Venezuela Seen Staving Off Default Again Even as Crisis Worsens

  • PDVSA to pay $4.1 billion due by year-end, Aberdeen says
  • Goldman Sachs says country has now fallen into a ‘depression’

Even as Venezuela’s economic collapse deepens, the nation has a good chance of getting through another year without defaulting on its bonds.

That’s the conclusion of money managers including Aberdeen Asset Management and Wall Street banks like JPMorgan Chase & Co.

The cash-strapped country has been on default watch for the past two years as oil prices remain depressed, its economy implodes and political turmoil worsens amid an effort to recall the president. Yet Venezuela has managed to scrounge up enough money to honor billions in debt payments, and this year appears to be no different. Petroleos de Venezuela SA, the struggling state oil producer, has $4.1 billion of debt payments to make before year-end.

“We think they have sufficient resources to pay” $1.4 billion coming due in October, said Anthony Simond, a money manager at London-based Aberdeen Asset Management, which oversees about $10 billion of emerging-market debt. He owns notes due in 2016 and 2017 issued by PDVSA, as the oil company is known.

While he acknowledges the $2.7 billion of payments in November will be a “bit trickier,” he said President Nicolas Maduro wants “to avoid a default at any cost.” Oil Minister Eulogio Del Pino, who is also president of PDVSA, has said the company is in advanced talks to refinance debt due in the next 18 months.

For an analysis of how PDVSA can win a debt reprieve, click here

Maduro’s hold on power is increasingly tenuous as worsening shortages of everything from food to medicine fan public discontent. Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a July 22 note that the country has fallen into a “depression” with signs of hyperinflation, but is likely to make all its debt payments this year by drawing down international reserves.

QuickTake Venezuela, on the Brink

The International Monetary Fund predicts gross domestic product will shrink an unprecedented 10 percent this year, while inflation will exceed 700 percent. On July 20, Alejandro Werner, director of the IMF’s Western Hemisphere department, said Venezuela will be home to the “worst growth and inflation performance in the world.”

Despite all this, JPMorgan analysts led by Ben Ramsey expect Venezuela to make good on debt payments.

“We remain of the view that willingness to pay is very high,” they said in July 27 note to clients. “And PDVSA has no intention of triggering a credit event.”

After slashing default bets in recent months, traders boosted them last week after Maduro shook up his cabinet, a move that included replacing a key member of his economic team and giving a top post to a military general accused of drug trafficking by the U.S.

PDVSA’s press office declined to comment about any debt initiatives underway at the company or investors’ perception of the producer’s creditworthiness. Calls and e-mails to officials at the central bank went unanswered.

To get by, Venezuela will count on a rebound in crude prices, its gold reserves and financing deals from China, according to Walter Molano, chief economist at BCP Securities LLC in Greenwich, Connecticut. 

“I feel pretty confident they will pay,” he said, adding that a PDVSA default would create even more complications for the economy. "Without oil, Venezuela dies."

— With assistance by Noris Soto, Fabiola Zerpa, and Ralph Cope

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