Venezuelan bonds, beaten down to distressed levels over the past few months, have rallied following rising hopes that the country might, just might, escape default again this year — something most in the market had come to accept as inevitable.
The rally in oil prices, with Brent crude up 45 per cent since mid-February, will certainly help the public finances. And the administration has recently introduced some sensible if overdue reforms, taking steps to rationalise its complicated foreign exchange regime, which distorts economic incentives.
But the key reason for renewed investor optimism is that the government is signalling an “almost kamikaze-like commitment to keep servicing its international borrowings”, in the words of Medley Global Advisors, a macro research service owned by the Financial Times.
At issue are $10bn of bond repayments and a further $6bn or so of Chinese loans that fall due this year. Against that, Venezuela may receive only about $22bn from oil exports — virtually its only source of hard currency — and must spend about $4bn on oil-related imports in 2016. That does not leave much of a cushion, especially since the government has already gone a long way to depleting both its liquid FX reserves and the central bank’s stash of gold.
It is encouraging, therefore, that Caracas is starting to engage with its creditors, including China, with the aim of discussing a “debt liability management” programme, which appears to be code for postponing bond repayments, or potentially even writing them down.
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The key is that this would be an agreed restructuring rather than a unilateral move by Venezuela and it would reduce the risk of an accidental default. And while it will be tough to negotiate, pursuing such a deal is a much more pragmatic strategy than hoping further gold sales or even higher oil prices will bail the country out in the second half of the year.
Of course, much can and will go wrong. Even if creditors are willing to be paid later and even, potentially, to be paid less, the shortage of dollars is so extreme that the government will have to further squeeze (non-oil) imports, which were already cut by a quarter last year.
That will only exacerbate the ongoing recession and the shortage of consumer goods, potentially sparking hyperinflation. And if that were not enough, the country is experiencing a drought that is hitting food production and a shortfall in electricity generation that may lead to widespread blackouts. Public health is deteriorating and violence and criminal activity are on the rise.
At some point, all of this must surely lead to a social explosion that will lead — at the very least — to the removal of President Nicolás Maduro (pictured above), something the opposition-led lower house of parliament is trying to engineer through constitutional means.
If the opposition succeeds in doing so, a peaceful transition of power starts to look possible and a new, more orthodox government would swiftly start to reform the economy, revive the private sector and halt the decline in oil production. Granted, it may force a debt restructuring on international bondholders, but at least recovery values should improve.
The alternative, where Mr Maduro clings to power until he is removed violently, either through street protests or military intervention, is a much worse outcome both for Venezuela and its creditors. This country has already shown how the unsustainable takes longer to unravel than most deem possible.
The hope is that it does not dissolve into anarchy before a peaceful political transition can be engineered.
Dan Bogler is president of Medley Global Advisors