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Andean Group - October 2014 (ISSN 1741-4466)

ECONOMY: As oil prices plummet, Maduro clutches at international straws

Things are moving quickly in the wrong direction for Venezuela, but the government is sticking to its line that everything is fine.

It is not inconceivable that Rafael Ramírez, Venezuela’s former longstanding oil minister, president of the state oil company Petróleos de Venezuela (Pdvsa) and latterly vice president of the economic area under President Nicolás Maduro, is glad of his brand new post at the foreign ministry, where it is relatively easy to chalk up popular victories. Just weeks into his job, Ramírez was in full flight at the United Nations(UN) in New York, celebrating Venezuela’s new two-year seat on the UN Security Council (UNSC, see next article). Thereafter he was bound, along with Maduro, for Cuba, for a summit of the regional left-wing Bolivarian Alliance for the Peoples of Our Americas (Alba) on the Ebola crisis, in which Cuba has taken a recognised global lead.

Back home, Ramírez’s successors; Asdrúbal Chávez in the oil ministry, Eulogio del Pino at Pdvsa and Brigadier General Rodolfo Marco Torres in the vice presidency of the economic area (also the finance minister), are feeling extreme heat, as international punters bet on the imminent meltdown of the rentier state.

Presenting the 2015 budget on 21 October, Marco Torres said the treasury was prepared for “whatever scenario that presents itself with the price oil”. That scenario, to most external observers, is one of an oil shock that Venezuela - despite the government’s protestations – is ill equipped to absorb. President Maduro might insist that the country can live with oil at US$40/b, but right now all the facts suggest otherwise.

The budget assumptions are - in a word – glib. The US$117.7bn plan, up 35% in annual terms, uses the existing official exchange rate of BF6.3US$ and is based on an oil price forecast of US$60/b in 2015, unchanged on the 2014 budget. The Socialist government routinely uses an artificially low oil price assumption so that it then spend the subsequent ‘windfall’ generated by above-budget oil income at its discretion. Oil accounts for the 96% of the country’s export earnings and about 45% of its fiscal earnings.

However, the Venezuelan oil basket is in fact trading perilously close to the 2015 forecast – at US$77/b currently - having dropped US$15 in the last six weeks. Analyst Francisco Rodríguez of Bank of America calculates that a drop in crude prices to about US$80/b (or US$75/b for Venezuelan basket), will reduce oil export revenues in Venezuela by about US$10bn in 2015, from an estimated US$75bn in 2014 , a drop of 14%.

And with global oil supplies set to outstrip still-weak demand in the near and medium term, its future direction is pointing firmly down. Tellingly, President Maduro in mid-October called for an emergency meeting of the Organization of Petroleum Exporting Countries (OPEC), a request yet to be accepted.

Marco Torres forecast real annual GDP growth of 3% next year, which might technically be possible, depending on the depth of this year’s recession (some estimates go as low as -4.5%), but will not mean a ‘recovery’ in any sense for the vast majority of Venezuelans.

Likewise, the minister pencilled in inflation of 25%-30% (the IMF projects average inflation of 63% next year), yet admitted that the budget deficit this year is 17% of GDP – the only way around that is to devalue and/or monetise it by printing reams of local currency Bolívares – either option means inflation. There was no mention of devaluation, but it seems almost inevitable. Neither was there any mention of a reduction in the country’s lavish fuel price subsidies (amounting to US$12bn-US$15bn a year) – but again, some sort of recalibration seems unavoidable.

The finance minister again insisted that Venezuela had full capacity to service its external debt. Yields on Venezuelan bonds hit a five-year high of 17.87% in mid-October, as investors demanded ever more of a risk return to hold the country’s sovereign debt. And the country’s five-year credit-default swaps, already the highest in the world, hit a five-year high of 19.89 percentage points the day of the budget presentation, according to the financial wire Bloomberg, implying a 75% chance that Venezuela will default in the next five years.

The state oil company Petróleos de Venezuela (Pdvsa) has US$3.0bn in bond payments due on 26 October (and has the liquid reserves to do so). Venezuela paid US$1.6bn on 8 October to service its Global 2014 bond. Unusually however, it did so from its (already-scarce) central bank foreign reserves. Normally, the Venezuelan treasury makes these payments by drawing down US dollars from its external accounts, rather than buying currency at the time of payment, fuelling the speculation about the true state of the country’s financial position. Venezuela has US$17.6bn in debt service falling due on bonds over the next three years: US$5.9bn in 2015, US$4.7bn in 2016 and US$7bn in 2017.

Our sister publication, LatinAmerican Economy & Business (LAEB), in recent editions has looked into the possibility – being touted by some economists since June — that the country could/or should default. LAEB identified three signs to watch out for indicative of an imminent default. The first is an increase in the velocity of money in the country, a monetary alarm bell indicating that households and businesses have lost faith and see a collapse as inevitable; the second fiscal - a sharp drop in the price of oil, dramatically affecting prospects for Pdvsa and the government; and the third political - widespread social unrest, most likely over rampant inflation and the continued shortages of basic goods and a gradual withdrawal of public support for the government’s (ostensibly) inclusive Socialist agenda.

While Venezuela’s overall debt is low – at 51% of GDP (though some analysts put it at a higher 70% to account for various off-budget credit sources) — that does not automatically mean that it is solvent. In fact, Venezuela is facing a US dollar liquidity crisis of major proportions – forcing the heretofore exuberantly high spending government to hoard scarce dollars - and force the bulk of a very difficult adjustment onto the local population, in the form of a severe cutback in imports (to which the country is addicted) and rampant inflation, as the central bank prints local currency Bolívares hand over foot in a bid to monetise its debt.

LAEB analyst Andrew Hutchings presciently noted that “…a 10% fall in the global price of oil would have serious implications”. Other analysts are even gloomier, suggesting that the government’s true cash needs are so high that the breakeven oil price for the country is up to US$121/b. Ominously, in just six weeks, the price of Venezuelan oil has dropped 16% - from US$92.6/b on 5 September to US$77.7/b in the week of 13-17 October.

  • Venezuela has US$17.6bn in debt service due on its sovereign bonds over the next three years: US$5.9bn in 2015, US$4.7bn in 2016 and US$7bn in 2017.
  • Import cover down to two days

After Venezuela used central bank reserves to service its US$1.6bn bond payment in early October, the bank’s liquid foreign reserves came down to an estimated US$300m, from US$2.0bn before the amortisation. That is just two days of import cover. There is still no sign of the US$750m special strategic reserve fund announced by President Maduro in September, which he said would fold monies from the various (multi-billion dollar) off-budget funds like the China Fund and the National Development Fund into central bank reserves.

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