Rising default risk
Investors in Venezuelan debt (EMB) are undeterred by the rising probability of a default by this embattled country. Emerging market fund managers are increasingly attracted to the high yields associated with Venezuela’s high-risk bonds. Some experts, however, still believe that Venezuela’s default is coming soon. The nation recently defaulted on its $2.5 billion loan from Russia’s oil company Rosneft.
Recently, Kevin Daly, an emerging market debt specialist at Aberdeen Asset Management, told the Financial Times that Venezuela’s default is inevitable. “But amid mounting expectation that future defaults are inevitable as the crisis-ridden country’s coffers run dry and protests against the increasingly authoritarian government mount, some investors now believe the strongest returns may come from longer-term paper.” He continued, “The backdrop suggests we are moving closer to a credit event. The government is becoming more dysfunctional, the protests are becoming more fevered and it does feel like there could be splits in the government and military.”
Falling oil prices since 2014 and mismanagement of the economy have led to triple digit inflation in the troubled country and depleted its foreign reserves.
Since 2013, the economy has decelerated by 27% and the IMF predicts inflation to touch 720% this year. To further add to investor woes, the country’s central bank has stopped publishing economic indicators such as GDP, balance of payments etc.
The country is now facing a shortage of basic necessities including food and medicines. Venezuela’s unpopular government led by Nicolas Maduro has become even more dependent on financial deals and sale of assets to boost its foreign exchange reserves. The Maduro government has slashed imports of basic necessities for years to meet its bond commitments which has spurred shortages.
Economic experts believe the only way out for Venezuela is to scrap its price and currency control mechanisms that have crippled the private sector. Venezuela’s bonds are currently the highest-yielding among all emerging market securities due to the high default risk attached to them.