January 22, 2016 6:00 pm
Farmers brought parts of Uruguay to a standstill this week demanding the government help them recover unpaid bills from Venezuela in the latest sign that the crisis-ravaged South American country may soon renege on it debts.
In spite of Venezuela’s socialist president Nicolás Maduro reassuring bond investors that he will make good on more than $10bn of payments this year, economists say default is “practically inevitable” as prices for oil, the Caribbean country’s lifeblood, plummet.
Crude oil accounts for 96 per cent of export revenues and falling prices, coupled with years of mismanagement, have crushed the country’s economy.
A sell-off in sovereign bonds has pushed the price on benchmark 2026 debt to 37 cents in the dollar, a level considered a precursor to default. The cost of insuring Venezuelan bonds has tripled in the past 12 months.
Analysts at Bank of America Merrill Lynch estimate that the recovery value on Venezuela’s $123bn of external debt could be as low as 21 per cent if current low oil prices persist.
“Venezuela is running out of runway and falling oil prices are quickly shortening the tarmac,” says Russ Dallen, who heads investment bank, Latinvest.
If the country does default there are fears that it may face an Argentina-style fight with holdout investors due to the structure of its debt.
A number of the bonds issued by Venezuela and state-run energy company PDVSA do not contain collective action clauses, meaning investors are not bound by a majority agreement and can sue for full repayment, delaying any credit resolution.
So far, Venezuela has managed to meet its debt obligations by swapping part of its chunky gold reserves, issuing debt through Citgo, the US-based subsidiary of PDVSA, and securitising oil loans it had made to some of its Caribbean allies.
The government should be able to make payments due in February using available assets, say credit analysts at Barclays. But they warn, “they are insufficient to finance the gap of nearly $30bn that Venezuela could face in 2016”.
Venezuela is running out of runway and falling oil prices are quickly shortening the tarmac
- Russ Dallen, who heads investment bank, Latinvest
“It is practically inevitable to default if the current economic dynamic stays in place,” says Henkel García, an economist at Econométrica in Caracas. “Given the precarious state of Venezuela’s economy, even with a drastic change in measures it wouldn’t be enough.”
With Venezuela’s oil exports now selling at around $21 per barrel, revenues from exports are dwindling. Ecoanalítica, a Caracas-based consultancy, calculates the country needs a price of $75 per barrel to balance its budget.
“If their oil basket averaged $25 for the rest of the year, Venezuela would have total revenue of less than $20bn and their foreign debt takes up over half of that this year at $10.5bn,” says Mr Dallen.
Venezuelans have grown weary of battling food scarcities and punishing levels of inflation, which the IMF forecasts will surpass 700 per cent this year.
Last month they dealt a blow to the socialist government by granting the centre-right opposition a large majority in the national assembly.
When the country’s late leader Hugo Chávez was elected in late 1998, the price of Venezuelan oil hit $8 a barrel, and many praised him for his ability to nudge Opec to raise prices.
Mr Maduro, his uncharismatic anointed successor, has not enjoyed the same success. This week his government tried, unsuccessfully, to lure fellow Opec members to convene an emergency meeting to cut output.
In an effort to tackle the shrinking economy the president has also unveiled an economic emergency decree which is expected to provoke a stand-off with opposition lawmakers.
Luisa Palacios, head of Latin America macro and energy research at Medley Global Advisors, a service owned by the Financial Times, said in a recent note that “default seems to be on the cards this year, and it is coming with a risk of regime change”.