Venezuela: Another Blow To Businesses

The economic situation in Venezuela continues to deteriorate, with the black market exchange rate now standing at more than 10 times the official rate, inflation at 54.3%, and reserves continuing to plummet.

Despite these difficulties, President Nicolás Maduro has decided to stay the course, if anything ramping up his anti-business rhetoric. Last weekend, he ordered stores to remain open and to sell products at deeply discounted ('fair') prices, threatening 'parasitic' business owners that do not comply with orders with imprisonment. Maduro also announced plans to introduce a nationwide cap on profit margins to prevent further 'crimes of capitalism'.

Obviously, all this is very negative for Venezuela's already-poor business environment. The government's actions will only serve to further shrink the private sector, exacerbate shortages (and ultimately inflation), and worsen the market distortions which are constraining economic growth.

Over the course of a week of intimidation and hostility directed at the productive sector of the economy, markets reacted with very sharp moves in the bond and credit default swap (CDS) markets.

All of this confirms our long-held view that the reduction in bond yields when the late President Hugo Chavez passed away earlier this year was not warranted, given the continued government intervention in the private sector and the high degree of uncertainty associated with Maduro's presidency.

We think there could be further downside for Venezuelan financial markets, especially if Maduro is given decree powers, as proposed by a bill currently sitting before parliament (and looking increasingly likely to pass).