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2017-04-12 10:46:02
Venezuela Staves Off Default, but Low Oil Prices Pose a Threat

Venezuela appears to have put off a reckoning on its tens of billions of dollars in debt, but its ability to avoid a disastrous default will probably require much higher oil prices than appear likely in the next year or two, financial experts say.

With its oil production and international reserves falling at an accelerating rate, the government is juggling as fast as it can to pay for imported food and medicines while meeting its short-term bond payments. Even as the country has drastically slashed imports, its reserves have declined by half over the last two years, to $10.4 billion. Most of that sum is in gold and is pledged as security for many of the government’s creditors, which include international institutional investors and everyday Venezuelans.

“The probability of default is rising,” said Stuart Culverhouse, head of sovereign and credit research at Exotix Partners, a London-based investment bank that trades Venezuelan bonds on behalf of clients. “So far their willingness to pay has been pretty firm, surprisingly so given the political situation. But you have to ask how long that can continue when they are probably spending more on debt service than imports.”

Complicating the picture is the escalating political turmoil challenging President Nicolás Maduro, who needs to shore up his popularity if he is to retain power in the elections scheduled for next year. Consumers have to endure long lines for food and other necessities, and hunger is spreading. With Venezuela’s refineries in disrepair, even gasoline is in short supply. A monthly inflation rate of 20 percent is shrinking the value of paychecks.

International financial experts say that the global oil price will have to rise about $15 a barrel — to $70 — to substantially improve the financial situation for the government and Petróleos de Venezuela, its state-owned oil company, better known as PDVSA. With United States oil production rising, and the commitment of the Organization of the Petroleum Exporting Countries to extend production cuts in question, few energy experts expect prices of more than $65 a barrel over the next year unless political violence causes a serious oil disruption in the Middle East.

The external bond debt of the government and PDVSA amounts to roughly $60 billion, most of which has been incurred since President Hugo Chávez took power nearly two decades ago and installed a socialist-inspired government. But that tells only a piece of the story, since the country has additional liabilities with international lending institutions. China appears to have quietly stopped making new project loans guaranteed by oil shipments last year.

All told, the Venezuelan government and the state oil company owe $8.5 billion in payments this year, and at least an additional $7.9 billion in 2018 — amounts that economists say will further erode international reserves that form the last defense against default.

Venezuela said it would make the nearly $3 billion in payments due on Wednesday, and PDVSA said it had been making bank transfers for several days to meet the deadline. Those payments are mostly related to PDVSA’s April 5.25 percent note, which requires a combined interest and principal payment of $2.5 billion. Normally that would be an easy stretch for an oil company with some of the largest reserves in the world.

But PDVSA is but a shadow of its old self. The company’s cash is running out, its oil fields are losing pressure, critical equipment at its ports and processing plants are in disrepair, and it is unable to pay billions of dollars it owes to the international oil service companies critical to its operations.

Once one of the premier oil exporters, Venezuela now produces roughly two million barrels a day, down by more than a million barrels over the last two decades. Experts say they expect another 10 percent decline in production this year.

Since last November, Venezuela has gotten some relief; oil prices have gradually risen after OPEC cut its oil production by more than a million barrels a day, to the lowest levels in a year. Venezuela has been one of the leading members of the cartel pushing for the production cuts. Its recent output, as estimated by the Middle East Petroleum and Economic Publications, is about 60,000 barrels a day above the production target Venezuela agreed to last year. Such figures suggest that the country may be cheating a bit on its commitments.

“They still have rabbits in their hat,” said Walter Molano, head of research and chief economist at BCP Securities, based in Greenwich, Conn. “They will do everything they can to keep on servicing their debt with the hope that oil production turns around and oil prices go up.”

PDVSA has turned to Citgo, its American-based refinery and gas station subsidiary, for relief. In recent years Citgo has borrowed several billion dollars, using its three refineries and pipeline assets as collateral, with the money going to Caracas. PDVSA pledged about half of Citgo’s equity to bondholders, and the rest to secure a loan from Rosneft, the Russian oil giant.

Late last year, Venezuelan oil officials began to consider transferring control of a Venezuelan oil field around San Felix to Citgo to increase Citgo’s valuation and raise its creditworthiness for more borrowing. But at the moment, financial analysts say, Citgo is not in a position to borrow much more for its parent company.

“Citgo has been used as a cash cow,” said Diego Ferro, co-chief investment officer at Greylock Capital Management, a New York-based hedge fund that invests in distressed, high-yield bonds, including Venezuela’s. “They are trying to get any cash that they can. And over the next year and a half until elections, they will go to more absurd ways of monetizing things.”

Still, Venezuelan bonds have been a lucrative trade for some investors. When oil prices dipped below $30 a barrel in February 2016, the April 2017 PDVSA bonds sold at 36 cents to the dollar. Those who held the bonds to maturity this week will gain a return of nearly 114 percent on principal, according to Nomura, which trades Venezuelan bonds for clients.

“While they are able to muddle through, your exposure to Venezuela is going to outperform almost everything else in the emerging-market bond universe,” said Siobhan Morden, Nomura’s head of Latin America fixed-income strategy. “However, you have to be very careful to have an exit strategy. You’re looking at an advanced stage of cash-flow stress.”