"As a solution to rampant inflation, banning price rises and jailing shopkeepers has limited potential," says The Economist. But with consumer prices rising at more than 50% over the past year and important local elections looming next month, Venezuelan president Nicols Maduro is willing to give anything a try.
So in early November, the government seized a number of electronics stores, arrested the managers for "usury" and ordered them and other businesses to sell off their stock at discounted prices, hoping to placate wavering voters with a bargain television or fridge.
Unsurprisingly, investors were rattled, with US dollar-denominated bonds issued by the Venezuelan government and by state oil company PDVSA falling to their lowest levels for two years (almost no foreigners invest in Venezuelan equities, but its high-yielding bonds feature in many emerging-market debt funds).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, this may have been an overreaction, says Walter Molano of BCP Securities. There's no doubt that Maduro's policies make Venezuela "a tough place to live, but the country is in no threat of imminent default".
The government has the ability to keep servicing its external debts it should run a current account surplus of 3.5% this year and doing so will be crucial to ensuring that foreign direct investment continues to flow into oil field developments in the Orinoco Belt.
Since populist policies funded by those oil revenues are "Maduro's only hope of retaining power" in the long term, there's little reason for the "rhetoric and aggression" levied against domestic capitalism to turn into a similar assault on international investors. "Venezuela is a mess but the rewards are interesting."
That may be too optimistic, says David Rees of Capital Economics. "The current plight of low growth, high inflation and successful debt servicing could be sustained if oil prices remain at around $110 per barrel... but it all hinges on oil prices remaining high."
A drop to $90 per barrel in the next couple of years would quickly burn a hole in the country's finances and default or at least the suspension of payments on some debts owed to international creditors would become a real risk. "It is clear that the government is walking a tightrope."
-
Spot the Dog: £67bn in underperforming funds revealedAround 137 funds consistently underperformed their benchmark, BestInvest's Spot the Dog report finds. Which funds are in the dog house?
-
What does a BP and Shell merger mean for the UK oil industry?BP’s struggles have made it vulnerable to a takeover. Could it merge with Shell to create a British behemoth?
