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Venezuela has one of the largest oil supplies in the world, and oil serves as the primary source of income for Venezuela’s economy. The large drop in prices has severely hampered its ability to import products, and has prompted a rapid rise in inflation. The IMF is forecasting that inflation will hit 700% by year end 2016, compared to the Venezuelan government’s forecast of a 180% increase in inflation.
Venezuela was offering around a 23% yield on benchmark dollar bonds, and when compared to global interest rates that are negative or hover above zero, it offers a high reward for investors to make high returns on their investment. However, there are high risks of an economic and social collapse, and food shortages, protest, and high crime rates act as strong deterrents for many high- yield seeking investors.
China is one of several foreign investors who are beginning to reevaluate its relationship with Venezuela on continuing its investing and loaning activities in Venezuela. The decrease and potential further drops in the flow of capital may lead to further budget setbacks and shortages, along with the increased likelihood of defaults on government and state-owned bonds.
China is still owed around $20 billion on the $60 billion that has been lent, and there are increasing concerns that corruption in Venezuela’s government led to the misappropriation of funds that were loaned. For increased investment, China is asking for guarantees that the investments would be respected by the opposing parties in government. Many investors are becoming concerned to due safety risks, as many investors and expatriates have become targets for kidnapping and extortion. Citizen security is a high issue of concern for investors, and a recent Gallup poll revealed that perceived citizen security is lower than Syria.
Chinese investors' actions will be closely watched as it could lead to further economic ramifications in Africa and other countries in Latin America. This is largely due to the large amounts of financing from China to resource-rich countries during the boom in the commodities market. Venezuela’s potential nonpayment may increase the potential risk of nonpayment for other countries that China has invested in, and may prompt the reevaluation of the risks involved.
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