Venezuela: Risk Assessment
Country Risk Rating
Business Climate Rating
- Major oil reserves along the Orinoco River and offshore gas potential
- In default on its sovereign and quasi-sovereign debt (PDVSA), payment delays in everyday business
- Economy heavily dependent on hydrocarbons, loans from China and Russia, and Iranian aid
- Non-transparent and discretionary management of oil revenues
- Shortage of foreign currency and goods (basic foodstuffs, medicines)
- Serious political insecurity
- Crime (homicides), corruption, trafficking of all kinds, black market
A collapsing economy
The Venezuelan economy will enter 2021 with GDP 74% below the level recorded in 2013 when the crisis began. The combined effects of the pandemic at the local and global level, and the stepping-up of sanctions by the Trump administration, dealt further blows to an already weakened economy. The COVID-19 crisis led to the introduction of restrictive measures in the country. These measures are expected to be only partially lifted in early 2021, as the virus is still circulating in the country and hospital care capacities are weak, so sluggish household demand is unlikely to be revived. However, the ongoing dollarization of the economy should prevent a return to the hyperinflationary episodes of 2017-2018. In this context, remittances sent by the 5.2 million Venezuelans living abroad will be central in providing foreign exchange to households. As emigration accelerates, structural issues for the economy, such as those presented by an aging and increasingly uneducated population, will arise. Government spending will continue to be constrained by lack of access to financing, and investment will be non-existent, with even China reluctant to undertake new projects due to poor returns on previous investments. The Trump administration's decision in November 2020 to ban crude-for-diesel swaps, which were previously allowed on humanitarian grounds, will also weaken the economy as a whole. For companies in the non-oil sector, this energy constraint will compound the problem of access to foreign currency for imports. While aid measures have been announced to support companies amid the pandemic, they are unlikely to materialize given the government's weak financing capacity. In the oil sector, production hit record lows in 2020 (367,000 barrels per day in October 2020 against 687,000 in October 2019), while expiring exemptions led PDVSA’s last remaining European clients (Repsol, Eni) to terminate their crude orders. The situation is expected to improve only marginally in 2021, assuming the Biden administration reinstates the diesel exemption, as the drop in production is set to continue due to the massive lack of investment and the flight of skilled workers.
External and current accounts in a deep hole
After the semblance of an attempt to consolidate the public finances at the end of 2019 and in 2020 in a bid to break the vicious circle of monetization of the deficit and hyperinflation, the government was back to its old ways in the run-up to the legislative elections of December 2020. The 2021 budget provides for spending equal to USD 8.1 billion compared to USD 5.4 billion in 2020, mainly driven by social spending. Meanwhile, oil revenues continue to decline, and the country has lost access to multilateral financing following the 2017 suspension of interest and principal payments on 2019 and 2024 bonds. The amount of arrears was four times the amount available in reserves in June 2020. In partial default, the country was only able to obtain a moratorium from China, its main creditor, on USD 19 billion in debt (repaid in oil deliveries) until the end of 2020, with no extension to 2021 so far.
Because of the collapse in refining capacity, Venezuela now imports gas condensate from Iran to be mixed with its crude to make it exportable. The fall in crude oil production, coupled with the necessary discount to sell lower-quality crude subject to North American sanctions (a barrel sold at around USD 27 versus USD 40-50 a barrel for Brent in 2020), leaves a major hole in export earnings. A structural transformation appears to be underway in an effort to give non-oil activities, which are still weak, a bigger share of the country's exports. After contracting sharply in 2020, imports will increase marginally with the smaller drop in activity. This will generate a trade deficit that will not be compensated by expatriate remittances, leaving the current account in deficit. Pressure on international reserves, now mainly composed of gold rather than foreign currency, will increase. Exchange rate pressures will also increase, after the accelerated monetization of the deficit by the central bank ahead of the elections pushed the bolivar below 1 million to 1 USD, closing the gap with the unofficial exchange rate.
Regime change still unlikely
Despite the recognition of Juan Guaido, president of the national assembly, as the legitimate head of state by the majority of the international community, President Nicolás Maduro, who has the backing of the military, seems disinclined to relinquish power. The legislative elections of December 2020, in which the opposition refused to participate, allowed the regime to regain control of the last institutional bastion held by the opposition. The departure of opposition leader Leopoldo Lopez, who escaped the regime by fleeing to Spain, has not changed the situation. The Guaido camp suffered a major blow after a U.S. court ruled in November 2020 to uphold demands by bond creditors to seize a portion of Citgo, the country's only remaining profitable asset, which is located in the United States. The election of Joe Biden in the United States is also unlikely to change the country's position towards the regime, with bipartisan support in Congress for sanctions.