On a knife-edge

A leaked report from Venezuela’s central bank estimates that the country’s economy collapsed by almost 19% last year (official figures are no longer published). Most analysts expect a further drop of at least 5% this year.

The International Monetary Fund estimates that inflation reached 475% last year and expects it to exceed 1,660% this year.

Nicolas Maduro, the country’s socialist president, said in mid-March that imports plunged to US$17.8bn last year, about half the 2015 figure. Venezuela’s central bank reserves have now dwindled to US$10.6bn, down from US$30bn in mid-2012.

The country has a complex monetary arrangement that makes use of three different exchange rates simultaneously for the bolivar. The main official exchange rate is Bs10 per dollar. But on the black market, the dollar fetched Bs2,770 at the end of March.

The country’s minimum wage is around Bs104,000 a month, or a meagre US$37.50 at the unofficial exchange rate.

Shortages of staple goods seem to be going from bad to worse. Widespread shortages of bread now exist. In March, 80% of the country’s bakeries reported that they have no wheat in stock. Doctors say that only around 30% of medicines are now available.

The country’s crude oil production stands at around 2.25m barrels a day, down from 2.9m at the start of 2014.

“Venezuela is experiencing a very sharp recession,” said Richard Francis, a sovereign ratings analyst at Fitch. “The country is witnessing hyperinflation and oil production has fallen tremendously. Politically, this could also be a very tricky year for the country, and a change of president cannot be ruled out.”

However, most analysts expect the sovereign and PDVSA, the state-owned oil giant, to meet their international debt repayments totalling US$9.7bn this year.

Mouths to feed

PDVSA has principal payments of US$4bn and interest payments of US$2.3bn this year, according to Torino Capital, a New York-based brokerage house. The sovereign does not have to pay back any principal but has interest payments of US$3.3bn. Elecar, the state-owned electricity distributor in Caracas, has to pay interest of US$56m this year.

Total payments next year are down on this one but still amount to around US$9bn. The sovereign has to pay back US$2bn in principal and has US$3.3bn in interest. PDVSA has US$840m in principal and US$2.1bn in interest. Elecar has US$650m in principal and US$28m in interest.

At the start of this year, Venezuela’s debt management issues were eased slightly by the rise in oil prices (Brent crude peaked at US$57 a barrel on January 6). But during the past two months, the prices has slipped back to around US$51.80.

“I do not think a default by PDVSA or the sovereign will happen this year,” says Francisco Rodríguez, chief economist at Torino Capital. “In my view, the government’s financing situation is not quite as critical as people think it is. Many people only look at the central bank reserves but the country has a number of assets that could be sold.”

In January, upfront fees on credit default swaps for Venezuelan government debt dropped to 44%, from 59% in December. This was the first time since September that the probability of non-payment over the following 12 months had dropped below 50%. However, an 89% likelihood of default over a five-year period still exists.

A key date is April 12, when PDVSA must pay US$2.23bn of interest and principal on its 5.25% 2017, 5.375% 2027 and 5.50% 2037 bonds. The payment should provide insights as to whether PDVSA and the sovereign’s muddling through can continue past this year.

The company still has most of a US$1.5bn loan from Rosneft, the Russian oil giant, which it signed last year. It also generates around US$2.5bn in oil sales each month, which can be directed towards debt payments. As a last resort, it could call upon the country’s international reserves.

At the end of October, PDVSA undertook a partially successful debt restructuring that removed some of the immediate pressure. It swapped bonds valued at US$2.8bn maturing this year – or about 52% of the tendered amount – for US$3.4bn of bonds due in 2020.

Venezuela’s total exports this year should amount to around US$34bn (oil makes up 95% of them). Total imports are expected to add up to around US$19bn and international debt servicing stands at US$9.7bn, leaving a financing gap of US$5.3bn.

The sovereign faces extremely high debt financing costs, so it would be very expensive for it to tap into international credit markets. For example, the sovereign’s 10-year bond is yielding 10.40%.

Furthermore, a major obstacle to the sovereign issuing debt is that it must be approved by the country’s Congress. The legislature is controlled by opposition parties and they could be reluctant to support the government.

PDVSA does not face this problem and it is possible that it will attempt to issue additional debt this year, especially as most of the international debt burden falls on it.

“The markets are now pricing in a lower probability of default,” said Edward Glossop, Latin America economist at the Capital Economics consultancy. “The oil price rise at the end of last year removed a lot of the strain on PDVSA.

“The government had to undertake a very big squeeze on its imports last year in order to service its international debt. As some analysts have observed, a default on the people took place rather than a default on international bondholders.”

Family silver

PDVSA and the Venezuelan state have a host of international assets that could be liquidated. Citgo is a US refiner and petrol retailer that is owned by PDV America, an indirect wholly owned subsidiary of PDVSA. However, it cannot be sold, as it was pledged as collateral during last year’s debt restructuring. It could, however, issue subordinated debt.

PDVSA owns 10 oil refineries – mainly in Europe and the Caribbean – that could be put up for sale. It is also owed US$10bn through trade credits to members of Petrocaribe, an oil alliance of a number of Caribbean countries that allows them to purchase oil from PDVSA on conditions of preferential payment. According to Torino Capital, these credits could have a market value of up to US$4bn.

The state owns Monomeros Colombo Venezolanos, a Barranquilla, Colombia-based producer of fertilisers, animal feeds and industrial products. It is also the owner of Bandes Uruguay, the banking group headquartered in Montevideo.

It is estimated that the sovereign has an untapped credit line of up to US$5bn from past loans from China. This can only be spent on imports from China, although it is possible that Venezuela could find money by buying a greater amount from that country and reducing its reliance on the rest of the world.

There is also speculation that China could provide additional credit to Venezuela this year. However, some analysts rule this out because of the extreme political instability in the country.

A number of experts believe the chances of the sovereign or PDVSA defaulting this year have worsened. For example, at the end of October, Fitch downgraded PDVSA’s credit rating to the highly speculative grade of CC from CCC.

“We think this year is a very challenging one for PDVSA,” said Lucas Aristizabal, a senior director in corporate ratings at Fitch. “The company’s cashflow is very uncertain because it all depends on what share the state takes.”

Venezuela’s sovereign bonds are not for the faint-hearted but were among the best performers in emerging markets last year. They gave investors a 46% 12-month return to the end of October.

The country is experiencing extreme political and economic instability. Even President Maduro admits that last year was the toughest one that any one can remember. The 50% drop in imports was catastrophic and led to widespread hunger.

Francisco Rodriguez expects imports to increase by an overall US$1bn this year, although the first two months did not bode well and indicated a further decline.

In January, Maduro appointed Tareck El Aissami, a former interior minister, as his vice-president. However, in February, the United States imposed sanctions on him and accused him of involvement in international drug trafficking.

The government blocked a presidential recall referendum last year and postponed gubernatorial elections until this year. Presidential elections are supposed to be held at the end of next year, but the government is making moves to proscribe some opposition parties from participating.

Luis Almagro, the general secretary of the Organisation of American States, is pushing for Venezuela to be suspended if it does not hold general elections as soon as possible.

There is speculation that Donald Trump’s administration could impose sanctions on PDVSA, preventing American companies and businesses subject to Washington’s jurisdiction from doing business with the oil firm. Venezuela is heavily dependent on PDVSA’s exports to the US but it is hard to predict what impact sanctions would have.

Venezuela has one of the worst economies on the planet, and the country’s 32 million inhabitants face a humanitarian crisis. However, the sovereign and PDVSA should just about manage to keep good on their debt payments this year.