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Fitch, Capital Economics: Venezuela's woes to persist following Maduro win


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Fitch, Capital Economics: Venezuela's woes to persist following Maduro win

Fitch Ratings and research company Capital Economics expect Venezuela's economic troubles to continue following the win of incumbent Nicolas Maduro in the country's presidential election.

Maduro won the May 20 election with 5.8 million votes against opposition and independent candidates. However, Maduro's rivals contested his victory, charging the poll was marked by widespread irregularities. The U.S. said it would not recognize the results.

"Venezuela's challenging political environment will continue, with the incumbent administration showing limited willingness to pursue the reforms necessary to address severe economic imbalances amid heightened social tensions and a humanitarian crisis," Fitch said.

According to the rating agency, Maduro's victory reinforces its view that Venezuela will continue to have a long and complicated debt restructuring process amid legal and political challenges. The U.S. could also impose additional sanctions that could further weigh on oil production and exports. "A recent $2 billion arbitration court ruling in favor of ConocoPhillips against the Venezuelan government will also likely disrupt the oil sector's ability to export," Fitch said.

Furthermore, Fitch sees "limited political willingness for the broader economic reform that is necessary to address a number of issues contributing to Venezuela's protracted and deep recession, and hyperinflation."

Capital Economics also believes that Maduro's victory will mean greater sanctions from the U.S., possibly on the oil sector, and a challenging sovereign debt default and restructuring. In particular, Venezuela's August payment on its debt "looks extremely challenging," the research firm said in a report.

The government and the country's state-owned oil company PDVSA are both in technical default after missing $1.8 billion in coupon payments since November 2017. With no "credible deal being put on the table ... we think that a full-blown debt default is only a matter of time," Capital Economics said.

The research company also does not see "real solutions" for the country's economic downturn, which would have included dollarization as a possible solution for hyperinflation and a deal with the International Monetary Fund.

"Past form suggests that deficit monetization and ultra-loose monetary policy will continue," Capital Economics said. "At best, we are likely to see further cosmetic tweaks to the convoluted currency system."