Venezuela — the terrestrial paradise

The Sterling Report

With Yanique Leiba-Ebanks

Sunday, August 13, 2017

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When Christopher Columbus “discovered” Ven ezuela in 1498, he wrote to King Ferdinand and Queen Isabella that he was certain he had found a terrestrial paradise! This apparently was due to the beauty of the land, the abundance of fresh water, and the lovely climate.

I am sure that many would argue that it is Jamaica that is the paradise, but be that as it may, this is what Columbus wrote.

Venezuela has had a long and fascinating history. They have had multiple civil wars, political upheavals, rebellions and coups.

The discovery of oil during World War I turned the country's fortunes around, and the Venezuelans transformed their economy from a dependence on agriculture to one on oil. This gave them a long period of growth and prosperity; however, like most nations dependent on oil, their finances were heavily dependent on oil prices. Thus, the oil glut in the 1980s hurt their economy very badly.

Economic crises tend to be directly correlated to political crises, one of which led to attempted coups in 1992 led by none other than Hugo Chavez, who, of course, after being pardoned, became president in 1999 and led the country until his death in 2013.

It is ironic that having led attempted coups himself, Chavez became the victim of one in 2002, and was out of power for a whole two days! However, the army and his supporters quickly returned him to power.

Most Jamaicans can recall the PetroCaribe years, when Jamaica, among other countries, became the recipient of very generous terms for purchasing oil from Venezuela. It was recently reported, however, that the fall-off in Venezuela's oil supplies has led to Jamaica receiving substantially less oil from month to month, forcing us to seek other suppliers.

Far from the terrestrial paradise that it once was, the current situation in Venezuela is a terrible one — marked by ongoing protests, violent crime, poverty, significant deterioration in the health system, possible impending dictatorship by Nicolas Maduro's regime, and an unspeakable possible 720 per cent inflation expected in 2017.

This has been a horrendous situation which has kept Venezuela on top of many a news cycle. After the elections held on July 31, the US issued the following statement by treasury secretary Steven Mnuchin: “Yesterday's illegitimate elections confirm that Maduro is a dictator who disregards the will of the Venezuelan people. By sanctioning Maduro, the United States makes clear our opposition to the policies of his regime and our support for the people of Venezuela who seek to return their country to a full and prosperous democracy.”

Their current situation has huge implications for their ability to service debt. Many Jamaicans are invested in the PDVSA (their state-owned oil company) bonds. The debt due in 2017 is trading near 89 per hundred, which, although discounted, suggests that most investors believe that they will be repaid. The longer-dated debt is trading in some cases below 50 and even in the 40s, which suggests that investors believe the risk is extremely high that the country will default on their debt.

This is not news, as there has been speculation for some time that the country would default, but President Maduro has insisted that they will honour their debts.

In the meantime, it would take a very brave investor to buy their debt as long as the current challenges persist, and the bigger question for most other investors is whether to cash out at low levels or stay and hope for a miracle.

My advice is to study the situation and judge for yourself, as my crystal ball is currently out of commission. I have to say, though, that things are not looking good at all. Let us hope that the country can turn their fortunes around.

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at:




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