February 24, 2016
Late last month, we brought you the latest from Barclays on Venezuela, where Nicolas Maduro’s socialist paradise is rapidly collapsing in the face of falling oil prices.
“The economic emergency decree and any measures that the government could take at this point may be too late,” the bank declared. “After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid.”
In other words, Venezuela is careening towards the second-largest sovereign default in history (behind Greece) because even if Maduro manages to pay back what comes due this month, the real test comes this autumn when Caracas will need to come up with more than $5 billion in principal and interest.
As Bloomberg notes, “Venezuela has $35.6 billion of dollar bonds outstanding and owes $67 billion once interest payments are included. State-owned oil company Petroleos de Venezuela SA, known as PDVSA, has $33.5 billion of bonds, and $52.6 billion counting interest.” Incidentally, Reuters reported this afternoon that PDVSA is now in talks with foreign banks on a proposed restructuring.
“Venezuela will not go into default, and the fact that we are talking with banks shows that there is interest in investing in Venezuela,” PDVSA president Eulogio Del Pino told reporters outside of national assembly this afternoon.
“At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of the oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations,” Barclays said in January.
In short, it seems unlikely that even with the “measures” announced by Maduro this month, the country will be able to service its debt and import a sufficient amount of food to keep the shelves stocked. By nationalizing pretty much everything, Hugo Chavez managed to leave the country entirely dependent on imports, paid for with oil revenue. That oil revenue is now crimped and Venezuela is rapidly running out of reserves (oh, and the gold is leaving):
Although Maduro may be able to scrape together enough cash to carry on for a few months, this is going to end in tears one way or another.
As we documented in “In Venezuela, ‘Savage Suffering’ Takes Hold Amid Frightening ‘Food Emergency,'” the country’s beleaguered masses are struggling to survive amid empty grocery store shelves and inflation that the IMF says will hit 720% this year.
As we put it, “the public may have been unwilling to stage an outright rebellion with inflation at 200%, but at 720% it’s difficult to see how things won’t careen into outright social upheaval in the not so distant future. Especially once the country defaults and the public comes to realize just how wasteful the government is with what should be a vast store of national oil wealth.”
Echoing that sentiment is Barclays whose latest missive on Venezuela suggest that although it’s not entirely out of the realm of possibility that the country could manage to avoid a default in 2016, the public’s patience may be about to run out. Here’s more:
The key variable over the coming months will be public patience. In the attempt to meet debt payments, the government will likely need to impose an additional severe import cut, which, combined with the relative price distortions, will likely lead to a deepening of the scarcity problems and the economic and social crisis in general. The private sector reports inventories at levels that in some cases could be barely enough to satisfy a few days of demand. Some food companies have had up to 80% of their production capacity shut down because of a lack of inputs. The financial system is seeing FX allocations to its clients at levels close to zero, which could imply a sharp decline of imports over the coming months.
So far the government has been successful in containing social pressures with a combination of military presence, fear and media control. Nonetheless, isolated events of looting and violence have been reported (El Nacional, January 31, 2016). In the absence of a catalyst, this might not escalate, but it is a very fragile situation. So far, Venezuelan society has been patient, but will this continue to be the case?The society, in some ways, has arguably opted for economic regression by adapting its consumption to the goods available and accessing them via channels other than the traditional distribution channels, such as barter and unofficial markets. Moreover, BCV data for the balance of payments for 2015 suggest that a large portion of imports could have been financed with private sector savings or sources other than government FX allocations. Therefore, there is a possibility that the government could further cut FX import allocations, limiting them to just essential goods. It is difficult to measure the level of social unrest, but the least that can be said is that this is a risky strategy for government that could increase the possibility of an escalation.
In other words, a revolution may be imminent and you might want to fade this rather remarkable tightening in the country’s CDS spreads:
As a reminder, 5-year CDS spreads recently blew out to levels Greek spreads hit in 2011 – right before the country defaulted.
It seems unlikely that the opposition – which won a major victory at the polls in December – will be able to drive Maduro out in time for the country to avert a further economic collapse or a sovereign default.
Indeed, the fact that Maduro was able to win the Supreme Court’s backing for his “emergency” economic measures would appear to suggest that the political dynamics in Venezuela aren’t materially different. It’s one thing for the populace to feel as though their government has let them down, but it’s entirely another for the electorate to discover that they are essentially powerless to change things even when their vote clearly demonstrates a desire for something different.
Bring on “the toilet paper rebellion”
This article was posted: Wednesday, February 24, 2016 at 7:50 am