Hopes that Donald Trump’s presidential victory would mean a new beginning for US policy toward Venezuela are beginning to fade.
Investors who were betting that Trump would reshape negotiations to resolve the political impasse in the South American country were dealt a blow after the US president-elect picked Senator Marco Rubio to be the next secretary of state. A staunch supporter of tougher sanctions against Nicolás Maduro’s government, Rubio represents for many a setback to a failed hawkish policy, reducing the chances of a possible agreement.
His appointment was the first in a series of signs of a return to the strategy that dominated Venezuelan politics during Trump’s first term. The so-called “maximum pressure” approach included a tough set of economic sanctions and recognition of a parallel government led by former National Assembly president Juan Guaidó.
“Signals from Trump’s nominees suggest a worst-case scenario reminiscent of the early Guaidó era,” said Guillermo Guerrero, strategist at EMFI Securities. “But ‘maximum pressure’ has already failed once and is unlikely to be effective this time.”
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Trump also chose Mike Waltz, another Maduro critic, as his national security adviser. Waltz is a co-sponsor of a bill known as the BOLIVAR Law, which tightens restrictions on entities that do business with the Venezuelan government without a U.S. license.
Venezuela’s defaulted dollar bills have lost more than a cent across the curve since Rubio’s appointment, with losses mounting after the BOLIVAR Act passed the lower house of the US Congress a few days later. Sovereign notes are trading at around 14 cents, while PDVSA notes are exchanging for 10 cents or less.
The drop is “clearly a sign that some people are not as optimistic about a Trump normalization with the Maduro government,” said Francesco Marani, head of trading at investment firm Auriga. “It’s difficult to predict where rock bottom might be.”
A short-lived rally
It’s a turnaround from the days leading up to the US election, when Venezuela was seen benefiting from a Trump victory. Hopes that Trump could break a political impasse that had been brewing during the Biden administration caused government bonds to rise to 17 cents on the dollar.
Ramiro Blazquez, head of research at BancTrust & Co. says it is still premature to rule out a negotiation with the new US administration.
“It’s simplistic to think he will repeat the path,” Blazquez said of Trump. “Continuing Democrat policy would have extended the status quo without reaching any kind of definition.”
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Even before Trump takes office, the Biden administration is ramping up the pressure in its home stretch. On Nov. 27, he sanctioned 21 officials who he said supported Maduro’s effort to challenge the results of the July presidential election, which the country’s opposition and Washington say he lost.
Maduro’s current term ends on January 10, posing an early test for the new US government, with Maduro and the opposition claiming victory.
Money managers raised Venezuelan bond prices earlier this year after JPMorgan Chase & Co. reintroduced the debt into its indexes, which most emerging market investors follow as a benchmark for their portfolios. Banknotes also rose in value ahead of the country’s July elections, in hopes of a regime change or that Maduro would win US recognition in a fair election.
Now, a further escalation of sanctions would likely pose a downside risk for bonds. The government has been in default on foreign debt since 2017 and owes more than $150 billion to foreign creditors, according to economists’ calculations.
“Without a path to normalization and restructuring, credit will remain under pressure,” Guerrero said.
