Erste Asset Management Investment Blog

Hyperinflation in Venezuela

Hyperinflation in Venezuela
FEDERICO PARRA / AFP / picturedesk.com

Venezuela is in a difficult situation. Hyperinflation describes the economic environment best. For 2017, the IMF estimates a consumer price inflation of 650% y/y, and for 2018, the estimate is 2,300%.

Since 2007, the cumulated inflation amounts to an incredible 41,000%. This comes with consequences: according to the IMF, real GDP will shrink by 12% this year. Since 2007, real GDP has slumped by an impressive 25%. Per capita income has even fallen by 36%. Foreign exchange reserves have declined by USD 9.7bn. In 2008, they had peaked at USD 42bn.

Bad governance

The most important reason for this disastrous development is the bad governance. When it comes to the indicators published by the World Bank on freedom of speech, political stability, quality of public administration, and rule of law, Venezuela is at the bottom of the list. The country is rife with corruption. The Corruption Perception Index by Transparency International has Venezuela ranked 166th, which is not far ahead of Somalia, the country that is 177th and last.

High likelihood of state bankruptcy

Accordingly, the country risk has increased drastically. The rating agency Standard & Poor’s has continuously downgraded the rating of Venezuela in recent years. In 2006, the country was rated BB-. On 3 November, it was downgraded from CCC- to CC. This means that bankruptcy is all but certain, it is just not clear when it will happen.

Unclear announcement

The downgrading on 3 November was triggered by unclear announcements made by President Nicola Maduro last week, according to which about USD 60bn of external debt was to be restructured. For 13 November, foreign creditors have been invited to the capital city, Caracas. This invitation does not constitute bankruptcy, legally speaking. President Maduro said he was going to service the debt, albeit in a restructured form.

Losses

Outstanding bond prices have accordingly fallen. For example, the price of VENZ 9 ¼, maturity in 2027, fell by 39% on 2 November. By 7 November, it had plummeted to 28%. This equals a loss of about 31%. It is unclear, whether the current scenario has been fully priced in yet.

US sanctions

The existing US sanctions prevent new bonds from being issued under US law. This makes both the refinancing of the old debt and the issue of new debt in case of a restructuring impossible.

Also, the government officials of Venezuela, who have been tasked with the negotiations on 13 November, are affected by US sanctions. Their appointment could be regarded as provocation.

Alternatives

This leaves two alternatives. Venezuela could try to issue bonds in other currencies. This is seen as unlikely to be successful. New loans from Russia or China are only slightly more likely. Why should these two countries grant loans only for bond creditors to get their money. Geostrategic interests have also entered the picture here: after all, Venezuela holds the biggest oil reserves in the world, and the Latin American country is not far from the USA.

Only a question of time

The incentive for Venezuela to avoid bankruptcy is mainly to avoid the seizing of their oil shipments. Still, the rating by Standard & Poor’s suggests that bankruptcy is only a matter of time.

 

Legal note:

Prognoses are no reliable indicator for future performance.

RESPOND TO THE ARTICLE

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

Share post:
Exit mobile version