Caracas, Venezuela – Disturbances have broken out in multiple Venezuelan detention facilities as prisoners protest inhumane conditions and mistreatment. Reports filtering out of the country indicate that clashes between inmates and security forces have left several injured. The UK Embassy in Caracas has confirmed it is closely monitoring the situation, advising British nationals to avoid the areas around the prisons.
For the markets, this is yet another reminder of the volatility that continues to plague Venezuela’s crumbling economy. The latest unrest underscores the precarious state of a nation already reeling from hyperinflation, capital flight, and a collapsed currency. Investors who have dabbled in Venezuelan debt or assets should be on high alert. The risk premium on any Venezuelan exposure is already sky-high, but this sort of social disorder can only exacerbate the flight to safety.
The protests are a symptom of a deeper malaise. Venezuela’s economy has been in freefall for years, with GDP shrinking by more than 70% since 2013. The government’s response to the pandemic and economic crisis has been ham-fisted at best, leading to widespread shortages of food, medicine, and basic utilities. Prisons, often overcrowded and underfunded, have become tinderboxes.
The UK Embassy’s involvement is a reminder that international diplomatic channels remain active, despite the lack of formal relations between the UK and the Maduro regime. The embassy is likely coordinating with other diplomatic missions to ensure the safety of foreign nationals. But from a fiscal perspective, there is little the UK or any other foreign power can do to stabilise the situation. This is a domestic crisis that requires domestic solutions, and those solutions have been woefully inadequate.
For investors, the takeaway is clear: steer clear of Venezuelan assets. Even speculative plays on a potential recovery are fraught with risk. The country’s central bank continues to print money with abandon, fuelling inflation that the International Monetary Fund estimates will hit 5,500% this year. The bolivar has lost so much value that it is practically worthless. Capital flight is rampant, with those who can afford it moving their wealth into dollars, cryptocurrencies, or physical assets abroad.
The gilt market, by contrast, remains a safe harbour. UK government bonds have rallied in recent weeks as investors seek refuge from global uncertainties. The yield on the 10-year gilt has fallen to 0.8%, reflecting strong demand. It is a stark contrast to Venezuelan bonds, which trade at distressed levels and offer yields of over 20% for those willing to take the plunge. But that yield is not a reward; it is a warning.
Central bank policy globally is also worth watching. The Federal Reserve and the Bank of England have maintained accommodative stances, but the risk of inflation is ever-present. If the US or UK economies start to overheat, we could see a tightening that would ripple through emerging markets like Venezuela. That would only compound the misery.
In summary, the clashes in Venezuelan prisons are a microcosm of a nation in crisis. For the UK Embassy, it is a matter of diplomacy and safety. For investors, it is a red flag. The bottom line: Venezuela is a basket case. Do not be tempted by the siren call of high yields. Stick with the safety of gilt-edged securities and maintain a healthy dose of scepticism toward any asset with exposure to this troubled nation.
