The Markets Are Predicting a Venezuelan Default
President Nicolás Maduro says there’s a foreign conspiracy at work against Venezuela. In a Dec. 13 speech on state television, he lashed out at the international credit-rating companies that assigned junk ratings to his country’s foreign currency bonds, accusing them of orchestrating “a vulgar, immoral financial blockade.”
The reality is more mundane. A 40 percent plunge in oil prices this year is raising concerns that Venezuela is running out of dollars to pay its debts. The worries have pushed up yields for the country’s bonds to levels not seen since the 1998 Russian financial crisis spurred a selloff in emerging-market debt. Credit-default swaps—financial contracts that insure investors against nonpayment—peg the likelihood of a default at more than 90 percent.
Maduro’s popularity is rapidly eroding amid an economic crisis marked by widespread shortages and runaway inflation. Gross domestic product contracted 3 percent this year and will shrink 1.5 percent in 2015, according to the median estimate of 15 analysts surveyed by Bloomberg. The Central Bank of Venezuela hasn’t published inflation data since August, when it reported prices were up 63 percent in the previous 12 months—the fastest pace for any country. “I just spent the last three hours looking for medicines,” says Alicia Gonzalez, a retired civil servant living in Caracas. “I can’t even begin to think about Christmas presents this year.”
In a November poll by the Caracas-based consulting firm Datanalisis, more than 70 percent of respondents said Maduro shouldn’t be allowed to finish his term, which ends in 2019. “Unless the government is able to generate a significant improvement in economic conditions during the coming year, it could lose its parliamentary majority and face a recall referendum in early 2016,” wrote Bank of America economist Francisco Rodríguez in a note to clients.
Venezuelan crude has dropped below $60 a barrel, following OPEC’s decision not to rein in production to counter slumping prices. (Maduro’s government had lobbied for a reduction in output at the cartel’s November meeting.) Venezuela needs oil to average $85 a barrel to keep up debt payments and pay for imports, even assuming it cuts handouts to regional allies and reschedules loans from China, says Siobhan Morden, head of Latin America strategy at Jefferies Group.
Prices of Venezuelan bonds fell to a 16-year low on Dec. 15 after Maduro said he had no plans to curb the domestic gasoline subsidies that eat up more than $15 billion of the budget each year. A reduction in cut-rate oil exports to Cuba and other Caribbean nations is not on the table either. Maduro has also resisted pressure from within his own cabinet to devalue the currency: The official exchange rate ranges from 6.3 bolívars to 50 bolívars per U.S. dollar, depending on the type of transaction. On the streets of Caracas, a dollar fetches 180 bolívars.
Marco Santamaria, a money manager at New York’s AllianceBernstein, says Venezuela’s creditworthiness will remain in doubt even if oil rebounds. The government had been running a deficit and depleting its stock of foreign currency when crude was at $100 per barrel. International currency reserves are at their lowest levels in a decade and cover only about 40 percent of the debt due over the next five years. The Ministry of Finance didn’t respond to requests for comment.
Maduro has declared that he has no intention of halting debt payments because it would not be consistent with the course charted by his predecessor and mentor, Hugo Chávez. “There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development,” he said in the Dec. 13 speech.
Analysts at London-based Capital Economics think otherwise. “The writing is on the wall for Venezuela,” they wrote in a Nov. 28 report. “We continue to think that a default is more likely than not in the next two years.”