Venezuela is Alone in its Troubles

Financial Times – IMF crunches the numbers for possible Venezuela rescue
Move could require $30bn a year or more in international help
The IMF has had no official relationship with Venezuela since Caracas cut off relations in 2007 and has not conducted an on-the-ground review in 13 years. Officials insist no rescue is imminent and publicly say they are simply conducting normal surveillance, stressing that they have had no meaningful contact with the government other than occasional low-level responses to requests for data. But in recent months IMF staff have quietly crunched numbers for a potential bailout that, were it to happen, could be bigger financially and more politically complex than its much-criticised involvement in Greece. “The market needs to be properly prepared for this,” said a senior IMF official. “This is going to be Argentina meets Greece in terms of complexity,” added Douglas Rediker, a former US representative at the IMF.

Comment

Venezuela’s situation is dire and the story above will raise eyebrows with the potential aid numbers. But Venezuela is a lonely blemish on the emerging market landscape.

The map below shows average total returns for emerging market sovereigns in the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index. Venezuela is the only sovereign with total return losses on average this year.

The next charts help illustrate how dramatically Venezuela has fallen behind its peers. With 2017 total returns now -10% on average, Venezuela trails the next worst emerging market sovereign by over 12%.

The chart on the right shows total return versus duration for each sovereign issue in the index. Venezuelan issues are highlighted in orange. There are only a handful of non-Venezuelan issues with losses on the year. Venezuela accounts for all issues with losses exceeding 5%.

As we noted back in December:

Gustavo Diaz, an employee of Home Depot in Alabama, does more than anyone else to set the price of everything from rice to aspirin to cars in his native Venezuela, influencing the inflation rate and swaying millions of dollars of daily currency transactions via his dolartoday.com website.

On dolartoday.com, Mr Diaz and his two partners provide an unofficial, but widely used, benchmark exchange rate. This exchange rate is posted every day on his website and on his Twitter account which is followed by over 3 million people.

As the chart below shows, the black market puts the exchange rate at 31,109 bolivars to buy $1, down 96% in the last year. The official exchange rate remains at 10 bolivars to buy $1.

Conclusion

The collapse of Venezuela has taken place as its emerging markets peers are seeing the best economic growth since 2010. With nearby Caribbean nations likely to need billions in hurricane-related aid, Venezuela will be hard-pressed to raise the sums mentioned in the story below. Venezuela managed to sink despite a rising tide of emerging market performance, This uniquely poor performance further weakens Venezuela’s position as it hopes to find support from the international community.