A wave of anti-government protests is likely to continue through 2017, elevating death and injury risks for foreign nationals. As Venezuela’s economic crisis deepens and substantial debt repayments loom, a sovereign default is becoming increasingly likely in 2017. The business environment will remain extremely challenging for foreign investors, even if Maduro is removed from power, with expropriation an elevated risk.
Throughout April and May 2017 Venezuela has experienced continuous protests and civil unrest, which are likely to further intensify in the remainder of 2017. In the context of economic crisis, the opposition Democratic Unity Roundtable (MUD) has called for national protests, demanding early presidential elections and the release of political prisoners. Protests were further motivated in May 2017 by President Nicolas Maduro’s announcement that a National Constituent Assembly would be created to rewrite the constitution, sidelining the opposition-controlled National Assembly.
Protests have become increasingly violent, and security forces have responded with live ammunition. At the time of writing, 48 people had been killed in protests. Foreign nationals in Venezuela face an elevated risk of death or injury throughout the country. Businesses, particularly those in the retail sector, will also face a heightened risk of looting, given shortages of food, medicine, water and gas. 100 businesses are reported to have been looted since April 2017.
Protests are increasing pressure on Maduro, making it unlikely that he will remain in office until the end of his term in 2019. However, the ending of the recall referendum process in October 2016 makes it difficult to remove Maduro through the legal system. This makes Maduro’s ouster through coup or military intervention increasingly likely. Currently, the military remains loyal to Maduro and this is critical to his survival. However, in the case of a sovereign default, Maduro would be unable to meet military salary payments, elevating the risk of military intervention in politics and regime change.
Venezuela is in a state of economic crisis, and will continue to be so throughout 2017. Real GDP reportedly contracted by 18.6% in 2016, whilst inflation is expected to reach 3,000% in 2017. Foreign investors will also face elevated currency inconvertibility and transfer risks. Capital controls have been in place since 2003, alongside a complex multiple exchange rate system. Businesses must navigate complicated regulations in order to qualify for access to foreign currency. This process is likely to become more stringent as foreign reserves are strained in the current crisis.
The risk of a sovereign default is also significantly elevated in 2017. Venezuela faces around USD 9 billion in debt repayments in 2017, over half of which are interest and principal obligations relating to state oil company PdVSA. Foreign currency reserves stood at USD 10.2 billion in April 2017, the lowest level since 2002, further reducing state capacity to meet payment obligations. If PdVSA defaults this year, the government would lose its only significant income stream, almost certainly causing a government default.
However, the government will try to meet its payment obligations. Gas shortages in April 2017 were reportedly caused by reduced fuel imports, as the government tried to maintain hard currency reserves ahead of a USD 3 billion debt repayment.
Venezuela will continue to present an extremely challenging business environment for foreign investors in 2017. Government policy is likely to remain highly interventionist as long as the ruling Partido Socialista Unido de Venezuela (PSUV) remains in power, even if Maduro no longer holds the presidency. Expropriation risks are elevated. On 20 April 2017 the Venezuelan government seized a vehicle assembly plant in Valencia belonging to the US’ largest car manufacturer, General Motors.
The company was forced to cease operations in the country and lay off around 2,700 workers. The incident is the latest in a string of expropriations in Venezuela. In July 2016, an industrial plant belonging to US consumer care company Kimberly Clark was seized, while in 2013 Superior Energy Services had two oil rigs seized by Venezuelan state oil company PdVSA.
Arbitration awards from the International Centre for Settlement of Investment Disputes (ICSID) Tribunal are difficult to enforce in Venezuela, as the government is keen to avoid exacerbating its strained debt position further by paying out large sums. However, the government is also wary of having its assets abroad seized, and so is willing to enter into joint ventures with foreign firms, instead of paying awards. In 2016, Gold Reserve, agreed to enter into a joint venture to develop the Brisas and Las Cristinas mining projects, after being awarded USD 770 million by ICSID.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Bangladesh, Rwanda, Chile and Ghana, all of which have been the subject of recent enquiries from JLT's client base.
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 firstname.lastname@example.org