Bank of America has assessed the likelihood of a short-term default on Venezuela’s national debt, and their findings suggest any further economic shocks would push the regime over the limit.
The bank’s monthly GEMS Fixed Income Strategy & Economics report, released on January 5, makes reference to three related factors that have endangered Venezuela’s ability to honor its financial commitments: the fall in global petroleum prices, the failure of President Nicolás Maduro to carry out macroeconomic readjustments, and fears of widespread political upheaval.
The global financial institution, headquartered in Charlotte, North Carolina, nevertheless emphasizes that Venezuela has sufficient assets to confront the situation. They also signal that the Maduro administration may well take the extremes necessary to fulfill their promises to external creditors.
The report’s authors assert that a default would arise if the financial situation were to deteriorate further than initially predicted, or because “the country’s economic situation could be worse than reflected in official government data.”
The document evaluates the possibility that Venezuela could have further non-registered external debt, alongside loans from the Chinese Fund, which aren’t included in official debt statistics. It concludes that the “Venezuelan debt ought to be considered high risk.”
Data Clouds Hard Times
Boris Ackerman, head of the Economic Sciences Department at Venezuela’s Simón Bolívar University, told the PanAm Post that Bank of America has painted a “gloomy” outlook for Venezuela.
Ackerman explains that according to OPEC figures, Venezuela’s daily production of 2.4 million barrels of oil is largely consumed by domestic demand, 700,000 barrels per day, and the need to comply with accords with China, Cuba, and regional Petrocaribe buyers at preferential rates, worth 750,000 units daily.
As a result, only 1.1 million barrels remain for unrestricted sale abroad. With prices at some US$50 per barrel, this will result in approximately $20 billion this year.
In 2014, meanwhile, Venezuela received approximately $60 billion from oil exports, but only half of this income ended up in state coffers at the Central Bank of Venezuela (BVC). It’s unknown whether the remainder was allocated to service international agreements, or if it simply never entered the country, with BVC balance of payment figures remaining unclear.
Ackerman also indicates that Venezuela has an internal circulation of 2 billion Bs., an excessive amount in relation to the country’s external assets: “Venezuela practically depends on petroleum for [96 percent of exports], but its done this independently of foreign currency reserves. Creating a system which produces them could take years.”
For Alicia Sepúlveda, director of CEDICE, a Caracas-based policy institute, the Venezuelan officials had room to maneuver while petrol prices were high, but rampant public spending must now be curtailed. Instead, the Maduro administration is having to secure the financing that keeps it in power through other means.
PDVSA to Avert Default?
President Maduro’s moves to arrest the economic crisis will likely include a still-unclear process of fiscal reform. Ackerman signals that an increase in the VAT is likely, alongside a renewal of taxes on all banking transactions, formerly at 0.75 percent.
Among the forthcoming measures is Convenio Cambiario (Exchange Agreement) #32, which stipulates that state oil firm, Petróleos de Venezuela (PDVSA), could sell foreign currency reserves to the Central Bank at any of the three official exchange rates currently in force.
Ackerman suggests that, as a result, PDVSA will have fewer bolívares in hand, generating greater inflationary pressure: “Maybe this isn’t a planned currency devaluation, but it will have all its inflationary effects.”
For Sepúlveda, Agreement 32 is “purely symbolic,” given the failure to clarify which official rate will apply.
On Wednesday, January 7, Maduro announced during his state visit to China the signing of cooperation treaties worth over $20 billion in energy, industrial, and development projects.
The Venezuelan premier has also briefed reporters on a deal to create Special Economic Zones (SEZs) with China, which will be subject to a distinct economic legal climate with the objective of promoting investment. Ackerman describes this as a free gift to China: “The deal will be to give part of the country or a region to China, with the objective of re-exporting goods to other countries, such as those that make up Mercosur.”
For the expert, the creation of SEZs in Venezuela would permit China to penetrate the market of ALBA countries, accessing cheap labor without having to pay tariffs.
CEDICE’s Sepúlveda similarly believes that Maduro’s trip abroad in search of external financing will bring few benefits for Venezuela: “Clearly all he can offer from our country is petroleum, and its prices are very low. It will be a very expensive debt that will continue to hold the country to ransom.”
For Ackerman, the only solution that could save Venezuela from default would be to free the economy from state controls, in particular the fixed exchange rate. At the same time, the Venezuelan regime would have to boost confidence among Venezuelan businesses to encourage new investment and the export of products other than petroleum.
“All of this would mean changing the model left by [late President] Hugo Chávez, going contrary to the government’s natural instinct. The problem can be summed up in three words,” Ackerman suggests. “Reality is tough.”
Ackerman and Sepúlveda assert that this inclination of the regime is a recipe for poverty. The CEDICE analyst explains that while those in power focus on redistributing wealth rather than creating it, the bleak outlook is unlikely to change.
Translated by Laurie Blair. Edited by Fergus Hodgson.