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Raul Gallegos :
Venezuela's oil and debt gamble

 



Beware the things a mismanaged oil-rich country might do when pressed for money. This rule applies in spades to Venezuela under President Nicolas Maduro.

His administration's plan to sell $5 billion in bonds issued by state oil company Petroleos de Venezuela, or PDVSA, is an apt example. Maduro needs money to repay bondholders, importers, airlines, food companies, carmakers, oil-production suppliers and other creditors. Loading debt onto the company is a sure indication of desperation amid a cash crunch, courtesy of 15 years of failed economic management by Maduro's leftist mentor, the late Hugo Chavez.

After months of protests, Maduro is under pressure to end shortages of toilet paper, flour, milk, diapers and, well, you get the picture. It turns out that the $120 billion or more Venezuela derives from annual oil sales isn't enough. A combination of unsustainable social spending, corruption and cut-rate oil sold to regional allies is pinching the state's finances. So it isn't so shocking that Maduro's solution is to saddle PDVSA with more debt.

Barclays reckons Maduro's government will try to make more foreign currency available to the private sector, but “the risk is that it will try to maintain this higher level” by “using additional debt.” That is an understatement. Such “risk” can quickly become a certainty.

The truth is that Venezuela's cash needs are growing faster than its oil output, which is lower than it was when Chavez -- the granddaddy of Venezuelan populists --took office in 1999. And it is unlikely oil prices will rise enough anytime soon to satisfy Maduro's hunger for cash. This is why PDVSA's $5 billion bond sale is testing analysts' expectations of how much debt Venezuela might issue this year.

PDVSA generates half of the government's revenue and 90 percent of the country's exports, but its leverage is still considered low by credit-rating company Fitch Ratings. Venezuela's rising ratio of debt to gross domestic product, which Moody's Investors Service expects to reach 41 percent this year, is also considered manageable. That gives Maduro flexibility to issue more debt when needed.

Of course, this isn't sustainable. Government and oil-company debt payments this year will exceed $6 billion, most of it due late in the year. Plus, the 12.78 percent yield on Venezuela's 10-year bond is already the highest in the western hemisphere. The more debt Venezuela issues, the higher the interest rates it will pay, the more its annual payments will grow and the greater the pressure on Maduro to reduce the social spending that keeps him in power. But for a government that loves short-term economic solutions, running up the tab makes sense.

So far investors have willingly lent money to Venezuela, with the understanding that, despite its broken policies, it pays bondholders in a timely manner. But if a government that is running out of options resorts to debt as a way to survive the next few years, that trust could soon be tested.

 

 

Raul Gallegos is the Latin American correspondent for Bloomberg's the World View blog. Follow him on Twitter @raulgallegos. E-mail him at rgallegos5@bloomberg.net. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Bloomberg The World View , on May 21, 2014 . Petroleumworld reprint this article in the interest of our readers.

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