Latin America: Oil pours trouble on Venezuela’s economy
Parallel FX rate rockets; default more and more likely.
Venezuela is making ever-more desperate attempts to stave off default this year, after oil prices fell again this summer, just as debt repayments and an election in December draw closer.
Venezuelan oil, which accounts for 95% of the country’s export earnings, fell below $40 a barrel in late August, according to the energy ministry, down from a previous low in January. As a result, some fear the government’s knife-edge budgeting of dollars could fall apart, forcing a default this year, when state oil company PDVSA faces a $1.4 billion bond redemption in October and a $2 billion amortization in November.
In July, Jamaica tapped the Eurobond markets to pay back loans under the PetroCaribe oil subsidy programme at a discount, allowing Venezuela $1.5 billion in extra up-front cash. Aside from new funding from China, according to Reuters, the country also withdrew $1.5 billion of IMF special drawing rights in June.
They’ve already cut so much I can’t see it as a possibility, given the scarcities in the country.
Kathryn Rooney Vera, Bulltick Capital Markets
Given that extra liquidity, many in the investment community still think the country has a good chance of avoiding default this year, despite a refusal to curb spending.
“A default would be viewed as a failure of the authorities,” says Kathryn Rooney Vera, strategist at Bulltick Capital Markets in Miami. “It’s unlikely to happen before the election.”
But with more than $10.7 billion in sovereign and PDVSA debt servicing needs coming due next year, Rooney Vera and others see a default in 2016 as almost inevitable – something further import restrictions, for example, cannot avoid. “They’ve already cut so much I can’t see it as a possibility, given the scarcities in the country,” she says. “It’s a humanitarian crisis in Venezuela.”
In late August, amid increasing scarcities of food and medicine, president Nicolas Maduro closed the country’s border with Colombia, declaring a state of emergency in the border areas. Smuggling subsidised fuel and food into Colombia is thought to have surged in recent months, along with the parallel exchange rate, making the trade even more lucrative.
The parallel rate fell to Bs727 in late August, according to DolarToday, a website that tracks the Venezuelan currency market from the Colombian border town of Cucuta. The rate breached Bs300 in May, beginning the year at Bs173. By contrast, for some imports of certain basic goods, the state still exchanges dollars at a rate of just Bs6.3.
Rooney Vera says she increasingly agrees with comments by Harvard economist and former Venezuelan planning minister Ricardo Hausmann, who said last year it would be more ethical to default than further ration foreign currency in a country that imports so many essential goods.
Some investors are already beginning to look beyond the Maduro government, as the economy worsens and prices rocket.
Research from Bank of America Merrill Lynch projects 2015 inflation in Venezuela will reach 131%, up from 62% in 2014 and 40% in 2013. BAML says GDP will contract at a similar rate to last year, around 4%, though the IMF, which has not published its annual Article IV consultation on Venezuela for almost 10 years, said in April it expected a 7% drop in output.
Maduro told reporters in New York in July he would refuse to let international observers monitor the election. But his popularity has plummeted in tandem with the economy. He gained the approval of less than a quarter of Venezuelans surveyed in July by local pollster Datanalisis.
“There’s a feeling that this is almost over,” says a source in Caracas. “After the election, the country could turn very quickly into one of the most hostile environments for investors to one of the friendliest.”
Many investors doubt the Maduro government has the wherewithal for an orderly restructuring. However, they hope that even under a military replacement to Maduro, or a takeover by a more pragmatic camp inside the ruling party, there could be important changes. An IMF-led restructuring could allow relatively rapid improvements in economic health, given Venezuela’s low debt-to-GDP level and the possibility to offer oil warrants in exchange for bonds.
We are talking to some of the most important business groups in Venezuela about potential acquisitions in this country
Rodrigo Narajo, VIPCapital
“Few governments survive a chaotic default, so this would usually accelerate a transition in government,” says Ajata Mediratta, co-president of Greylock Capital Management in New York. “Venezuela’s bonds are trading below any rational recovery rate, given its vast natural resources.”
Others see a pent-up surge in deal making after a post-election shift in policy, with government food and raw material producers being privatized to tackle shortages, for example – or even a bigger and more rapid version of Mexico’s energy liberalization, to attract the investment needed to ramp up oil production. The repatriation of billions of dollars of Venezuelan savings that have been kept offshore during the Chavez and Maduro era could speed up the country’s rebirth.
Rodrigo Naranjo, partner at Caracas-based investment bank VIPCapital, says his bank has had more enquires this year from clients looking to acquire other business in Venezuela than at any other time in the past eight years. A former banker at JPMorgan and ABN Amro, Naranjo says the interest is from Venezuelan family groups, which were in existence long before Chavez came to power.
“We are talking to some of the most important business groups in Venezuela about potential acquisitions in this country,” says Naranjo. He adds that other Latin American groups, and eventually European and US buyers, could follow.