Incumbent Nicolas Maduro’s victory in Venezuela’s presidential election last weekend is expected to prolong the country’s economic woes after the US State Department said it did not recognize the result of the vote.
The lack of recognition from the US government paves the way for heightened sanctions, possibly on Venezuela’s oil exports, and increases chances of the sovereign defaulting on and restructuring its debt.
Edward Glossop, Latin America economist at Capital Economics said the Venezuelan government and state-owned oil company PDVSA’s debt repayment schedule this year was “extremely challenging.” A recent $2bn arbitration court ruling in favor of ConocoPhillips against the Venezuelan government can also potentially disrupt oil exports.
Fitch Ratings, meanwhile, said the incumbent administration showed “limited willingness” to pursue reforms necessary to address economic imbalances.
Real solutions, such as dollarizing the economy, or pursuing a deal with the IMF are unlikely to bear fruit. And according to Glossop, the best market players could expect to see are “cosmetic tweaks” to Venezuela’s currency system.
“Policy ‘fixes’ included introducing further exchange rate tiers, creating the sovereign’s digital currency [Petro] and re-denominating the bolivar,” said Glossop in a report on Monday.
Falling oil production, tighter external liquidity positions and deep economic imbalances led Venezuela to default last November, added Fitch, which has rated it RD since then. The government and PDVSA have both missed a total of roughly $1.8bn in coupon payments since November.
Bondholders, so far, have opted not to force immediate repayments of the securities, and hope Maduro will revisit debt restructuring talks.
“But with Mr. Maduro winning, it is difficult to see a credible deal being put on the table,” added Glossop.