VENEZUELA: Foreign Debts and Default: Political and Economic Implications

Political cohesion is key towards helping Venezuelan economic and positive international reputation recovery...but it could be a long way off.  Photo (c) AFP 2018Political cohesion is key towards helping Venezuelan economic and positive international reputation recovery...but it could be a long way off. Photo (c) AFP 2018

By Marcus Turner-Jones It has been well documented in news outlets around the world that Venezuela’s current political and economic situation is catastrophic, with anti-government protests having occurred frequently throughout 2017.

For the first time, the South American country is now unable to pay back its foreign bond debts, meaning that it could be in troubled waters on an international scale for the foreseeable future.

Here are some of the ways this reflects the severity of Venezuela’s situation.

Reputation

Photo (c) La Tercera 2017

Having very little support from the Venezuelan people, it is almost impossible for the current government, led by President Maduro, to produce any effective solutions to the problem, or to appeal to the international community for help (given their low credibility). Photo (c) La Tercera 2017

Currently, it is fair to say that Venezuela is not an attractive country to do business with, given the immense instability and uncertainty which is pervading its image.

Having very little support from the Venezuelan people, it is almost impossible for the current government, led by President Maduro, to produce any effective solutions to the problem, or to appeal to the international community for help (given their low credibility).

Most investors are now likely to view Venezuela as a no go area for investment, meaning that the country faces an uphill struggle to regain any economic credibility and foreign investment.

Restructuring Foreign Debts and Default

Photo (c) El Planeta 2017

President Maduro announced that the country’s foreign debt would be restructured, something which preceded the major default suffered by the country. Photo (c) El Planeta 2017

The country’s foreign debts are estimated to amount to around $150bn, a sum which it simply cannot afford to pay back in its current situation.

Towards the end of 2017, President Maduro announced that the country’s foreign debt would be restructured, something which preceded the major default suffered by the country.

This served to further worsen the chances of a recovery, and will no doubt cause increased anger amongst the population of the country.

Falling Oil prices

Photo (c) Analytica 2016

Oil prices have been falling and stagnating for a number of years, something which has had a crippling impact on all countries which rely on oil as their main source of income. Photo (c) Analytica 2016

Oil has always been a major foundation of the Venezuelan economy, accounting for around 95% of its total exports.

Oil prices have been falling and stagnating for a number of years, something which has had a crippling impact on all countries which rely on oil as their main source of income.

Venezuela is no exception, and the major reduction in income as a result of falling oil prices has no doubt contributed towards the major long term crisis the country is now facing.

Future Prospects

Foreign bonds form part of many investment portfolios, along with Forex trading, but Venezuela’s are now incredibly unstable, and likely to continue to crash in value. Foreign Affairs Latinoamerica (c) 2017

It looks as though it will take a significant amount of time for Venezuela to recover both economically and politically. Although a new trade deal has been signed with Russia, it will undoubtedly require the help of the international community to begin its recovery.

It is likely that trading with other countries will become far more difficult for Venezuela in a number of ways. Foreign bonds form part of many investment portfolios, along with Forex trading, but Venezuela’s are now incredibly unstable, and likely to continue to crash in value.

The political and economic instability combined with falling oil prices means that Venezuela’s chances of paying off its debt through export income have been significantly weakened. Its majorly devalued bonds are now unattractive to foreign investors, which means that the country’s economy is in dire straits. Political cohesion is likely the first step towards helping the country’s faltering economy recover and bringing it back into the international playing field, but it could be a long way off.