LatinFinance - January/February 2018 - 14

Source: Reuters

made little sense to pay $2.3 billion this quarter if it knew it would
end up defaulting."
For a debt restructuring to work, advisers and fund managers
say two main conditions need to be met: Maduro must commit to
economic reforms, and the United States has to lift sanctions that
bar US banks from buying freshly printed Venezuelan sovereign
debt.
The possibility that either condition will be met appears remote.
The US government is expected to keep the sanctions in place while
Trump is in charge, and Maduro has so far shown few signs that he
will overhaul economic policy.
"Bondholders need an assurance that if the debt will not be
paid off at maturity, then it will be at some point in the future,"
says Raymond Zucaro, chief investment officer at RVX Asset
Management, a US asset manager that holds Venezuelan debt.
"They are not getting that reassurance, and I think the country is just

RUNNING OUT: Venezuela has slashed imports by 93% in five years to save
money to make its debt payments

getting closer and closer to full default."
Victor Rodriguez, CEO of the US investment advisory
firm LatAm Alternatives, agrees. "If there is no change in
macroeconomic policy, no one will give the restructuring any
credence. I think the government has just been testing the financial
waters. It said it wants a restructuring just to see how the markets
would react."
Indeed, the Venezuelan government's political strength appears
to have improved in recent months. Street protests between April
and July claimed the lives of 125 people and alienated many ordinary
Venezuelans who were not able to get on with their daily lives.
But critics credit some of the rise in Maduro's approval ratings
- to 31.1% in November from 21.7% in September, according to a
poll from Venebarómetro - to the government's elimination of
political opposition. In late July, the government established a new
Constituent Assembly to replace the opposition-dominated National
Assembly and to rewrite the Constitution. Most opposition parties
participated in the gubernatorial elections of October 15, but their
voters stayed away, and the governing socialist party, or PSUV, won

14 L ATINFINA NCE.COM - January/February 2018

SIOBHAN MORDEN, NOMURA

"THE CLEARLY REACTIVE AND
DOGMATIC PRESIDENT MADURO
WILL FINALLY HAVE TO PREPARE
FOR THE WORST"
18 of 23 races.
Mayoral elections also took place in 335 cities and towns on
December 10. Most of the opposition parties boycotted the vote,
so the PSUV won 295 races with a turnout of 47%. Maduro then
declared that only the parties that took part in the mayoral elections
could contest the presidential ones, scheduled for December this
year.
This latest measure means that the leaders from the three main
opposition parties - Justice First, Popular Will and Democratic
Action - cannot stand as candidates. Speculation also exists that
Maduro, who has indicated that he will run for reelection, will move
the presidential election forward to spring.
In early December, Maduro's government began fresh talks with
the main opposition coalition to try to put an end to the political
crisis. Analysts are not optimistic that any progress will be made
because the political chasm between the two sides remains vast. But
the imploding economic situation could put even greater political
pressure on the government.
Worsening crisis
According to the International Monetary Fund (IMF), Venezuela's
economy shrank by 26.4% between 2014 and 2017. It declined
another 12% in 2017 and is predicted to drop by 6% in 2018.
As the economy sinks, prices in turn, have risen. The IMF says
inflation climbed 254% in 2016 before leaping 652% in 2017. The IMF
expects inflation to soar 2,349% in 2018, while some analysts think it
will surpass 4,000%.
As a result, Venezuela's currency, the bolívar, is fast losing
value. According to the official exchange rate, 9.98 bolívares equal
one dollar. But on the black market in December, one dollar
fetched 100,000 bolívares, a sharp rise from 7,000 bolívares in
last July. The minimum monthly wage in Venezuela stands at
456,000 bolívares per month. Although that would amount to
$45,700 at the official exchange rate, it comes to just $4.50 a month
at the black-market rate.
"We cannot ignore the domestic shock of the worsening
economic crisis," Morden says, comparing Venezuela's situation
with the recent military takeover in Zimbabwe after the government
experienced difficulty paying soldiers and civil servants. "These
are the same reasons that may undermine the core support for the
Maduro administration," she says.
Still, Venezuela has one thing going for it: oil. The country sits on
top of the world's largest oil reserves with about 300 billion barrels,
compared to 266 billion barrels in Saudi Arabia.
The Venezuelan government will likely find a way to make bond
payments through the second half of the year. But, barring a change
in policy by the Venezuelan or US governments, either a full default
or an eventual restructuring appears to be inevitable sooner or
later. LF
http://www.LATINFINANCE.COM
Table of Contents for the Digital Edition of LatinFinance - January/February 2018
