- PDVSA is likely to default first, followed by the government
- External funding gap needs to narrow to avoid credit event
Venezuela is “highly unlikely” to have enough hard currency to fully make its debt payments this year, although a default isn’t inevitable, according to a report from Moody’s Investors Service.
State-owned oil company Petroleos de Venezuela SA, which has large payments due this year, is likely to default before the sovereign, the credit ratings company said. That, in turn, could imperil government finances to the point it won’t be able to make payments either, according to the report. Moody’s said there is a non-negligible probability that a credit event for both could be avoided, although a default is more likely than not.
Venezuela’s debt is the most expensive in the world to insure against non-payment using credit-default swaps, after the tumble of the price in oil, which makes up about 95 percent of the country’s export revenue, eroded its hard currency reserves. The International Monetary Fund predicts its economy will shrink 8 percent in 2016, while inflation rate will reach about 480 percent.
“Everything remains in flux, changing all the time,” Jaime Reusche, a senior sovereign analyst at Moody’s, said in an interview. “The biggest difference of course has been the oil price which has increased since May, and since earlier in the year, so the oil price gives Venezuela’s external accounts a lot more stability and a lot more breathing room.”
Traders in the credit-default swaps market are pricing in a 60 percent probability that the country defaults in the next 12 months. Venezuela’s bonds are the worst-performing in the world over the past two years. So far this year they have returned 14 percent.
For the country and PDVSA to both avoid default, the external funding gap would need to narrow either from additional financing, debt relief from China, higher oil prices, or a combination of all three, Moody’s said.
Amid worsening shortages of everything from basic medicine to toilet paper, a push to oust President Nicolas Maduro is gaining traction. If there’s a recall referendum to end Maduro’s term, the government might prioritize the use of dollars for imports in order to boost his popularity ahead of the vote, increasing the probability of a sovereign default, Moody’s said.