Venezuela's failing economy has put the country on the cusp of a coup d'état or a tightening of control by President Nicolas Maduro
New York’s biggest Venezuela ‘death watch’ specialist, Siobhan Morden of Nomura Securities, says that the crisis-wracked country is at a cross roads. Here’s where it can go, in the simplest of terms: towards a Cuban style autocracy led by Socialist Party leader and current president Nicolas Maduro, or a military coup of ‘moderates’ who team up with the opposition to kick Maduro to the curb. For now, the Cuban-road is looking like the road Maduro will travel.
Barron’s and others reported on the military take over of certain sectors of the economy on Friday. Bond prices for Venezuela’s one year debt fell 1.3% to 48.24. The country is being held together by polygrip, but the government continues to bite off more than it can chew.
Wall Street has been banking on cooler heads to prevail. As the economic crisis worsens, the camp that suggests Venezuela’s biggest problem is that it’s not Socialist enough is being vacated by the day. The opposition, meanwhile, remains mired in bureaucratic red tape to get a recall vote on Maduro. It’s definitely not happening this year.
For the market, if cooler heads do ultimately prevail, an unlikely scenario, Venezuela’s bonds will be the best buy in Latin America. Similar trades were made in Argentina last year, and in Russia in 2014.
Current yield on Venezuela’s debt is over 22% on average. Fitch says a sovereign default is imminent. Venezuela, an economy dependent on oil revenue, is now one that requires its government to work as a grocery store, handing out rations. It’s practically war time.
As a result of this disarray, Friday’s 50-50 chance that Venezuela heads towards autocracy, with Maduro in role as dictator, seems more like a 60-40 chance today.
“The superpowers for the military heighten the debate about autocracy and democracy with significant implications on bond prices,” Morden wrote in a note to clients on Friday.
That superpower ministry position for Defense Minister Padrino Lopez raises concerns as to what type of political transition will occur. There are risks of either a Maduro orchestrated coup, whereas allies in the military take control and install him as defacto dictator, or opposition within the Socialist Party out-maneuver him and throw him out of office. This would require Chavistas to work with the opposition. The opposition represents the private sector, the sworn enemies of Chavez and therefore strange bedfellows.
It is unclear just how strong popular support is for Maduro and whether, given the economic crisis, he could summons popular support to back him up in the event of an anti-Maduro coup détat.
One poll from May that was reported on this month by the Christian Science Monitor suggests 25% support for Maduro’s government, a dismal rating. One of the only reasons it is that high is thanks to the residual goodwill of voters who benefited from the Hugo Chavez years, when high oil prices and income distribution made Venezuela one of the three richest in Latin America. As of 2013, Venezuela’s per capita GDP was higher than Chile’s, Brazil’s and Mexico’s, and trailed Argentina with around $14,400 per capita, based on World Bank figures.
If Chavista moderates even exist, they will have to fight among themselves if they are to do anything about Maduro’s tilt to a closed economy. Some Chavista lawmakers have even suggested the legislative branch should be abandoned. Democracy in Venezuela is on the wane.
Maduro’s claim that the country’s economic woes are due to an “economic war” waged by the opposition and the private sector can rally his base. This is especially true if he brings up Washington involvement. Chavez loyalists hate the U.S. for its role in backing a failed coup against Chavez in 2002.
Nomura’s strategist Morden thinks the main thing to watch now is Lopez. How does the military manage to control food distribution and what will it do with trade at the ports, which is now under its command. The market has no faith this will succeed.
“The centralization or maybe efficient control of bad policies will not resolve the economic crisis,” Morden wrote.
Venezuela’s opposition leader Henri Falcon supposedly endorsed Lopez,saying he represents more of the institutional faction of the military and this may allow him more power over the repressive military leaders backing Maduro.
Lopez could be a straw man. There has been no mainstream reports of dissent from the military and the ‘Chavistas’ that have criticized the Maduro Administration’s handling of the crisis. There are regional elections this fall. That will tell a lot about the future of the Socialist Party, and the grip it has, if any, on the collective imagination.
“It is still our base case scenario that the intensity of economic stress forces a political transition,” says Morden. “However, we cannot ignore the recent autocratic trend.”
Meanwhile, the recall referendum faces impossible administrative hurdles thanks to a biased election authority that is likely to derail the process. Last month, Maduro said there would be no recall vote until next year. That’s like Bill Clinton saying the House of Representatives cannot vote on his impeachment until he says so.
Political risk could pull the rug out from under junk bond traders hoping for a repeat of Argentina.
Venezuela’s 10 year bond traded at 11.73% yield on Thursday July 14, rising 16.2% in just four days and is now up over 11% in four weeks as the market prices in the ‘Cubanization’ of the country.
Investors are hoping to double their money like they did in Argentina, but to do that, Venezuela will have to take the road less traveled — one that gives the private sector more say over the country. Despite the economic crisis in Argentina, the exit of Cristina Kirchner now hasthree year Argentina bonds at negative yield. Bond prices are up 100.24%in the last 12 months.