These are bad times for Venezuela and its debt: ever lower oil prices mine the country creditworthiness and this risk has been readily priced by the market. Creditors are asking a huge reward for their faith in the country solvency as the dollar-denominated bonds with maturity in 2020 trade at a yield of 37%. President Nicolàs Maduro claims that Venezuela has always met its debt repayments and it will keep on this track. This is to be tested already in the second half of 2016, when $6 billion out of its $64 billion of foreign-currency denominated debt will come due.
The most immediate determinant of this situation is the fact that Venezuelan oil, trading at as low as $25 per barrel, is the only export for the country and its only source of foreign currency. At the current level of oil price Venezuela will earn $22 billion from exports in 2016, a fall of 77% from 2015.
Government’s response to this scenario has been severe: drastic reduction of imports together with the set-up of a complicated system of multiple exchange rates. This strategy has produced a shortage of staples such as rice and toilet paper, to the point that further constraints in this direction are likely to trigger social explosion.
Even with such low levels of imports, Venezuela is expected to have a financing gap of more than $30 billion in 2016. Its $52 billion-worth of sellable assets are shrinking fast while a non-negligible part of its reserves is in the form of gold held in the vaults of the central bank. At least 27 tonnes of it are deemed to have been shipped back to service debt.
Half of Venezuelan foreign debt is directly owned by the government whilst the other half has been issued by PDVSA, the state-owned oil company. There is an important differences between these two categories of debt: most of the sovereign-debt contracts have collective-action clauses (CACs). These clauses imply that, in the event of a restructuring, if the restructuring is accepted by holders of an agreed proportion of debt, it can be imposed on all of them.
PDVSA, instead, would have a harder time restructuring its debt as its bond contracts do not have CACs: if some bondholders are not satisfied by a restructuring strategy, a few could keep PDVSA in their hands. On the other hand, Venezuela is striving to avoid the default of the company, especially as the monopoly holds considerable assets outside the country that could be seized by the creditors in the event of a default. PVSDA will probably try to delay the payments due later this year, but this will require the agreement of all creditors.
President Maduro has recently admitted that the country is facing an economic catastrophe. As a response he raised the price of petrol 60-fold and has fiddled with exchange rates, reducing the number of official rates from three to two and allowed one to float. Nonetheless, Venezuelan oil is still cheapest in the world and, by now, the government has failed to present a plan to pay its debt. In 2007 the country stopped its co-operation with IMF, so that now, the most likely source of assistance for Venezuela may be China. The latter has already lent more than $50 billion, accepts repayment in oil and may as well accept a delay in repayment in exchange for favourable access to energetic and mineral Venezuelan resources. This may keep the country afloat while praying for a recovery in the oil markets but the cost is likely to be high.
Chiara Cauli
The most immediate determinant of this situation is the fact that Venezuelan oil, trading at as low as $25 per barrel, is the only export for the country and its only source of foreign currency. At the current level of oil price Venezuela will earn $22 billion from exports in 2016, a fall of 77% from 2015.
Government’s response to this scenario has been severe: drastic reduction of imports together with the set-up of a complicated system of multiple exchange rates. This strategy has produced a shortage of staples such as rice and toilet paper, to the point that further constraints in this direction are likely to trigger social explosion.
Even with such low levels of imports, Venezuela is expected to have a financing gap of more than $30 billion in 2016. Its $52 billion-worth of sellable assets are shrinking fast while a non-negligible part of its reserves is in the form of gold held in the vaults of the central bank. At least 27 tonnes of it are deemed to have been shipped back to service debt.
Half of Venezuelan foreign debt is directly owned by the government whilst the other half has been issued by PDVSA, the state-owned oil company. There is an important differences between these two categories of debt: most of the sovereign-debt contracts have collective-action clauses (CACs). These clauses imply that, in the event of a restructuring, if the restructuring is accepted by holders of an agreed proportion of debt, it can be imposed on all of them.
PDVSA, instead, would have a harder time restructuring its debt as its bond contracts do not have CACs: if some bondholders are not satisfied by a restructuring strategy, a few could keep PDVSA in their hands. On the other hand, Venezuela is striving to avoid the default of the company, especially as the monopoly holds considerable assets outside the country that could be seized by the creditors in the event of a default. PVSDA will probably try to delay the payments due later this year, but this will require the agreement of all creditors.
President Maduro has recently admitted that the country is facing an economic catastrophe. As a response he raised the price of petrol 60-fold and has fiddled with exchange rates, reducing the number of official rates from three to two and allowed one to float. Nonetheless, Venezuelan oil is still cheapest in the world and, by now, the government has failed to present a plan to pay its debt. In 2007 the country stopped its co-operation with IMF, so that now, the most likely source of assistance for Venezuela may be China. The latter has already lent more than $50 billion, accepts repayment in oil and may as well accept a delay in repayment in exchange for favourable access to energetic and mineral Venezuelan resources. This may keep the country afloat while praying for a recovery in the oil markets but the cost is likely to be high.
Chiara Cauli