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Freitag, 11. August 2017

Why Venezuela Struggles So Hard to Avoid Default: QuickTake Q&A

Why Venezuela Struggles So Hard to Avoid Default: QuickTake Q&A

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Predicting when Venezuela will finally default has been a decade-long parlor game for bond buyers, but recent events add urgency to the exercise. After years of mismanagement, the country appears closer and closer to running out of money. Adding to investors’ concern is the increasingly anti-democratic turn of President Nicolas Maduro, whose move to rewrite the constitution and strip power from congress has been met with U.S. sanctions. Still, for all the turmoil, Venezuela has a track record of paying its debts, and investors who’ve held on through the worst of times have been rewarded with some of the world’s best bond returns.

1. What are investors’ main concerns?

First, the economics look bad. Foreign reserves have dwindled to a 15-year low of about $10 billion, a grim figure considering Venezuela and the state oil company known as PDVSA are due to pay about $13 billion in debt before the end of 2018. Combine that with oil prices at half of what they were just three years ago, slumping crude output in a country that gets 95 percent of its export revenue from that one resource, triple-digit inflation and a rapidly shrinking economy, and it’s a tough road ahead. Second, the level of political turmoil is unprecedented, with deadly street protests against Maduro’s government raging on a near daily basis, open calls for the military to stage a coup and shortages of food and medicines as the government prioritizes debt payments over imports of basic goods. 

2. How creditworthy is the country?

Venezuela isn’t current with most of its key economic statistics, so the most basic data an investor would use to gauge the country’s creditworthiness aren’t available. One key number is the current account balance, a broad measure of trade that looks at money moving in and out of the country, including bond interest payments. Normally, a government would borrow money to plug any gap, but steep borrowing costs preclude such a tactic for Venezuela. Estimates of the size of the country’s current account deficit vary depending on which economist you ask and assumptions about how much the country has slashed imports to keep paying its debts. Still, we can be pretty sure that the situation is unsustainable.

3. When will the money run out?

To make ends meet, the government is blowing through central bank reserves. That hoard now consists of just $1 billion in cash, with much of the balance made up of gold bars, according to investment bank Torino Capital. Venezuela can buy itself some time by continuing to take advance payments for its oil from China and Russia -- as long as they’re willing to pay them. And it can keep reducing imports. However, the economy depends on foreign manufacturers for everything from antibiotics to baby formula, and shortages have already become severe, so the humanitarian costs are significant.

4. Why doesn’t Venezuela just get it over with and default?

That choice has confounded socialists and capitalists alike, but it boils down to the risk that Venezuela’s international oil assets could get seized by creditors or tied up in court. Through PDVSA, Venezuela -- home to the world’s largest petroleum reserves -- has offshore refineries and oil receivables that investors will almost certainly try to make a play for if their bonds go unpaid. PDVSA’s Houston-based refining arm, Citgo Holding Inc., has also been used as collateral to back some bonds. And if creditors start going after Venezuela’s oil assets, buyers of its crude are apt to turn to other sources, depressing not only demand but the price of Venezuela’s main treasure.

5. How do the U.S. sanctions play into this?

So far, sanctions have been limited to freezing the assets of individuals (including Maduro himself), and don’t have a direct effect on the country’s ability to pay. But speculation has grown that the U.S. could impose steeper economic penalties, such as a ban on oil imports from Venezuela. Analysts across Wall Street have said such a move would make it incredibly difficult for Maduro to stay current on his obligations for much longer. About 40 percent of Venezuela’s petroleum exports go to the U.S., bringing in about $10 billion. While the country could find other buyers, it’d probably have to sell at a discount because of higher transportation costs. Sanctions could also keep U.S. companies partnered with PDVSA from continuing their operations in the country, adding another dent in production. All told, oil-related sanctions could cost $7 billion in revenue, Torino estimates. Furthermore, if sanctions effectively eliminate any business ties between the U.S. and Venezuela, the incentives for Maduro to keep paying would eventually dry up. And Maduro could just blame the default on the yanquis.

6. What would a debt restructuring look like?

It would be enormously complicated. Not only would creditors have to figure out a sustainable repayment plan for the government, there also would need to be a workable solution for PDVSA, since it would likely default around the same time. Fights between creditors would be inevitable as they sorted out who’s entitled to what. In addition to all the bonds, Venezuela owes billions of dollars in awards resulting from international arbitration disputes and to private companies with cash trapped in the country, while PDVSA and its subsidiaries have a slew of outstanding loans. Another question is whether investors could even engage with Venezuela or PDVSA if sanctions end up barring U.S. entities from doing business with them.

7. What if there was a change of government?

Investors believe a new government would work for a faster resolution and is a necessary condition for getting a restructuring done. Still, a new regime would almost certainly seek assistance from the International Monetary Fund, which would probably recommend imposing steep losses on creditors. And some opposition leaders have warned they’ll flat-out refuse to honor certain debts -- like bonds bought by Goldman Sachs Asset Management -- that they say are part of a fund-raising effort by the dictatorship that skirts congressional oversight. Critics of the Goldman deal said the bank had thrown the government a lifeline through “hunger bonds,” so named because Venezuelans are going underfed so the regime can keep up debt payments.

8. Is there any precedent for Venezuela’s situation?

There are some similarities to the devastating case of Romania in the 1980s when dictator Nicolae Ceausescu imposed Draconian austerity measures in an obsessive drive to pay off the country’s foreign debt by the end of the decade. Living standards plunged as food, heating, electricity and medical care were rationed. Ceausescu knocked out the debt, but by then, public anger was so high that he was overthrown and executed a few months later.

The Reference Shelf

  • An analysis by Georgetown law professor Anna Gelpern on Venezuela’s parallels with other debtors in crisis.
  • paper on how to restructure Venezuelan debt by attorney Lee Buchheit and Duke University Professor Mitu Gulati.
  • A July report by Torino Capital’s Chief Economist Francisco Rodriguez titled “Sanctioning Venezuela.”
  • A Bloomberg View commentary by Rodriguez on Venezuela’s reasons to avoid default.
  • commentary by Harvard professor Ricardo Hausmann.
  • A QuickTake Q&A on Venezuela’s “hunger bonds.”

    Before it's here, it's on the Bloomberg Terminal. 

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