Maduro Tinkers With Policy as Venezuelan Debt Default Looms

  • President announced devaluation and fuel price hike Wednesday
  • Venezuela is `covering the sun with one finger': BNP Paribas

President Nicolas Maduro missed an opportunity to salvage Venezuela’s ruined economy on Wednesday with half-hearted measures that failed to reassure analysts at banks including Barclays Plc and Citigroup Inc. that the country can avoid default this year.

Maduro raised the price of gasoline 60-fold to 6 bolivars a liter, still the world’s cheapest, and promised to devalue the official exchange rate to 10 bolivars per dollar from 6.3. The measures are aimed at boosting the government’s finances by cutting subsidies and ensuring it gets to keep a higher share of its waning oil revenues.

“These measures are tinkering around; they’re refining failed policies,” said Siobhan Morden, head of Latin American fixed-income strategy at Nomura Holdings Inc.

BNP Paribas was equally dismissive. Maduro is “covering the sun with one finger,” analysts at the bank said in a report to investors Thursday.

The devaluation was so small its fiscal impact will be negligible and the increase in the price of gasoline is not enough to counteract the shock to the government’s finances from falling oil prices, analysts said. State-owned oil company Petroleos de Venezuela brought in just $77 million last month, down more than 90 percent from January 2015, Maduro said Wednesday as he prepared the public for the hike in gasoline prices, the first in almost 20 years.

Treading Carefully

“I’m giving orders in an economic emergency to construct a new model,” Maduro said during a five-hour televised speech yesterday. “I say this to the people, I need your support.”

He has to tread carefully. The weaker bolivar means the government will probably raise the cost of the subsidized foods most Venezuelans now rely on, at the same time as fuel prices increase.

When Venezuela raised gasoline costs in 1989 it triggered a wave of protests that left hundreds dead in what became known as the Caracazo riots and paved the way for the late President Hugo Chavez’s rise to power. Maduro described the hike in gasoline prices as a “win-win,” saying it would help finance social security payments.

Bond Payments

While the government will probably make its bond payment scheduled for Feb. 26, its ability to make payments in October and November is “extremely limited,” Citigroup analysts wrote, and depends almost entirely on oil prices.

Venezuela’s gross domestic product shrank 5.7 percent last year even as the cost of living rose 181 percent, the central bank said on Thursday. Other economies, such as Yemen and Sierra Leone, are estimated to have shrunk more last year, according to International Monetary Fund data. None had faster inflation.

“The lack of a package of consistent fiscal and exchange rate measures implies that deficit financing will continue, fueling inflation acceleration,” said Francisco Rodriguez, chief Andean economist at Bank of America Corp. “This will hurt the government’s popularity as scarcity is bound to worsen.”

Rodriguez argues that Venezuela has enough assets it can sell to avoid a default this year.

PDVSA’s bonds due in October rose 3.5 percent to 59.483 cents per dollar. The sovereign bonds due in 2022 gained 2.5 percent to $40.755 cents per dollar. Venezuelan bonds have lost investors 11 percent this year, the worst performance in the region.

“The announcements will do little to counteract the economy’s deep distortions and continuing deterioration,” Risa Grais-Targow, an analyst at Eurasia Group wrote in a note. “In fact, the devaluation will temporarily exacerbate inflation, thus contributing to rising discontent, while goods scarcity will worsen on the back of lower oil prices... This, in turn, will likely help to propel regime change later this year or early next.”

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