Venezuela: Risks Of Default And Social Unrest Grow Amid Hyperinflation

In Venezuela, things are going from bad to worse amid a tumble in the price of global oil, a plunge in the nation’s currency, consumer goods shortages, and hyperinflation combined with a social and political upheaval which could undermine the country’s willingness or ability to pay its external debt, Jefferies warns.

Venezuela relies heavily on oil, as it accounts for around 97% of its export revenue, which the nation urgently needs to pay off its debt.  As the price of oil has tumbled — alongside the nation’s currency — the situation has remained extremely grave.

Venezuela’s hyperinflation — absent of wage growth — has increased to nearly nine times monthly wages necessary for workers to purchase a monthly consumer basket of goods, which is a leading indicator for social unrest, warns Siobhan Morden, head of Latin America strategy at Jefferies.

Morden expects that candidates who are opposed to President Nicolas Maduro’s regime are likely to pursue legal means in order to gain power ahead of Venezuela’s December election.

Here is more the head of Latin America strategy at Jefferies:

“It has been two consecutive months of inflation increasing 20%-30% month over month with annualized inflation reaching over 200% and a structural break to now much higher inflation. This also does not yet incorporate the impact from the partial border closing last month. The political intention was to trap cheap goods within Venezuela and reduce the scarcity shock to inflation; however this might backfire on both interrupting an influx of goods from Colombia as well as less smuggling of cheap goods back to Colombia. The local press suggests that scarcity in the border cities [has resulted in] more hoarding …

The social impact from hyperinflation is clear with the wage ratio increasing to almost nine times monthly wages necessary to purchase a monthly consumer basket of goods. The timing is also inopportune ahead of the National Assembly elections and we assume that President Maduro will have to again hike the minimum wage …”