of Maduro´s government. The measure came as response to Ortega´s decision to open an investigation into fraud allegation surrounding the ANC election.

Two countries are able to influence Venezuela´s government: China and the United States. The former is the country main financier, though is unlikely to get involved in its borrower domestic conflict. After the ANC, China came out arguing that the election was held smoothly. However, the US already imposed sanctions on 13 high-ranking Venezuelan officials and, after the ANC, financial sanction on Maduro were also announced.

The US is the main importer of Venezuelan oil, with roughly 740kb/d and representing 43% of Venezuela’s total oil exports or 60% of cash generating from oil exports. Thereby a possible banning of exports to the US would certainly impact Venezuela’s ruling government.

Despite this, a trade ban is not likely to occur due to the following reasons: 1) it would further hurt local population; 2) US oil companies investing in Venezuela would lobby against it; 3) it could provoke a temporary spike in petrol prices in the US and 4) it could prompt to an immediate sovereign default by Venezuela, as it would impact its ability to pay and its willingness.

The government´s capacity to pay its debts has been surprising - but is unlikely to last very long. Foreign exchange reserves stand at just over USD 10 billion and roughly USD 7 billion is in gold bars (a good part has been pledged as security to the government´s creditors). The country and its state-owned oil company PDVSA together owe USD 5 billion in principal and interest payments due until the end of 2017.

According to credit-default swaps, the odds of a credit event over the next 12 months have risen to 70%, from 64 % reported in the week prior to the ANC vote. Additionally, Oxford Economics forecasts a sovereign default to occur in 2019, as cash runs out. It also believes that the episode would only be avoided if the Chinese government comes to rescue one again.

A regime change seems no yet imminent, though the likelihood of a coup has gradually increased. For now, power is being retained through repression, however there are an escalating number of defections from military and United Socialist Party of Venezuela. On August 6, the Venezuelan Army stopped an attempt to overthrow the government by a group of military officers in Valencia. They seized control of a fortress yet for only a limited time (seven military leaders were detained).

Recent research has shown that 21% of the population consider themselves chavista, 42% opposed to it and 34% are neutral. General elections are scheduled in 2018, but Maduro could try to postpone them.

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