Previous Quarterly Editions
Expropriation Risk: 88 90 90 86 Political Violence Risk: 90 87 89 86 Terrorism Risk: 48 50 52 54 Exchange Transfer and Trade Sanction Risk: 90 90 90 88 Sovereign Default Risk: 92 90 94 94
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President Nicolas Maduro’s position has not been strengthened despite a comfortable victory in the May presidential election. In August, he appeared to come under attack from drones as he delivered a live televised speech at a military parade. Although Maduro was uninjured, members of the National Guard broke ranks and fled in what became a potent image of a vulnerable president deserted by the national armed forces. Among the fourteen suspects quickly arrested and charged with treason and terrorism for what President Maduro is describing as an assassination attempt were members of the National Guard and a prominent opposition member of the National Assembly. The involvement of National Guardsmen will reignite government concerns of conspiracies in the armed forces, with the drone attack following the arrest of 40 Guardsmen linked to another alleged plot against Maduro in April. Having won the election he called, Maduro is now forced to address the crippling economic crisis and ongoing collapse of the national oil industry, where falling output as more staff leave negates the benefit of rising global prices. The government announced measures in mid-August to address hyperinflation, boost government revenues and galvanise economic reactivation. These include reducing the subsidies that give motorists the cheapest petrol in the world at an annual cost to the government of 18 billion dollars, an increase in VAT from 12% to 16%, and the pegging of wages, prices and the exchange rate to the state-backed cryptocurrency, the petro. The central bank will increase the frequency of foreign exchange auctions to three and subsequently five days a week. However, the measures failed to instil any immediate confidence in the government’s capacity to cope with the current economic chaos. At the same time as devaluing the domestic currency by 96% through the removal of five zeros from bank notes, the government announced an increase of 3,000% in the minimum wage. This will hit small and medium enterprises, although the government has committed to covering the cost of the salary increase for three months. The IMF now estimates that the final inflation rate for 2018 will be one million percent. Venezuela is the first country to peg the value of its domestic currency to a cryptocurrency but while the petro is purported to be backed by crude oil it is not free floating like a cryptocurrency and remains controlled by the central bank.
Although the ruling PSUV made pre-election commitments to left wing allies that it would step up expropriations from the private sector, the urgency of boosting government revenues appears to be forcing it to move in a different direction. In August, the government announced the planned sale of public assets in the aviation and transport sector. This follows the sale of loss-making state-owned enterprises in 2016 that included the Bicentenario supermarket chain and the state fishing company. These partial privatisations have passed largely under the radar of public attention, but there will be protests from the labour sector if, as expected, the government is forced to step up the pace of de-nationalisation.
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Street protests have subsided as key opposition leaders and an estimated 2.5 million Venezuelans have left the country. Leopoldo Lopez was not among the political prisoners released in June, although some of his supporters were. A planned relaunch of general strike action against the government in the coming months risks a return to violent confrontation with the security forces, who have been brutal in responding to anti-government demonstrations. There is also an increased risk of spontaneous protests as the government’s economic adjustment impacts gasoline prices and availability of basic goods. A new concern is violence against Venezuelan migrants outside of the country. Ecuador and Peru have imposed new passport requirements on Venezuelans amid rising local anger as the influx drives up housing and food costs. The Pacaraima border post with Brazil has already seen clashes between Venezuelans and local Brazilian residents.
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The drone attacks have highlighted the ongoing frustration with the Maduro government among both the radical political right and also Bolivarian elements on the left who view Maduro as having betrayed the legacy of the late President Chavez. While the option of leaving the country has served as a release valve for accumulating political tensions, Venezuelans overseas continue to mobilise around social media and other networks that see violence as the only way to remove Maduro.
Amid concerns about the impact on the Venezuelan population, and more recently the regional concerns about action that would encourage further cross-border migration, the Trump administration appears to have pulled back from threats of trade sanctions on the Venezuelan energy sector. Neither targeted sanctions on individual Venezuelan officials, nor the earlier financial sanctions imposed by the US, EU, Canada and some South American countries have had any discernible impact on the Maduro administration.
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Although Maduro returned from Beijing in September with a five billion dollar extension to the country’s Chinese credit line, there has been no progress on the restructuring of Venezuela’s estimated 65 billion dollars of foreign debt. Arrears on international securities increased to 6.1 billion dollars after Venezuela missed interest and principal payments of 1.1 billion on two of its bonds in August. As addressing the accumulation of debt arrears will not be a priority for the government, creditors will increasingly look to Venezuela’s assets overseas to recoup financing. These include CITGO, the US refining arm of PDVSA, which in August was ordered by a US court to expropriation compensation of 1.4 billion dollars owning to a Canadian mining firm. Venezuela is appealing the ruling but may have to liquidate CITGO, which is valued at eight billion dollars. Venezuela has agreed a two billion dollar arbitration settlement with ConocoPhillips, to be paid in instalments, which will enable PDVSA to recommence crude exports from its Caribbean refining facilities. International reserves have fallen again to less than 8.5 billion dollars.
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