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http://www.ft.com/cms/s/0/bf292f54-4125-11e5-9abe-5b335da3a90e.html
When Venezuela’s President Nicolás Maduro took power two-and-a-half years ago, he inherited Hugo Chávez’s unshakeable commitment to service the country’s debts, and Venezuelan oil at over $110 a barrel.
Those days are long gone. Oil prices dived again last week, sending Venezuelan crude down towards $40 a barrel, the economy is forecast by the International Monetary Fund to shrink by 7 per cent this year and the country has been rapidly burning up its reserves to plug what Moody’s, the rating agency, estimates is a $30bn external financing gap in this year alone.
Now bondholders are rushing to protect themselves against a default next year, pushing demand for Venezuelan credit default swaps to a record high this week. Investors are asking if Mr Maduro’s desire to maintain his predecessor’s debt commitments is finally starting to crack as inflation spirals out of control and Venezuelans suffer mounting shortages of basic goods.
“Next year’s risk hangs on Venezuela’s ability to pay; this year’s risk hangs on Venezuela’s willingness to pay,” says Henkel García, director at Econométrica, a Caracas-based consultancy.
No major oil-producing country has felt the pain of the oil price crash as acutely as Venezuela, where crude sales account for 96 per cent of exports. Economists estimate a one-dollar drop in oil prices equates to a $700m hit to government revenues.
The price of Venezuelan credit default swaps (CDS), a form of insurance contract against a borrower reneging on its debts, has surged in the past month on renewed oil price weakness. Five-year CDS prices are up 31.2 per cent, beating January’s record as investors fret about how much money the country has left for payments.
Although they have recovered slightly recently, probably as a result of an oil debt deal with Jamaica and a loan from China, foreign reserves have fallen sharply from a 2015 peak of $24.2bn in late February to a 12-year low of $15.3bn in late July.
But with some 80 per cent of central bank reserves held in gold, according to Bank of America Merrill Lynch (BofA), the 5.7 per cent slide in prices this year has not helped. Analysts at Barclays estimate the drop will trim $1bn out of its reserves if bullion prices do not recover.
Mr Maduro has scraped the barrel in order to raise money, selling a refinery in the US in June and tapping Caribbean neighbours for early repayment of oil loans, at an average 50 per cent discount.
“There’s very little left and we’re not factoring much of [the oil loans] in,” warns Jaime Reusche, senior analyst at Moody’s, which predicts a greater than 50 per cent chance of default in 2016.
Venezuela’s total debt servicing liabilities amounts to $128bn over the next 24 years. But more worrying for Mr Maduro, is that about 25 per cent of that is payable in the next three years, according to BofA.
Francisco Rodríguez, a Venezuelan economist at BofA, reckons Caracas still has some fuel in the tank and estimates there is some $61bn in state-owned assets that could be sold to plug the holes.
“Venezuela could continue paying bondholders for longer than it keeps paying Mr Maduro’s salary,” he says, alluding to parliamentary elections in December that may begin to erode the Venezuelan president’s grip on power, if the embattled socialist ruling party is defeated by a divided opposition.
A lack of official data means annual inflation estimates range from 115 per cent, according to Moody’s, to 722 per cent, says Steve Hanke of the Cato Institute, highlighting there are no painless choices for the country.
Last month Mr Maduro welcomed the No vote in Greece’s referendum on bailout by referring to the “financial terrorism” of the IMF. Barclays analysts warned in a note the comments could suggest a turning point in the Venezuelan government’s longstanding commitment to pay its debts.
“Venezuela is broke, but a disorganised default would be a disaster. The country needs an IMF-led reform programme that can put $20bn or more on the table for the market to understand that Venezuela won’t go to hell,” says Ricardo Hausmann, a Harvard professor and former Venezuelan minister of planning.
“But that won’t happen with Maduro on the president’s seat,” he adds
Jan Dehn, head of research at Ashmore, an investment firm which owns Venezuelan debt, believes Mr Maduro will choose a painful adjustment over defaulting on the country’s debts as the risk to the state oil company is too great.
“Once they default on any of these securities, Venezuela will also be cut off from the credit lines that currently keep PDVSA in business,” he says.
The risk to bond holders is limited at this stage, Mr Dehn argues, pointing out Venezuelan bonds due to mature in 2022 already trade close to their recovery rate at 39.75 cents in the dollar, slightly up from 37 cents in January.
“Your downside risk is 10 cents in the dollar but your upside risk if they don’t default is high,” he says. The Venezuelan bond due to mature in February 2016 trades at 81.5 cents, suggesting a default is not expected before then.
With global crude supply outpacing demand until late 2016 at the earliest, according to the International Energy Agency, it may be just a matter of time for the oil-dependent nation.
When Venezuela’s President Nicolás Maduro took power two-and-a-half years ago, he inherited Hugo Chávez’s unshakeable commitment to service the country’s debts, and Venezuelan oil at over $110 a barrel.
Those days are long gone. Oil prices dived again last week, sending Venezuelan crude down towards $40 a barrel, the economy is forecast by the International Monetary Fund to shrink by 7 per cent this year and the country has been rapidly burning up its reserves to plug what Moody’s, the rating agency, estimates is a $30bn external financing gap in this year alone.
Now bondholders are rushing to protect themselves against a default next year, pushing demand for Venezuelan credit default swaps to a record high this week. Investors are asking if Mr Maduro’s desire to maintain his predecessor’s debt commitments is finally starting to crack as inflation spirals out of control and Venezuelans suffer mounting shortages of basic goods.
“Next year’s risk hangs on Venezuela’s ability to pay; this year’s risk hangs on Venezuela’s willingness to pay,” says Henkel García, director at Econométrica, a Caracas-based consultancy.
No major oil-producing country has felt the pain of the oil price crash as acutely as Venezuela, where crude sales account for 96 per cent of exports. Economists estimate a one-dollar drop in oil prices equates to a $700m hit to government revenues.
The price of Venezuelan credit default swaps (CDS), a form of insurance contract against a borrower reneging on its debts, has surged in the past month on renewed oil price weakness. Five-year CDS prices are up 31.2 per cent, beating January’s record as investors fret about how much money the country has left for payments.
Although they have recovered slightly recently, probably as a result of an oil debt deal with Jamaica and a loan from China, foreign reserves have fallen sharply from a 2015 peak of $24.2bn in late February to a 12-year low of $15.3bn in late July.
But with some 80 per cent of central bank reserves held in gold, according to Bank of America Merrill Lynch (BofA), the 5.7 per cent slide in prices this year has not helped. Analysts at Barclays estimate the drop will trim $1bn out of its reserves if bullion prices do not recover.
Mr Maduro has scraped the barrel in order to raise money, selling a refinery in the US in June and tapping Caribbean neighbours for early repayment of oil loans, at an average 50 per cent discount.
“There’s very little left and we’re not factoring much of [the oil loans] in,” warns Jaime Reusche, senior analyst at Moody’s, which predicts a greater than 50 per cent chance of default in 2016.
Venezuela’s total debt servicing liabilities amounts to $128bn over the next 24 years. But more worrying for Mr Maduro, is that about 25 per cent of that is payable in the next three years, according to BofA.
Francisco Rodríguez, a Venezuelan economist at BofA, reckons Caracas still has some fuel in the tank and estimates there is some $61bn in state-owned assets that could be sold to plug the holes.
“Venezuela could continue paying bondholders for longer than it keeps paying Mr Maduro’s salary,” he says, alluding to parliamentary elections in December that may begin to erode the Venezuelan president’s grip on power, if the embattled socialist ruling party is defeated by a divided opposition.
A lack of official data means annual inflation estimates range from 115 per cent, according to Moody’s, to 722 per cent, says Steve Hanke of the Cato Institute, highlighting there are no painless choices for the country.
Last month Mr Maduro welcomed the No vote in Greece’s referendum on bailout by referring to the “financial terrorism” of the IMF. Barclays analysts warned in a note the comments could suggest a turning point in the Venezuelan government’s longstanding commitment to pay its debts.
“Venezuela is broke, but a disorganised default would be a disaster. The country needs an IMF-led reform programme that can put $20bn or more on the table for the market to understand that Venezuela won’t go to hell,” says Ricardo Hausmann, a Harvard professor and former Venezuelan minister of planning.
“But that won’t happen with Maduro on the president’s seat,” he adds
Jan Dehn, head of research at Ashmore, an investment firm which owns Venezuelan debt, believes Mr Maduro will choose a painful adjustment over defaulting on the country’s debts as the risk to the state oil company is too great.
“Once they default on any of these securities, Venezuela will also be cut off from the credit lines that currently keep PDVSA in business,” he says.
The risk to bond holders is limited at this stage, Mr Dehn argues, pointing out Venezuelan bonds due to mature in 2022 already trade close to their recovery rate at 39.75 cents in the dollar, slightly up from 37 cents in January.
“Your downside risk is 10 cents in the dollar but your upside risk if they don’t default is high,” he says. The Venezuelan bond due to mature in February 2016 trades at 81.5 cents, suggesting a default is not expected before then.
With global crude supply outpacing demand until late 2016 at the earliest, according to the International Energy Agency, it may be just a matter of time for the oil-dependent nation.
