Fears of Venezuelan instability increase
PDVSA seeks funds amid economic crisis; Hyper-inflation, shortages and unrest
PDVSA, Venezuela’s state-owned oil company, was expected to go ahead with $4.5 billion of bond issuance at the end of November despite a growing economic crisis in the country and a jump in the yield on Venezuelan debt.
In mid-November, Rafael Ramirez, Venezuela’s 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 don’t 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 don’t see the loose monetary dynamics letting up soon. It’s 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.”
Most of the PDVSA’s 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 country’s 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.
The company has already taken on $10 billion in private loans this year, mostly from China and Russia. Often PDVSA agrees to export oil in return for the loans; in 2012, for example, the company did not receive cash for more than one third of its oil exports. The latest issue means PDVSA would have issued $32 billion in bonds since 2007. The issuance comes at a particularly difficult time for Venezuela. The country now has the world’s highest inflation rate, annualized at 54%, according to the central bank, with the money supply expanding by more than 70% during the past year. Economic growth has been weak this year at 1.19% and shortages of basic goods – including toilet rolls, powdered milk, nappies and toothpaste – have worsened. In mid-November, Nicolas Maduro, the socialist president who succeeded Hugo Chávez after he died in March, ordered the military to take possession of five electronics and appliance stores, belonging to the Daka chain, accusing them of price-fixing. He has declared an economic war on many private-sector businesses, which he accuses of overcharging clients and profiteering.
However, this move led to social unrest and pushed yields on PDVSA bonds up to almost 17%, their highest level in two years.
Officially, there are 6.28 Venezuelan bolivars to the US dollar but on the black market it is possible to get up to 55 bolivars to the dollar, probably the biggest difference between official and black-market rates for any country. The central bank’s reserves fell to $21.74 billion in October, from $29.8 billion in January.
Alejandro Arreaza, Venezuela analyst at Barclays, says: “The economy would need a largely contractionary adjustment to stabilize it, which would imply a high political cost for the government.” He says that recent opinion polls show that the economic crisis is starting to dent Maduro’s popularity.
The government’s response has been to escalate its criticism of the private sector. He adds: “The risk we see now is that a strong setback for the government in the December elections could further weaken Maduro’s leadership, limiting the government’s capacity to make the necessary economic adjustments and increasing political and economic uncertainty, which would continue to put pressure on Venezuela/PDVSA curves.”
Barclays says that although the authorities are still expressing willingness to make some economic adjustments after the elections, the risk of an incomplete adjustment is increasing. Such deficient measures would likely maintain the distortions that have been causing the deterioration of Venezuela’s fundamentals.
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 company’s yield curve (PDVSA 2014), which continues to offer an attractive yield.