FT | Venezuela on collision course for default crisis

By Dan Bogler | Financial Times

The Maduro government is unlikely to withstand this year’s heavy debt service obligations

Maduro government is unlikely to withstand this year’s heavy debt service obligations

Venezuela is rapidly heading for a showdown between its socialist government and the centre-right opposition that is likely to end up with the crisis-ridden country defaulting on its debt.

Nicolás Maduro, the country’s discredited and increasingly buffoonish president, raised the stakes last week by securing 60 days of emergency powers, supposedly to fix the economy over whose disastrous decline he has presided.

This has led the opposition, which in December won control of the lower house of parliament, to accelerate discussions on how to oust the president — either via a recall referendum, or by changing the constitution to cut short his term of office.

Meanwhile, Mr Maduro may well use his new powers in coming days to devalue the currency and raise petrol prices in an overdue response to the reality of the massive drop in oil prices.

While these measures are a step in the right direction, they will not save Venezuela from another year of contraction, with the economy forecast to shrink by almost 5 per cent this year after 8 per cent in 2015. They will only make its massive inflation problem worse (see chart). And they cannot stop the government from running out of dollars.

This is the crux of the matter, as far as investors are concerned. The country faces almost $20bn of debt service costs this year, with roughly one-third owed by the central government, another third by PDVSA, the national oil company, and the final third payable directly to China under an oil-for-financing deal.

So far, Venezuela has been at pains to honour its international obligations, even to the point of squeezing imports, which also require hard currency. This has already decimated its private sector and inflicted great hardship on its population, which is experiencing shortages of medicines and basic goods like toilet paper.

But with Brent crude at $32 a barrel and Venezuela’s heavy oil fetching even less, Barclays calculates that the country would have to spend 90 per cent of this year’s projected oil export revenues (virtually its only export these days) on servicing its borrowings.

That seems impossible. Or rather, any attempt to use virtually all the scarce dollars available for this purpose would worsen the shortages and lead to popular protests and social chaos. Hence the growing likelihood of a default, with Medley Global Advisors, a macro research service owned by the FT, pointing to a first crunch point in May, when $700m of interest falls due, though the government may last until the fourth quarter of the year, when it must repay more than $4bn.

At this point, only political change can forestall such a scenario. The government is clearly not capable of implementing the wholesale overhaul of the economy that is required, even if the various, and increasingly embittered, factions within the chavista movement could agree on how to proceed.

The opposition is also unproven but, not unlike the new Macri administration in Argentina, understands what needs to be done and would have international goodwill and the ability to recruit foreign expertise. An opposition government would probably insist on a restructuring of the country’s foreign debt, but perhaps in an ordered and transparent way that suggests higher recovery values.

So is a peaceful political transition possible? Venezuela is on its way to democracy and it is unlikely that Maduro can do more than delay what looks like an inevitable fall from power.

But, as Medley warns, such transitions can be messy as the layers of authoritarianism that have been built up over years are dismantled. The government controls most of the institutions, including the Supreme Court. The latter can, for example, spin things out by overturning decisions made by the opposition in the national assembly, though its judges would be unlikely to stand firm against overwhelming public protests.

The army is another matter and if it intervened to support the government it could trigger bloodshed. But while some in the military have benefited from corruption under the current regime, the armed forces are also split into factions and their loyalty is hard to divine.

For investors this all adds up to a fiendish puzzle. Longer term, political change and economic restructuring are positive, allowing the country to rebuild and unlock its vast mineral wealth.

But with a looming debt default and potential political and social chaos on top of the existing economic crisis, they need to tread, and trade, with caution.

Dan Bogler is president of Medley Global Advisors.

Bron: Financial Times

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