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Global Chief Underwriting Officer, Political Risk, Credit & Bond

Observing Venezuela’s spiral from political and economic chaos into a full-blown crisis, it’s easy to dismiss the notion that investors have anything to gain there. Although Venezuela is clearly a market with many risks, change is coming and it will create opportunities. Put another way, there really is nowhere for Venezuela’s economy to go but up.A recent nationwide blackout and violence are the latest in a litany of problems under the regime of President Nicolas Maduro:

Hyperinflation. In 2018, Venezuela’s inflation rate hit 80,000% — the highest of any nation on the planet. It is even higher now. One measure of the impact of hyperinflation: the price of a cup of coffee in Caracas. A year ago, it cost less than 1 bolivar. In early 2019, that same cup of coffee cost 2,800 bolivars.

Hunger. Shortages of food, water and medicine are rampant, sparking a humanitarian crisis.

Population exodus. As conditions deteriorated, at least 3 million people, 10% of the nation’s populace, have fled.

Expropriation. Since 1998, Venezuela has seized the assets of thousands of businesses. Between 2002 and 2015, the Venezuelan government conducted at least 1,322 expropriations or nationalizations, according to the Venezuelan Confederation of Industries (Conindustria), a business lobbying organization.

A major cause of Venezuela’s current woes is deeply rooted bureaucratic corruption. Maduro’s predecessor, Socialist Hugo Chavez, was elected in 1998 pledging to reduce poverty and end corruption. That didn’t occur, unfortunately, as Venezuela’s oil revenues soared and Chavez began aggressively nationalizing businesses. Maduro, whom Chavez anointed as his successor, took power in 2013 and maintained the status quo — until the collapse of oil prices caused a sharp blow to Venezuela’s fortunes. Maduro consolidated his power as a dictator and initiated a disastrous devaluation of its currency in 2018, making an already bad situation far worse.

With the right political environment and protections for investors, a new Venezuela will reward risk-takers.

Hope for change

As horrible as conditions are in Venezuela at the moment, signs of change are appearing. In January, voters elected Juan Guaido president of the opposition-controlled National Assembly. An international coalition, including the United States, the United Kingdom, France, Germany and Spain, have recognized Guaido as interim president and called for Maduro to relinquish power. Even more importantly, Venezuela’s neighbors and trading partners in Latin America want to see the country return to stability.The first step toward recovery requires a dramatic shift from autocracy to an environment that enables the growth of trade and investment. Once such an environment exists in Venezuela, businesses and investors will need assurances to re-engage. Political risk and credit insurance are important tools in providing such assurances.Several factors suggest that Venezuela offers opportunities in the next six to 18 months. Among them:

Natural resources. Venezuela remains resource-rich, with the world’s largest oil reserves. The country also has an abundance of natural gas, metals and minerals. Energy and mining can become growth industries.

Infrastructure development. Venezuela has numerous infrastructure needs, both in new projects as well as improvement of existing assets. From roads to telecommunications, there is ample room for growth.

Construction. Eighty-eight percent of Venezuela’s population in concentrated in urban settings, and the country has five cities with 1 million or more residents. Commercial and residential construction projects will be needed on an ongoing basis.

Businesses and investors should remain thoughtful about these opportunities and prepare for changes ahead. With the right political environment and protections for investors, a new Venezuela will reward risk-takers.A look around the region shows success stories, which should encourage those looking at Venezuela. Brazil and Argentina, for example, not long ago were struggling with their own economic problems. But they have largely solved those issues and are attracting capital again. In Venezuela, economic recovery won’t occur overnight, but for the first time in many years, it seems possible. About the Author

Daniel Riordan is president of Global Political Risk, Credit & Bond Insurance at AXA XL. Before joining AXA XL insurance business unit , he held various senior executive roles in political risk, specialty and global corporate property and casualty insurance at a leading global insurer. He has had a long association with the Berne Union, serving as president from 2013 to 2015. 

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