Macroeconomics: The Day Ahead for 05 January

Relatively light data schedule has China Services PMI, Vietnam Q4 GDP, Turkey CPI and residual Asian Manufacturing PMIs to digest, UK credit aggregates and US Manufacturing ISM and Auto Sales, as US intervention in Venezuela digested.
 

EVENTS PREVIEW

 
There are some statistical items of interest as the first full trading week of the new year gets underway, via way of US Manufacturing ISM and Auto Sales, UK Consumer Credit and Mortgage Lending, with China’s Services PMI, Turkey’s CPI and the remaining Asian Manufacturing PMIs to digest. But the focus will be on the consequences of the US military operation to depose and arrest Venezuela’s President Maduro, not only for the country itself, but the ramifications for the region and many other countries worldwide subject to geopolitical tensions. It serves as a general reminder that while financial markets have increasingly appeared to be much more insensitive to geopolitics, particularly during 2025, the numerous flashpoints, some like Venezuela or Iran and North Korea, long standing ones, can always throw a large spanner in the works. That said, initial market reaction outside of a very predictable slip in oil prices has been a large helping of indifference, which may reflect a great deal of agnosticism, though also further evidence of an impaired reaction function due to ‘shock fatigue’.
Some points to consider on Venezuela (far from exhaustive)
  • Oil Production: initial statements from the US administration suggest investments of billions in Venezuela’s production, but how quickly this can boost local production is highly debatable. Venezuela’s vast oil reserves are the largest in the world (ca 300-330 Bln barrels), but production is currently around 750K bbpd, a more shadow of the 3.0 Mln bbls it produced at its peak in the late 1990s (see chart). The production infrastructure is old, dilapidated and in drastic need of modernization (which US majors can certainly provide), and the same applies to distribution and storage – these are projects which will take a number of years to deliver tangible results. Far more complex are ownership rights and claims, above all given that a lot of production goes to service debts to Russia and China (estimated to be in excess of $80 Bln), with Venezuela deeply embedded in the ‘shadow fleet’ networks of China, Russia and Iran. Venezuela’s debts (including those of state oil producer PDVSA, and those that have been defaulted on) are estimated at $160-170 Bln, and then there is the ambiguous nature of international PDVSA subsidiary Citgo and its debts, already subject of numerous legal disputes. Estimates on the sort of haircuts that might be applied to restructure Venezuela’s debts into a sustainable load suggest a minimum 50% would need to be applied. It should be added that Venezuela also has a vast amount of gold and other (critical) mineral resources, but anyone with even a basic understanding of mining would point out that, in most cases, even an initial move to exploit these resources would take a minimum of 10 years. However, this new or rather evolving geopolitical narrative is now very much centred on resources and supply chains, with national / regional security as its focal points, and hegemonic interventions to the fore, but still very much in a ‘G-zero’ world. One in which the many non-aligned countries (above all those in the GCC) will seek to peddle their pragmatic and outward-looking ‘middle power’(influence) as well as their immense capital base amid all the geopolitical turbulence.
  • The history of US regime change interventions in countries in Latin America, or indeed other countries such as Afghanistan and Iraq is to say the least ‘chequered’. The dismantling of Saddam Hussein’s security apparatus in Iraq was catastrophic on any assessment, allowing both for the rise of ISIS and Iran’s control of significant parts of Iraq’s security – hopefully some lessons have been learnt, above all given the role that the military in Venezuela has played as the guarantor of both Chavez’s and Maduro’s grip on power over the past 25 years. For the time being Maduro’s VP Delcy Rodriguez has been put in charge of Venezuela’s government, though effectively only to execute on instructions from Washington – this can only be temporary, both given the fact that she lacks any legitimacy given the result of the 2024 elections, and the fact that there will be legal challenges in the US on the unseating of Maduro and the lack of legislative approval from US Congress.
  • Which country is next, and what precedents does this set elsewhere? Two important aspects to consider: a) many will argue that the US action taken in Venezuela gives legitimacy to Russia’s invasion of Ukraine – as much as this will provoke furious debate, the point cannot be dismissed out of hand. b) The list of countries which might also see intervention is quite long, but the ‘transactional’ nature of much of the current US administration’s policy implementation suggests control of resource supply chains is at the very top of its priority setting. Per se, Cuba with little or nothing in the way of resources, will be lower down the list, while Panama would appear to be quite high, and the US President has already put Colombia in the spotlight – as examples. Taken from the aspect of clamping down on illegal drugs trafficking, Mexico would also appear to be high, but with the USMCA up for renegotiation in 2026, economic rather than military measures appear more likely, especially with the US Mid-term Elections on November 3 moving front and centre, and the fact that Mexico is a country of 131 million people. It is also worth noting that China’s social media has lit up with discussions about the removal of Maduro as being a potential template for China intervening in Taiwan in the past 48 hours. As for the latest protests in Iran, this is a case of the chickens of atrocious economic policy making over decades coming home to roost, with a much weakened leadership finally being forced to make concessions (however small), and aware that even the brutal power of the IRGC is not capable of containing the current level of public discontent, above all about cost of living pressures. Outside forces will doubtless attempt to pour oil on fire, but how this lands in the longer run in terms of the fate of the regime of the Mullahs is very uncertain, and assuming a more benign and hospitable regime might take its place would be unwise.
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