Venezuela Debt Crisis May Offer Political Upside for Maduro

A looming debt default for Venezuela, long seen as catastrophic for the country's oil-dependent economy, may yet provide a vital political boost for embattled President Nicolás Maduro and help him consolidate power in the near term ahead of two crucial elections, bond investors and economists said.

Mr. Maduro announced plans on Friday to convene bondholders in Caracas on Nov. 13 to negotiate a debt restructuring on the country's foreign debt, estimated at between $100 billion and $150 billion. However, investors said that U.S. sanctions that restrict financial institutions from investing in new debt instruments issued by Venezuela's authoritarian government make a deal unlikely, triggering a messy and prolonged default.

"Maduro is adding up the numbers for the presidential elections next year and is trying to see how to raise imports," Alejandro Grisanti, an economist with the Caracas-based consultancy Ecoanalítica said. A default would give the leftist leader a six-to-nine month window to try to ease shortages that have pushed Venezuela to the edge of a humanitarian disaster, according to Mr. Grisanti.

At the same time, U.S. sanctions that prohibit bondholders from renegotiating debt with the Venezuelan government will allow Mr. Maduro to rally his Socialist Party supporters and deflect blame for the country's problems by pinning them on his ideological rivals in Washington, said analysts at the risk consultancy Teneo Intelligence.

"Politically the timing of this is not a coincidence," said John Polga, professor of Latin America studies at the U.S. Naval Academy in Maryland. "If they can use some of the extra money and nationalist rhetoric to boost approval to 30-35%, all of a sudden, he could win the presidential elections," he said.

That may only be a temporary respite before investors start targeting Venezuela's oil shipments and external assets seeking compensation. But Mr. Maduro has few other options as he tries to keep alive the revolutionary movement he inherited from his mentor and predecessor, the late Hugo Chávez. The International Monetary Fund expects the economy to shrink 12% and 6% in 2017 and 2018, respectively, while inflation tops 1,000%.

U.S. sanctions, rampant corruption in Venezuela, the scale of the debt and different types of bondholders could all come together to make for a chaotic restructuring or default.

"This will be the most corrupt, chaotic, and messiest default in the history of defaults," said Moisés Naím, a distinguished fellow at the Carnegie Endowment for International Peace in Washington. He said Venezuela wouldn't be saved by allies China and Russia, who instead would complicate negotiations. "They will be another factor in the chaos, who will intend to push to the front of the line to collect their debt," he said.

For years, the Venezuelan government said it would continue paying off debts, even as the country dramatically reduced imports and shortages caused widespread malnutrition. On Friday, however, Mr. Maduro struck a different tone, suggesting he had regrets about having sent money to repay Wall Street when it could have been used at home.

"It hurts me because that money could be converted into schools, or emergency rooms, or into homes," he said in a televised address.

Growing discontent led to four months of antigovernment demonstrations earlier this year that cost at least 125 lives as they were put down by state security forces that remain loyal to Mr. Maduro. Control over the military, the Supreme Court, and the national electoral council has helped the former bus driver and union activist hold on to power during his tumultuous four-year tenure.

In addition, an all-powerful legislative superbody created by Mr. Maduro's allies has left the political opposition in disarray and split over how to confront the president's slide into authoritarianism.

On Friday, the government stepped up its crackdown against political rivals stripping one opposition lawmaker, Freddy Guevara, of his parliamentary immunity from prosecution and banning him from leaving the country. On Saturday, Mr. Guevara, who is vice president of the congress, sought refuge in the Chilean ambassador's residence and was welcomed on the basis of that country's "humanitarian tradition," Chile's Foreign Ministry said. Mr. Guevara's political party, Popular Will, has denounced the Venezuelan government for trying to lock up the politician and for silencing dissent.

Mr. Maduro's ruling party dominated two elections marred by fraud earlier this year, one to elect the legislative body that usurped powers from the opposition-controlled congress as well as governor elections last month. But with detractors divided, Mr. Maduro and his allies may still triumph in upcoming races including mayoral elections slated for December.

"They're making all the rules," said Jim Barrineau, co-head of emerging-markets debt at Schroders, one of several large bondholders who have stopped investing in Venezuelan debt over the past several months. "They're not going to get displaced by the ballot box and the opposition is pretty toothless at this point."

--José de Córdoba in Mexico City contributed to this article.

Write to Kejal Vyas at kejal.vyas@wsj.com and Anatoly Kurmanaev at Anatoly.kurmanaev@wsj.com

(END) Dow Jones Newswires

November 05, 2017 16:47 ET (21:47 GMT)