Venezuela could be the first sovereign oil producer to ‘fully fail’

Ueslei Marcelino | Reuters

A riot security force member aims his weapon at a rally during a strike called to protest against Venezuelan President Nicolas Maduro’s government in Caracas, Venezuela, July 27, 2017.

Venezuela is already having a major meltdown, and a nationwide vote set for Sunday could send the country over the edge, a top commodities strategist said Friday.

Helima Croft, global head of commodity strategy at RBC Capital Markets, said in a note that Venezuela, which has the largest oil reserves in the world, could become the first sovereign oil producer to “fully fail” as a state if President Nicolas Maduro moves forward with the vote to form a new legislative body named the National Constituent Assembly (ANC).

The ANC would supersede other legislative bodies — including the opposition-led National Assembly — and would be able to rewrite the country’s constitution, cementing Maduro’s power. The ANC would also be composed mostly of Maduro’s supporters.

Those opposing the vote have taken to the streets in protest, and the United States and other nations have threatened to impose sanctions on Venezuela targeting its oil sector, and its state-run oil company Petróleos de Venezuela, S.A., or PDVSA.

“The Trump administration has issued stark warnings to Maduro about the elections and is
reportedly giving serious consideration to targeting the country’s oil sector by either
banning Venezuelan imports into the United States or prohibiting the use of dollars in PDVSA transactions,” Croft said.

“Either measure would result in extreme economic duress,” she added. “With the country’s foreign reserves recently having fallen below $10 [billion], PDVSA will be extremely hard pressed to avoid a disorderly default in the autumn or continue any semblance of regular salary
payments.”

The country’s economy is almost completely at the mercy of the oil industry, which contributes 95 percent of Venezuela’s exports. But a lack of investment in the industry has made it less and less profitable and productive.

A crash in oil prices that started in late 2014 sent the economy into a tailspin. Now, the International Monetary Fund expects Venezuela’s inflation rate to rise by a crippling 720 percent this year.

“Unless Maduro has an 11th-hour change of heart, Venezuela appears poised to earn the dubious distinction of being the first sovereign oil producer to fully fail,” Croft said.