In mid-November, Rafael Ramirez, Venezuelas oil minister and the president of PDVSA, said the firm would sell $1.5 billion in bonds to the central bank while the remaining $3 billion would be offered to service providers to pay down billions of dollars in accumulated debts. I dont think there is any way that PDVSA and the government will cancel the bond offering despite the hike in bond yields, says Alberto Ramos, Venezuela analyst at Goldman Sachs. They would lose too much face. We are becoming more and more concerned about the country. It has now entered a hyperinflation situation, and we dont see the loose monetary dynamics letting up soon. Its difficult to predict whether there could be a full-blown macroeconomic crisis, but there is a chance of a social unrest as frustrations with the government grow. Funding operationsMost of the PDVSAs issuance will finance operating expenses rather than badly needed investments (Venezuelan oil production has dropped to 2.75 million barrels a day from 3.12 million in 1998). However, Ramirez indicated that a proportion of the funding would be destined for social programmes, indicating that the government might increase its social expenditure in the run-up to key municipal elections on December 8. The government also plans to pay for $600 million of food imports, including milk and live chicks from Colombia with the dollar-denominated bonds. Some of the funds raised are also earmarked for the Sicad currency auction system, which functions alongside the countrys currency controls. This would be the first time that PDVSA has sold bonds directly to suppliers; previously it has sold them on the open market and repurchased them to pay off contractors. The note is called PDVSA 2026, but includes maturities in 2024 and 2025; it carries a 6% coupon. The bonds being placed with the central bank will gradually be sold domestically through the Sicad auctions. Bonds sold to suppliers might reach the market sooner, which is a risk given the present low appetite for Venezuelan bonds.
Despite the growing economic problems, most analysts believe that Venezuela is unlikely to default on any of its debt and most recommend that investors stay on the short part of the oil companys yield curve (PDVSA 2014), which continues to offer an attractive yield.