Geopolitical Risk, Bond Yields, and Possible Regime Change in Venezuela: What is the ICRG Saying?

PRS/ICRG has covered Venezuela for decades and have never really been surprised by the resilience of the regimes in the face of what appears to be significant unpopularity and international pressures.  Our risk rating methodology requires the evaluation of some 22 political risk metrics alone and many of those sub scores have emphasized the relative strength of the executive since Chavez’s time.

An article today in Bloomberg was interesting as it went to the heart of much of what PRS does as a quant-driven geopolitical risk firm.  It was noted that speculators were bidding up the price of the country’s defaulted bonds, driven by the assumption that President Maduro would be ousted, which would pave the way for a new, investor friendly government to cut a deal that repays some of the $60bn debt. Prices on the most widely traded of the defaulted bonds have climbed above 30 cents on the USD, the highest since 2019 and up from as little as just 16 cents back in January. (https://lnkd.in/eFqp5pQt)

I had a quick look at the country’s rating after reading the piece. The ICRG’s overall ‘Government Stability’ metric has dropped considerably since August, after an uptick following the elections.  Other metrics fell even further, as the central bank lacks transparency, and an increase in monetary liquidity have contributed to a continued rise in prices.  The role of the military in supporting Maduro cannot be underestimated.

Regime change might be linked to the mid-term vote in the US in 2026.  The piece noted Lee Robinson, the chief investment officer of the hedge fund Altana Wealth, said he ‘rethink the fund’s position if he doesn’t see a breakthrough before midterm elections in the US next year, when…politicians…start shifting their focus elsewhere.’

Other talk revolves around potential talks between Trump and Maduro as a precursor to a new regime in Caracas.

Speculation of this sort is solid insofar as it highlights some of the thinking that dominates the question of regime change and debt restructuring. However, there is some solid evidence underscoring the relationship between the ICRG risk series and bond yields.  One recent piece found that a 10-point deterioration in the ICRG can cause an average annual increase of 106 basis points in sovereign bond yields (https://lnkd.in/eq2ZquCC)

Venezuela’s political risk score hit a multi-year low in July, 2024.  It has been rising gradually ever since.

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CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.