Venezuela: Default may spur regime change

03 January 2018

The Venezuelan government is likely to hold elections in 2018 as scheduled, given opposition weaknesses. However, elections are unlikely to be free and fair. Venezuela’s economic collapse will continue without government action on reform, making a hard default likely in 2018. A hard default could precipitate regime change.

Security Environment

The intensity of anti-government street protests has weakened in recent months, alleviating pressure on the military to withdraw its support for President Nicolás Maduro’s government. Protest risks were most elevated between April and July 2017, when hundreds of thousands of individuals participated in daily protests. During incidents, the police used tear gas, water cannons and guns, whilst participants threw Molotov cocktails.

At least 125 people are believed to have died during the protests, whilst there was significant disruption to cargo movements and business operations. However, the frequency and intensity of protests declined after the government successfully formed a new national constituent assembly in August 2017. The poor showing of the opposition Mesa de la Unidad Democrática (MUD) coalition in October 2017’s gubernatorial elections further weakened opposition momentum. Internal divisions within the MUD will lessen the likelihood of a sustained and organised protest movement in 2018. However, impromptu anti-government protests cannot be ruled out.

Any protests are likely to be concentrated in urban areas, and will bring significantly elevated death and injury risks for bystanders. The ruling Partido Socialista Unido de Venezuela (PSUV) is likely to hold presidential and legislative elections, which are due by December 2018. Maduro’s December 2017 decision to ban the principal opposition parties from participating may mean that elections are held early in October 2018.

Trading Environment

On 13 November 2017, Fitch, Moody’s and S&P all indicated that Venezuela was in technical default after the expiration of a 30-day grace period on USD 200 million in bond interest payments. The government met with creditors in Caracas and announced that it would continue to service its debt, without offering any plan to restructure its debt. Venezuela’s creditors have reportedly begun to organise unofficially. A group, including BlackRock, Allianz and Goldman Sachs, were reported to have met with attorneys in late November 2017, although official action is unlikely to occur as long as Venezuela meets its other payment obligations.

However, Venezuela is unlikely to avoid a hard default in 2018, if the government does not implement the economic reforms necessary to restore economic stability. Venezuela faces USD 9 billion of sovereign and quasi sovereign bond payments in 2018, with a significant portion of this concentrated in H2 2018. A hard default would likely spur co-ordinated action by creditors, which could include the seizure of oil shipments. This would remove the Venezuelan government’s final source of hard currency, limiting payments to the military. In this scenario, the military may rescind its support for PSUV, spurring regime change and the introduction of a transitional government.

However, this would be unlikely to occur before early 2019.

Investment Environment

Foreign firms operating in Venezuela will continue to face a challenging operating environment in the 12 month outlook. Maduro is likely to escalate nationalist rhetoric ahead of a presidential election in 2018, elevating the already high risk of expropriation and contract alterations. The lack of legal certainty for investors has been exacerbated by the creation of a national constituent assembly in August 2017, which will rewrite the constitution and establish a new legal and regulatory framework. Contract enforcement will continue to be challenging, as the Supreme Court routinely favours the government over investors.

The expropriation of assets has occurred regularly in Venezuela in recent decades, with an estimated 1,284 companies experiencing expropriation between 2002 and 2013. Affected companies have been concentrated in the construction, retail, manufacturing and hydrocarbons sectors. Companies that suspend operations due to payment delays or the challenging economic environment will be at particular risk of expropriation. In July 2016, the Venezuelan government seized an industrial plant belonging to Kimberly-Clark after it announced plans to end operations in Venezuela.

Venezuela table

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Colombia, Brazil, Mexico and Cuba all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review Jan 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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