A few days after the second inauguration of Nicolás Maduro in early January 2019, a group of bondholders expressed their intention not to negotiate the delayed payments with the Venezuelan leader because the legitimacy of his new administration is in doubt. The international community has not recognized Nicolás Maduro as President after elections held last May (1). The bondholders claim that the only legitimate public body in Venezuela is the National Assembly, and they are willing to negotiate with the Venezuelan legislature to agree on a debt restructuring and an economic reform program.

Looking ahead at 2019, Venezuela has gloomy economic prospects: a decline in economic activity of 5% is expected, with inflation of approximately 10,000,000% according to the IMF World Economic Outlook from October 2018, another new historical (negative) record on this variable. In terms of debt commitments, Venezuela must pay a total of US $8,975 million, of which US $5,116 million correspond to sovereign debt (Rendivalores.com).

Hurtling toward collapse: New increases in the minimum wage and in the marginal reserve

Nicolás Maduro announced a new increase in the minimum wage on January 14. A 300% increase from Bs.S.4,000 to Bs.S.18,000, along with an increase of the same magnitude in the food ticket (cestaticket), bring the new integrated salary to Bs.S 19,500, or US $6.47 using the average weekly value of the reference exchange rate. Public and private salary tables were to be adapted beginning January 15, generating conflict in the various professional associations as these new measures are they would violate collective agreements. One of the sectors most affected by the measure has been the education sector. Teachers have engaged in marches and strikes. The Minister of Education, Aristóbulo Istúriz, admitted in an interview that the goal of adjusting salary tables is that all workers (both skilled and unskilled) receive the same remuneration. (See https://www.aporrea.org/actualidad/n337175.html; https://www.aporrea.org/trabajadores/n336727.html)

As a measure to counteract the hyperinflation in the country and the continuous depreciation experienced by the parallel exchange rate, the Central Bank of Venezuela announced a 60% increase in the marginal legal reserve, which will mean that banks will be required to transfer resources to the main Venezuelan financial entity as reserves and will therefore have fewer resources to allocate to internal credit. However, it is worth noting that for the week of January 11, the monetary liquidity increased by 20.6% with respect to the balance registered at the end of 2018; the parallel dollar has depreciated by 272% since January 1, 2019 (Central Bank of Venezuela, DolarToday, own calculations).

With the implementation of these measures, a worsening in the Venezuelan economic environment is expected, including as a greater acceleration in the growth of prices and more businesses forced to close due to their inability to adjust wages and lost access to low-cost financing (since in Venezuela the interest rates are regulated). The new credit restriction seriously compromises the profitability of the banking system and threatens a collapse.

Financial markets react positively to the political conflict in Venezuela

Since the week of January 18, Venezuela’s external debt instruments have seen improved results after several months of generalized uncertainty and poor performance (Bloomberg, 7 + 7 Weekly Report of Banco Mercantil, own calculations). Sovereign bonds averaged an increase of 1.30 percentage points compared to the close of the previous week, with the bond maturing in 2026 experiencing the highest increase. State oil company PDVSA recorded an increase in its price of 1.66 percentage points, with the bond with expiration in 2022 performing best during the week. On January 23, the prices of the sovereign bonds exhibited on average a significant increase of 6.76 percentage points with respect to the previous day; while the bonds of the state oil company PDVSA experienced a jump of almost 13 percentage points. This was also reflected in the decline in the country risk indicator for Venezuela, which fell that same day by 551 basis points, its steepest decline since November 10, 2017 (Rendivalores, Bloomberg, ámbito.com, own calculations).

On Wednesday, January 23, in the midst of a massive march in the city of Caracas, the president of the National Assembly, Juan Guaidó, was sworn in as interim president of Venezuela on the basis of articles 233, 333 and 350 of the constitution of the Bolivarian Republic of Venezuela. Hours after his inauguration, Guaidó said that he plans to hold talks with creditors to re-negotiate the foreign debt once he is internationally recognized as the legitimate president of Venezuela.

Faced with a potential regime change in the medium or long term, IDB President Luis Alberto Moreno declared that the organization is willing to work with the newly established interim government in various economic development projects in the country (https://www.swissinfo.ch/spa/jefe-del-bid-se-dice-dispuesto-a-trabajar-con-el-presidente-interino-de-venezuela/44704114).

Increasing national and international pressure: Venezuelan National Assembly and Brazil prepare new measures against the Venezuelan government

After assuming presidency on the first day of 2019, the president of Brazil, Jair Bolsonaro, met with several leaders of the Venezuelan opposition in exile and the Secretary General of the Organization of American States (OAS), to coordinate a series of concrete measures for the re-establishment of democracy in Venezuela. Although no details have been provided on the possible measures, it is expected that the measures will include diplomatic, economic, humanitarian support for Venezuelans who have migrated to Brazil.

Meanwhile, during its January 15 session, the Venezuelan National Assembly requested that the governments of nations that do not recognize the legitimacy of the Maduro government prohibit any management of liquid assets of the Venezuelan State by the illegitimate Maduro government in accounts in their countries, in order to protect Venezuela’s assets abroad in the absence of recognition by the international community. It is reported that the Bank of England has prohibited Nicolás Maduro from handling US $1.2 billion in gold bullion belonging to Venezuela held by the institution, and on January 25 the provisional government of Juan Guaidó received authorization from the Federal Reserve of the United States to control and manage the assets of Venezuela protected in US banks.

In addition, the legislative body also asked the governments of these nations to authorize accredited private banks to prohibit high-ranking officials of the Venezuelan government from handling funds, accounts and state assets established in their financial institutions.

The knockout blow? US Department of the Treasury approves sanctions against PDVSA and compromises the future of Maduro

Nicolás Maduro’s regime is increasingly hanging by a thread. In the afternoon of January 28, Steven Mnuchin, Secretary of the Treasury of the United States, announced a series of sanctions against the state oil company PDVSA to increase pressure for the departure of the increasingly internationally isolated socialist leader, as well as reaffirming the support of the US government for the interim president of Venezuela, Juan Guaidó. With these measures, the Maduro regime will not have access to the assets of the oil company, which are valued at approximately US $7,000 million, in addition to some US $11,000 million for lost oil export revenues from Venezuela to the United States (https://www.swissinfo.ch/spa/tesoro-eeuu-impone-sanciones-a-petrolera-venezolana-pdvsa–maduro-dice-son-criminales/44715584).

However, the Secretary of the Treasury himself clarified that the US refineries (including CITGO) will continue normal activities, with their funds destined to a blocked account. He also clarified that these measures will not be permanent, but that they intended to pressure the Maduro regime to change its authoritarian behavior and to combat corruption in the oil company (https://home.treasury.gov/news/press-releases/sm594).

In addition to impairing financing to the Maduro regime, which will jeopardize its ability to pay its external obligations, this measure could end up finally bringing down the weakened Venezuelan economy by restricting the entry of foreign currency to the country for exports to the United States.

Note:

(1) The countries that did not publicly recognize Nicolás Maduro as president of Venezuela are: Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Honduras, Panama, Paraguay, Peru, Guyana, Saint Lucia, the United States, and the European Union, which is made up of 28 countries.