For most sovereigns, the price of credit defaults swaps on a country’s debt usually rises after a leader is diagnosed with a potentially fatal illness.
Not so Venezuela. Spreads on the derivatives have been falling since rumours started circulating that Hugo Chavez, Venezuela’s leftist president, is suffering from cancer. Last week, the president himself confirmed that a cancerous tumor had been removed from his person at a Cuban clinic last month, by which time spreads had narrowed by more than 200 basis points.
At over 1000bps, prices had previously implied a 50% chance of default, no mean feat for one of the world’s largest oil producers. But increasing political interference with PDVSA, the state oil company, has crimped oil output by as much as 30% since 1998, according to some estimates. With oil exports accounting for more than 90% of total exports from Venezuela’s misfiring economy, this decline has led some analysts to predict a default as early as 2012.
With presidential elections scheduled for 2012, speculation about the future political direction of Venezuela has only increased. We asked three analysts for their views of what lies ahead.
Bret Rosen, Standard Chartered: Plenty of mystery and intrigue still surrounds Chavez’s health status, even after his recent return to Venezuela. It is clear that his health has altered the political landscape in Venezuela.
The next presidential elections are due to take place in December 2012, with plenty of speculation surrounding whether Chavez will be a candidate: his health will be the prime determinant. If Chavez’s health allows him to complete his term and run for re-election, he would have to be considered the favourite, despite the country’s anaemic growth, high inflation and rising crime.
If he is unable to run, there are several names within the PSUV that could represent Chavismo in the 2012 elections. However, none of these names carries the weight or has the charisma of Chavez, and would presumably be less likely to defeat the opposition.
Meanwhile, the opposition must stay unified, carry out its primary process and put forth one candidate, to have its best chance of defeated Chavez or a Chavismo candidate. If Chavez is unable to continue in office, we can foresee: 1) a period of conflict within Chavismo and perhaps a power struggle; 2) the opposition altering its strategy, which thus far has focused on criticizing Chavez; and 3) months of uncertainty due to the high level of political polarization in Venezuelan society.
Francisco Vivancos, Banco Mercantil: The Venezuelan economy is recovering from its 2009-10 contraction. With the high price of the Venezuelan oil basket at around $100 per barrel, that growth will strengthen in 2011 and especially in 2012, a year when fiscal policy will be designed to win the presidential election through more social spending and new fiscal and quasi-fiscal transfers.
The oil bill, along with the use of public funds, new debt (no problem about absorbing this due to monetization of fiscal origin) and quantitative restrictions on imports permit the closing of the tax gap and the maintainance of the balance-of-payments surplus. All this is possible with a public debt burden that remains tolerable, although on a worrying upward path.
The fundamental risk in Venezuela today is not external but internal, and is the result of the accumulation of imbalances and the loss of physical, human and institutional capital.
Expected results in 2011 and 2012 are favourable in terms of output growth (3.2% and 4.4%, respectively) and falling unemployment (9% and 8.8%), although inflation is likely to remain very high (24%).
A change in the economic policy regime is unlikely (although further adjustments to the exchange rate have not been ruled out). To reduce political conflict, the government is moving the socialist institutional framework forward through new nationalizations, discouraging private investment and creating supply constraints (with negative impact on inflation and shortages).
Stuart Culverhouse, Exotix: The markets’ view that Chavez’s health problems open the door to a change in government come next year’s presidential election, and with it a more orthodox and market-friendly approach, is too simplistic.
Venezuelan CDS have come in by around 250bps to 940bps and are now inside Portugal’s. There are many different scenarios, all with their own challenges. Venezuela suffers from ‘key man’ risk. If Chavez has to take more of a backseat, for example, we doubt the existence of procedures to ensure the smooth management of the country, given the increasing power and centralisation of decision-making he has exerted. This could lead to either a power vacuum or infighting within the government and more erratic policy-making as we head towards the elections.
Increased public spending will certainly be an election tool, adding further strain to the budget position and the precipitous rise in government debt. We estimate the debt as 25% of GDP at the end of 2010, although it would be much higher after accounting for new issues, other public debt and off-balance-sheet items and when measured at the parallel exchange rate.
Higher public spending will also stoke the already-high inflation (23.6% year on year in June) and put the exchange rate under pressure.
Yet there is no guarantee that the fragmented and divided opposition will be able to capitalize on this political uncertainty or the deterioration in economic fundamentals under Chavez’s term in office.
|A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.|