These are difficult times for Venezuela. The aftermath of President Nicolás Maduro’s January inauguration for a second term followed a re-election that was disputed by many. It saw opposition leader Juan Guaidó declare himself as Venezuela’s interim president, creating a wave of new uncertainty in the country and raising wider regional and global geopolitical concerns. With Venezuela now in a state of flux, it is not 100 per cent clear who will be its president – even within the next week or two.
For his part, Maduro has so far resisted calls to hold fresh elections. The issue of allowing aid into the country seems to have precipitated a standoff. It is difficult to cast yourself as a man of the people and yet deny the people badly needed aid while citing outside interferences. It is also an emotive issue for the army, who will know people or have family who are suffering greatly for want of basic goods. Conversely, Guaidó’s declaration that he will let aid enter the country could on one level be construed as supportive of the regime he is trying to delegitimize by providing a temporary fix for the regime’s addiction to US dollars. It would certainly help to ease some of the desperation which has taken the regime to the brink of collapse.
It is worth noting that Guaidó was almost unknown on the international stage until a few weeks ago, although he is clearly now making a determined move for the presidency. However, should Maduro leave the picture, the opposition to the current government is not unified. There will be fragmentation of the current opposition, and a divergence in their goals and aims, so the issue remains far from settled.
Two much more recognizable opposition figures also remain close at hand and could well make a future play for power. Henrique Capriles was seen as the leader of the opposition until he was banned from politics for 15 years in April 2017. There is also Leopoldo López, a former colleague of Capriles, but he has been under house arrest since August 2017. Meanwhile, a number of countries, including the US, the UK, France, Germany and Spain have now moved to officially recognize Guaidó as interim president of Venezuela, while other countries, most notably Russia and China, have opposed this.
US President Donald Trump’s immediate decision to recognize Guaidó as the new Venezuelan president appears to indicate a desire for the US to assert more influence over the Latin American region, where in recent years China especially and (certainly in the case of Venezuela) Russia have gained greater influence both as financial lenders and trading partners. As a result of the crisis, together with the precipitous decline in production by the leading state-owned oil and gas company Petróleos de Venezuela, S.A. (PDVSA), some sort of emergency and humanitarian aid may be required in the near future. Attempted collectivization of farms and the redistribution of farmland mean Venezuela no longer produces enough food to feed itself, and there are also growing shortages of other crucial basics such as medicines. In addition to this, the Venezuelan currency is now effectively worthless, and the country will need access to US dollars to buy some of the basics and other goods that the country does not manufacture itself.
I have been told by former International Monetary Fund (IMF) employees that it would take at least two years for any IMF program to be implemented in Venezuela as the IMF has not had a presence in the country for over a decade. The country does have a few loans outstanding from the Inter-American Development Bank, so does have some multilateral assistance, but the bulk of its recent borrowing has been bilateral in nature, from China and Russia, as a number of markets have been closed to it. Whether Maduro should cling to power or we have a new non-Chavismo president, we believe the potential knock-on effects are as follows:
- The market will be likely to receive greater clarity as to how bilateral debt is treated compared to traditionally issued debt.
- It is likely that China will expect seniority in debt payments (especially from Maduro), and it has already allegedly been in contact with Guaidó. News of how much China has been lending to an unsustainable regime in Venezuela (estimated to be about US$50bn) has also been poorly received back home.
- Holders of defaulted bonds would expect ‘pari-passu’ treatment across the gamut of government obligations. This may, however, shed more light on the nature of opaque Chinese lending to the country.
The other consequences of this could be a revision in Chinese policy and lending across the rest of Latin America and perhaps other parts of the world such as Africa. Either way, Venezuela looks set to endure more political turbulence in the days and weeks ahead, and there are potentially far-reaching geopolitical consequences on their way for both its domestic market and the wider Latin American region.
This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.