The Venezuelan bond market has returned to the spotlight in 2019 owing to the country’s jittery political and economic climate.
A combination of domestic and external factors are putting an increasing amount of pressure on Venezuelan leader President Nicolas Maduro to step down, potentially putting an end to the “Chavista” era, amid widespread calls from international governments for snap elections.
Nicolas Maduro was elected in April 2013 following the death of his predecessor Hugo Chavez and has largely been a continuation of the late president’s socialist policies. Yet, Maduro’s leadership has overseen Venezuela’s spiraling descent into economic and political breakdown, prompting a humanitarian crisis which has seen the displacement of over three million citizens from the country.
A more united and collaborative opposition front under the leadership of Juan Guaido – who is already recognised by the US and many western countries as the Venezuelan interim president after last year’s election was widely considered to be fraudulent – together with a new wave of US sanctions targeted at the country’s state-owned oil company Petroleos de Venezuela S.A. (PDVSA) and other layers of the government, is increasing hope among market investors that a regime change is a real possibility. This could mean that a new government could slowly start to implement a shift to a more sustainable macroeconomic framework, as well as create a convincing debt restructuring plan. As a consequence, this prompted Venezuelan and PDVSA bonds to rally hard in the first weeks of the year on the back of the market’s heightened optimism.
Among the various sanctions imposed against Venezuela during the last weeks, the Trump administration blocked US citizens from buying PDVSA issued bonds and then subsequently extended those limits to Venezuela’s sovereign bonds. However, US investors are still allowed to hold Venezuelan debt and sell it to foreign counterparts. The immediate consequence of the sanctions (which are expected to be lifted in case of a regime change) was the temporary halting of bond trading on secondary markets, with all market makers still trying to understand the scope of the sanctions and their legal room for trading.
Following the sanctions levied by the US, no US and US affiliated banks are trading PDVSA and Venezuelan bonds. The whole market community, index providers included, are currently investigating the matter and trying to gather more clarity on the issue. Observers say that the restrictions on trading are intended to financially starve the Maduro government and trigger a speedier regime change.
We believe the financial situation here remains very fluid, subject to daily changes with the market caught between the very interesting potential return of Venezuelan bonds in case of a credible regime change and the uncertainties created by US sanctions and their possible interpretations.
We believe that it is too premature to think about the details surrounding changes in economic policy that a regime change could bring with it. Just to mention a couple of possibilities, a credible reform of the Venezuela’s oil sector – with a broader participation of the foreign private sectors together with a convincing debt restructuring plan perhaps also linked to the future economic performance of the country – could represent a game changer for the future prospects of Venezuelan economy and therefore be very positive news for bondholders.
Ultimately, we feel that a regime change is a possibility but the main uncertainty we face is not knowing when it will occur. Investors will need to see a stable leadership of the country and a definitive plan towards economic stability in order to remain optimistic. These are the developments that we will monitor closely in the weeks ahead.