For months, analysts have been debating whether cash-strapped Venezuela will default on its debts. An expected bump in oil prices in 2017 could help it squeak by once again — but the risk of default remains.
Valerie Hamilton –
For weeks this autumn, Venezuela had investors holding their breath. In October, its state-owned oil company Petroleos de Venezuela SA (PDVSA) struggled to convince investors to accept a debt swap that would delay $2.8 billion in payments on bonds due in 2017.
Just weeks later, it missed a deadline on separate payments of $404 million, raising fears of a default.
In the end, PDVSA managed the swap and paid the bills, staying solvent for now.
But the high-stakes cliff-hanger underscored a problem that no financial sleight-of-hand can fix: Venezuela and the oil business that feeds it are running out of cash. Plummeting oil prices since 2014 have decimated export revenues from PDVSA, which supplies 95 per cent of hard currency in Venezuela’s oil-dependent economy.
Short of cash, the country has drastically cut imports of food and medicine, leaving shelves — and stomachs — empty, while quadruple-digit inflation has Venezuelan consumers hauling bagfuls of near-worthless cash.
In an October press briefing, IMF Western Hemisphere Deputy Director Robert Rennhack said the country “is obviously already in a very serious crisis — the way out is unclear.”
But the bills from foreign creditors keep coming, leaving Venezuela with a hard choice: make debt payments at the expense of its budget, or support its budget and default on the debt.
The country’s hard currency reserves are down to less than $11 billion.
With debt payments of $6.4 billion due in 2017, PDVSA in March reported only $5.4 billion on hand — a number that has likely since been depleted, according to Lucas Aristizabal, a senior director and PDVSA analyst at Fitch ratings agency. “The company’s liquidity position, we believe, is very weak,” he said.
Fitch and other credit rating firms rank Venezuelan debt as junk.
“We rate the company CC, which means that a default of some kind appears probable,” Aristizabal said.
Despite the scare in November, Venezuela hasn’t missed a single debt payment since 2002, according to the Wall Street Journal.
Analysts believe President Nicolas Maduro will do whatever he can to stave off a default, no matter what the cost — if only because the consequences of not paying could be even worse.
If Venezuela defaults, it could be cut off from further borrowing, slashing hard currency inflows and the imports they pay for, and leaving the struggling PDVSA for dead.
Venezuela and PDVSA have strategic assets abroad that a default could subject to seizure, and bank accounts that could be frozen, said Erika de la Garza, programme director of the Latin America Initiative at Rice University’s Baker Institute.
“The Venezuelan government’s will-ingness to pay its debt and avoid default is quite clear,” she said. “However, its capacity to pay will largely depend on the price of oil.”
The calculation appears simple: As oil prices collapsed, so did the economy, so if they bounce back, Venezuela should too.
In that spirit, Maduro lobbied hard for international production cuts intended to manipulate supply to boost crude oil prices starting in January.
But it remains to be seen whether oil prices will rise sufficiently enough to offset revenues lost through Venezuela’s share of the production cut, while still shoring up the country’s reserves to keep the wolf from the door. And oil prices are only part of Venezuela’s problem.
Analysts Dany Bahar and Sebastian Strauss of the Brookings Institution point out that PDVSA’s revenues have been declining since 2002, indicating troubles beyond the scope of the market alone.
A panel discussion at Washington’s Brookings Instiution concluded that a Venezuelan recovery will require “a change in government combined with profound market reforms.”
Panelist Ricardo Hausmann, a Harvard University economist and former Venezuelan planning minister, went further, arguing that Venezuela will also need significant international help, including an”inevitable” restructuring of its
external public debt.
Still, while a rise in oil prices may not be a miracle cure, they could bring some short-term help where it is desperately needed, Aristizabal said. — dpa