Still Two Sets To Go, Quico

Federer of Switzerland hits return to Djokovic of Serbia in their semi-final match of the Paris Masters tennis tournament in Paris(This is a guest post by a long time reader, MacPapas Medianas, who is writing from the second floor of what was once the highest grossing McDonalds in Latin America — a.k.a., el McDonalds de La Castellana).

The consensus in the opposition is that the Venezuelan government is full of incapable bureaucrats who are steering the economy off a cliff and to certain external default. That’s not surprising. We love nothing better than a good fatalistic narrative, and the conventional wisdom has been hardening around this one. Quico went as far to describe the debate as “over”, with default the clear winner.

But then the question is, when?

Most of the Wall Street types who get paid a lot of money to have informed opinions about Venezuela agree that at current oil prices, the government will have the capacity to pay its debts through 2015. Analysts also have their opinions about 2016 but mostly keep quiet about them. 2016 is too far out to make predictions; a lot could happen between now and then.

In the longer run Venezuela will, of course, need to earn more dollars than it spends; otherwise the debt it takes out to make up for the difference will become too big to pay off. That’s just common sense. But given its reserves and its cash flows, Wall Street types think that if shit hits the fan and Venezuela defaults, it will be in 2016 or beyond.

Still, if you watch the news, Chavismo seems crazy.

Why is Wall Street so confident about their continued willingness and ability to pay through 2015? Simple.

Ever since oil began to fall from its $109 high in June, all the way down to $75, where it is now, the government has been adjusting. Because they haven’t announced the adjustment measures together or called them a strategy, we often fail to see that they amount to a strategy.

But here are the facts. Since June, the government has:

  1. Reduced oil shipments to Petrocaribe and Cuba (the portion Cuba resells for a profit) and improved financing terms for Venezuela (more upfront cash, less loans). This could net Venezuela 100,000 barrels a day which amounts to about $3 billion dollars cash a year.
  2. Cut public sector spending. Although the government could certainly use the popularity from additional spending with Maduro’s approval at 30%, it reduced its budget by $2-3 billion this year.
  3. Cut dollar allocations to the private sector. Virtually no bidders are getting CENCOEX at 6.30 VEB/USD, and allocations to Sicad-I and Sicad-II (at 12 and 50 VEB/USD, respectively) have been meager. The reductions have saved the government a one or two billion this year.
  4. Managed payables. The PDVSA pension fund has been buying bonds that mature in 2014 and 2015 to reduce payments when bonds mature and the moneys are due. As much as 60% of the PDVSA 2014’s that matured this October were already owned by the pension fund or the government.
  5. Renegotiated the terms of Chinese loans. The disclosures have been opaque, but word on the street is that Venezuela managed to remove or modify the requirement for a minimum amount of barrels to be shipped to china every day—freeing up an additional $2-3 billion in cash per year.
  6. Delayed or cancelled costly infrastructure programs. This also saves the government precious dollars.
  7. Explored a possible sale of CITGO. Although various government spokespeople are on tape saying that CITGO is no longer for sale, executives from foreign oil companies toured the facilities just last week. PDVSA might want to have a bidder ready in case of an emergency.

I don’t know about you, but that looks to me like a relatively organized and coherent set of measures you would undertake only in order to make sure you could service your foreign debt.

Is that all? Hardly. There’s plenty of talk of other measures in the pipeline, though not yet agreed. For instance:

  1. Securitizing some of the $20 billion plus Venezuela has in receivables from Petrocaribe members and putting those bundled securities up for sale. Depending on the scale and characteristics of the securitization, it could raise the government from $1-5 billion.
  2. Giving foreign oil companies access to the Sicad-II rate so they can buy Bolivares for less to cover operating expenses and increase the profitability of their investments. There are literally billions of dollars in investments lined up. Giving foreign oil partners better terms could unleash that.

The external adjustment has never been announced, but it’s real.

Sure, the government’s management of the internal economy has been a disaster. Free gasoline, sky-high inflation, a broken exchange system, bachaquerópolis and a fiscal deficit of 15-20% of GDP (financed with printed money) are just the tip of the iceberg. But externally, in terms of its dollar inflows and outflows, Venezuela is closer to kosher than crazy.

And however erratic domestic policy-making gets, some facts don’t change. Key among them: the government cannot afford to default.

After all, what would it gain? Not much. It might be able to cut annual payments of principal and interest of around $10 billion a year to about $5 billion a year after it restructures the debt. But this is an economy that brings in $60-90 billion Venezuela every year from oil sales. Really, it’s going to cut itself off from international debt markets to save $5 billion? It doesn’t make sense.

On the other hand, what does the government have to lose from a default? A lot. First, the government will lose access to the credit markets it now uses to finance imports (by selling dollar-denominated bonds for Bolivares through Sicad-I and Sicad-II). A sudden stop to imports could worsen the already critical goods scarcity and be a severe shock to the economy, lowering the government’s popularity to dangerous levels. They could bypass this problem by issuing local-law, dollar-denominated bonds to pay importers (like Argentina) did but I don’t know if any importer would be crazy enough to trust Vene law after they just defaulted.

Second, PDVSA owns CITGO, a handful of other refineries in the Jamaica, Curacao and elsewhere, 23 oil tankers containing 30 million barrels of oil and a fleet of corporate jets: all of that could also be seized by defaulted bondholders. That’s not to be taken lightly, they need those corporate jets…how else are they supposed to get their nannies around?

What’s more, Chavistas have a lot of their own proceeds from corruption and influence peddling in Venezuelan bonds. If their investments tanked, god knows what these people could do (mutiny?). And then the public sector would come under serious financial scrutiny in a default, almost certainly revealing, fraud, corruption, and narco complicity.

Finally, the restructuring negotiations and media firestorm that characterize defaults would divide the government’s attention between default management and taking steps to ensure they stay in power—something they need to focus on at 30% approval.

If the government has the slightest clue what’s good for it, it will avoid default. That is why I think Venezuela will maneuver as much as it can before missing a payment. Maybe Chavez could have pulled off a default with minimal damage—he had the political chops to do it with grace, and maybe even come out on top. But Maduro, at 30% popularity? Please…

I should say this: if oil falls another 15 dollars, then all bets are off. At 60 dollars per barrel, Venezuela might not be able to pay the debt even if it wants to. But if oil hovers around these levels, I think it’s safe to say that the government likely can and likely pay through 2015.

We have to admit that some Chavista decision-makers are minimally rational and competent. They understand the basic cost-benefit outlook. They don’t want to default. They will avoid it while they can.

40 thoughts on “Still Two Sets To Go, Quico

  1. That is an excellent analysis. It says that despite some appearances, they know what they are doing when it comes to managing the external economic situation. But can they reduce the standard of living for an entire population dramatically, such as they are now doing, stay in power, and avoid wide-scale civil unrest or insurrection? Chavez “conoció bien su ganado.” I don’t think that Maduro, Cabello, et. al. possess the political skills to pull it off.


    • That is where the collectivos and the military come in and need to play their part to control the population while the standard of living is forcibly lowered. If they are intelligent about this then they can get away with it and manage lower oil and lower living standards.


  2. Excellent post!! , one sorely needed to give our view of things greater balance. however the information used for the most part is uncorroborated and includes figures which are speculative and slap dash (largely because of the govts opacity in disclosing what its doing or the scope of some of the measures its taking ).

    We really dont know to what extent these measures or their impact will be enough to remedy the regimes deepening financial crisis and avoid the looming risk of ultimate default . They do reveal that the govt is acting on several fronts in an effort to avoid or deferr a final financial cataclysm .

    Not helping things is the fall in oil prices, the creeping but apparently unstoppable drop in oil production (now at 2.3 MBD as per Opec sources) , the fall in the production of light/ medium conventional crudes forcing a greater reliance on the production of much less luchrative extra heavy crudes , the incapacity of the govt to control its own costs by avoiding waste and corruption, the impact of the coming power shortages and of course the fact that the more they cut the forex given private parties to maintain private manufacture and production the more discontent they will cause in the general population because of the resulting shortages.

    a Financial Default of course is something the regime will desperately want to avoid and which objectively speaking they probably have the means of avoiding . Of course at a cost which they might think politically prohibitive. Time will tell.!!


    • To the best of my knowledge, the information is accurate. The thing is, go to the BCV, Ministry of Finance or PDVSA’s website. They haven’t published a lot of information since 3Q2013. And the data they do still publish is scarce. The numbers here are sort of an amalgamation of the best stuff I (and other people on Wall Street) have gathered from different official and non-official sources.


  3. Sorry for raining on your parade, but the bond market and the “black” dollar is telling me that your analysis is a waste of time. If you include that in the last 5 days the reserves of the BCV has decreased by 500 millions , I will conclude that you should stop eating Big Macs.
    I will give you a hint…for each dollar that oil falls, Venezuela receives 700 millions less per year. Multiply by 39 (oil at 70), It will give you 27 bi less per year. All your savings goes for less than 10 bi (case they are real). This does not include the decrease of production, the refineries going dark, the decrease on the price of gold and many other “little ” things.


    • Sure, $27 billion a year less in revenues is a dramatic contraction. But its a dramatic contraction from all time highs. Oil was not always at $109. When Chavez was elected, it was at $15. And Post-Recession, it fell to the $40 in 2008-2009.

      There’s a small payment due in March (about $3 billion) and then another ($7 billion) in October or November. I think they will squeeze the money out from somewhere. If, as you say, oil production has dropped 0.5 mbpd and nobody knows about it, that’s another story.

      With regards to the black market. It tells me not that much about dollar finances. The government has been printing money like crazy–M2 has been increasing 60%+ year over year for like 2 years now. If theres the same (or slighltly less) dollars available and negative real interest rates, of course the black market is headed up.

      Anyways though. Thanks for reading. There will always be bulls and bears hahah.


      • On the subject of how much oil is being actualy pumped by Venezuela a local media reports that according to Opecs monthly Oil Market Report for the month of November (which shows a table with the production reported by each Opec member and another with the production as determined using secondary sources) Venezuelas last reported production (for the 2nd Quarter of 2014) was 2.826 tbd while that assesed by secondary sources for October of 2014 is of 2.328 tbd . The gap between the two production figures is 498 tbd .

        This number is very close to the ‘0.5 mbpd’ mentioned by MacPapas , add to that the continuing drop in the oil prices (close to 30% as per President Maduro) and the published report from the US that Citgo is failing to receive a large part of the crude oil it normally receives from Venezuela .

        Do we have a precise time table of the amounts which Venezuela / Pdvsa have to pay their financial creditors for the period 2014-2016 ?? I read the number 20 billion $ somewhere but dont know how that number was calculated. Beware that the Chinese loan is technically disguised as something different to distort the perception of how much Venezuela actually owes its offshore creditors.


  4. Good analysis. The IEA thinks that oil prices will keep falling well into 2015 and Russia is preparing itself for a catastrophic fall in prices. Interesting times.


  5. Excellent post. I was surprised about the petrocaribe changes, I hadn’t seen them anywhere else. Do you have some links for that? I think it is very telling about the situation and the sort of adjustment that the government seems to be doing–or at least trying to do–.


    • To be honest I don’t have the links to the PetroCaribe changes. I sourced that from a report from a Big Wall street bank that has good coverage on Venezuela.

      The changes makes sense though. We’ve seen it happening little by little, first with the increase in interest rate on the financed part of the shipments from 1% to 2% that all PetroCaribe recipients fretted about. The government is now at a time where it needs to prioritize internal popularity vs. international popularity. Maria Corina was already denied at the OAS and Venezuela already has its seat in the Security Council. For now, petrodiplomacy is a secondary priority.


      • Well, we gotta admit it took a while for this kind of change to happen, but it makes sense that it occurred hand in hand with changes in the loans’ agreements with China. All of this speaks about the various “greys of default” and adjustment needed.


  6. “I should say this: if oil falls another 15 dollars, then all bets are off. At 60 dollars per barrel, Venezuela might not be able to pay the debt even if it wants to. But if oil hovers around these levels, I think it’s safe to say that the government likely can and likely pay through 2015.”

    This is the central core of your argument. What numbers are you looking at that says 60 dollars per barrel is the ‘sure’ bankruptcy point? Perhaps “all bets are off” has already been breached at 75 dollars a barrel? Calamity and insanity starts from here, right now. Perhaps there is now only enough money to pay for food imports and absolute bare necessities? Panic may be just around the corner.


    • “Perhaps there is now only enough money to pay for food imports and absolute bare necessities?”
      Scarcity levels state that there’s NOT enough money even to import the food and absolute bare necessities.


  7. Where will maburro squeeze more dollars from?
    Cutting the “regaladera”? No. Effin’. Way. cuban prostibolution demands its tribute.
    Guess what’ll it be? One simple measure, raise gasoline prices.
    Boooo! The ghost of cuban-instigated-riots, uh, I mean, “caracazo”, “caracazo!” yeah, yeah, the caracazo ghost is howling!
    And the opposition won’t even open their mouth about it.


  8. “I should say this: if oil falls another 15 dollars, then all bets are off. At 60 dollars per barrel, Venezuela might not be able to pay the debt even if it wants to. But if oil hovers around these levels, I think it’s safe to say that the government likely can and likely pay through 2015.”

    Evidence that too much devil excrement can indeed become a curse: the Venezuelan government only acts sane when its deprived of all that oil revenue it is used to. If the barrel price goes below 60, PSUV will probably transform Venezuela in the most welcoming environment to do business in the continent. haha.

    “who is writing from the second floor of what was once the highest grossing McDonalds in Latin America — a.k.a., el McDonalds de La Castellana).”

    How interesting. When was that? And which one has surpassed it? Thanks.


  9. I believe that the Papafritas guy is on to something when he states that measures are being taken piece meal by the govt to slow the ongoing financial erosion in the countrys finances, my problem is that I cant match each measure to something that gives us better quality figures . For example do we know by how many bls the sale of oil to Petrocaribe has dropped this year , in what way the loan terms and prices are better than they were before , how much money the Pdvsa pension fund has available to buy Govt or Pdvsa Debt , In what way the Chinese loans are to be serviced on more lax terms . There is really no hard math to support the view that all those measures will have an impact which substantially delays or prevents a financial default in 2 to 3 years . If he relies on Wall Street sources but without much specifics then its a question of faith . Its not his fault that its so hard to come by reliable information but there is really not much to pin your assesment of the govts finances on. What i do know is that the oil income situation is growing critical , not only in terms of bls being produced and in terms of prices , but in terms of the net income that Pdvsa can realize on the kind of bls it now has avialable to produce and sell .(extra heavy crude) , Citgo is not getting the bls it usually gets because the kind of crude it needs is not getting produced in enough numbers , this diminishes the income from sales to the US very significantly . There is a limit to cutting imports of things needed to keep the countrys customary consumption needs going !! I feel that pieces like the one we are looking at should be encouraged and are deserving of compliment but the final conclusion is one which is far from being demonstrated.


  10. Again, which reserves as far as i know, this was discussed here, we only have 20 billions in reserves, 18 of them are in gold, about what reserves are we talking about, Fonden, Fondo Chino?, wasn’t those funds scrapped and replaced by a unique fund with only $750 millions in it?, did i understand wrongly that discussion?


  11. Quico, excellent piece. So the conclusion is “No default in 2015”. However fast forward only 8 months to June 2015, we r gonna be again talking about 2016, thus at this point, can anyone with a degree of certainty forecast what will happen in 2016? The answer is No. By Mid 2015, the above mentioned measures (i.e savings from all sort of cuts) would have been implemented already, and then what? What other fiscal or external fx rebalancing measures the govt will have under the hat? Probably few as most of the adjustments are already contemplated in your above list. PDVSA bonds in the 10 yr area are already 39 cents, only 4 cents/points from a theoretical recovery value (close to Argentina 2005) however market read now this will default sooner or later, this wont change until oil goes higher or market proven wrong. 2016 is just after the corner.


  12. To assign some intelligence or coordination to these “adjustments” is overly optimistic. I think they were made on the fly or forced on them (like China). The adjustments that can be made to avoid default have not been made. I don’t think default is coming, but this is too optimistic. For example, How you can get 5 billion dollars from the Petrocaribe debt requires magic. The debt is 20 billion, the interest rate is 1-2.5% with a two year grace period for 25 years. How out of that you can securitize and get 5 billion, or even 3, requires true magic, if my MBA education was worth two cents.


    • How much the bundled securities can be sold for depends on the characteristics of the securitization–in particular, on how senior the bundled securities are relative to other securities and whether or not they are guaranteed by the Venezuelan government and if so, on the details of the guarantee. The securitization can be done in lots of ways and the details are quite relevant.

      Also, Petrocaribe started in 2005 so some of those debts are due in 2030 (in 16 years). The average maturity of those debts (for now) is approximately 2034, in 20 years. These are the facts I considered when I argued the government could raise $1-5 billion. $5 billion was meant to be a best case ballpark estimate on the $23 billion face value the government is owed.


      • Of course they can not be guaranteed by the Venezuelan Government, you either bundled them guaranteed by the countries or do tranches guaranteed by each country. They will be the guarantee, if Venezuela does not step out of the picture, then it is hopeless. If you take Dominican Republic for 14 years, the ytm is 13.4% and securitize it guaranteed by that country (The largest debtor of the lot), given that they are paying 1-2.5% for the gasoline, you will have a hard time getting 15% for it. So, again, do the math, you will never get to those levels and the biggest “lendings” was done about five years ago, so that your 16 is, again, on the optimistic side of life. And remember the two years grace period too when you do the calculations, they make life even harder.


        • Sure, but not all of the debt is from the Dominican Republic. You have a Jamaican debt in there (7.5% YTM) and other countries that have lower risk premiums than DR as well.

          Suppose, for argument’s sake, that bundled security is structured like a “bullet” bond with 100% of principal paid at maturity, maturing in 20 years and a “cupon” of 1%. At a 77% discount, or 23 cents on the dollar, such a bond gives you 10.5% YTM. That price and yield is about what the securities would sell for in a best case scenario. Multiply the 23 billion Venezuela has in Petrocaribe receivables by 0.23 and you get $5.06 billion. That is where I am getting my estimate from. It is intended to be a best case ballpark estimate.

          The bundled securities–as you said–would probably sell for a higher YTM. They would probably sell in the neighborhood of 13% YTM. At 13.5% YTM, you only get 15 cents on the dollar, i.e., $3.45 billion. By writing $1-5 billion, I am stating best/worst case bounds.


  13. Economic cracks in Caracas
    • Uncertainty over Venezuela paying its invoices has affected the supply chain
    • This has led to fiscal resources stretching to breaking point
    • The yield on two-year state debt has accelerated from 9.234% in June this year to 29.822% last Friday
    By Stephen Pope

    Venezuela is a nation that is certainly enduring severe economic problems. In 2014, gross domestic product is on schedule to fall by 2.5% and consumer prices will expand by an eye-watering 62.2%.

    Given that oil exports account for 50% of the national GDP, it is not surprising to find that the markets are taking a very nervous view about a nation whose economy has been grossly distorted by recent experiments with state-controlled socialism.

    The hard left rhetoric of the late Hugo Chávez and current president Nicolás Maduro may have squeaked by when the oil price was trading above $100/Barrel. However, the current level of oil prices are just 48% of what the nation needs if it is to balance its books this year. Since the oil price decline began in June the government has floundered as it copes with ever-heightening macroeconomic dislocations that have created huge difficulties for Venezuelan industry.
    The crippling level of inflation and uncertainly over whether or not invoices will be honoured has gummed up the supply chain so that bottlenecks continue to fetter trade, limit business activity and thereby further reduce revenue into the government’s coffers.

    The upshot is that fiscal resources are stretched and are so close to breaking point that there is a genuine prospect of a sovereign default. The yield on two-year state debt has accelerated from 9.234% on June 1 this year to a jaw dropping 29.822% last Friday as the markets closed.

    The limited flow of revenue into the state has quite rightly spooked the markets as Venezuela has to meet obligations worth $28 billion of debt over the next two years. Meanwhile liabilities keep rising at a time when the balance of foreign reserves decreased to $20.5 billion in October 2014 from $21.3 billion in September 2014. This is the lowest since August 2004 when they were $20.7 Billion.

    We must be careful not believe the apologists for the current administration. They claim Venezuelan citizens have access to basics i.e. food produce and medicine. That does not explain why Maduro has blocked access to eggs, milk and ironically oil.

    Shortages of staples like meat, milk, soap and toilet tissue have become a chronic feature of daily life in this once wealthy nation. The sad fact is that grocery shopping has become a totally random hit or miss affair marked by ever-lengthening queues. The shortages affect both the poor and the well-off; so much for socialism helping the poorest in society.


    The difficulties have been bubbling under the surface for some years now and were always masked, cosmetically, by the healthy oil revenues that the nation could earn. Dogma-driven nationalisation of the consumer goods industries led to a lack of competition and incentive so productivity has declined, which implied that increasing amounts of consumer demand was met by imports to cover the shortfall.

    As is the way of any society where control is next to total within the centre, nods and favours were granted by Chávez to his favourites and their connected parties so allowing access to dollars at 6.3 bolívares fuertes for a dollar (USDVEF), and reselling them on the black market for USDVEF 97.

    This has created a surge in demand for dollars and put downward pressure on foreign currency reserves as the Banco Central de Venezuela has fought to stave off currency outflows. In short, Venezuela is being squeezed in a pincer movement by falling currency reserves and diminished export.

    Expert opinion, with or without Excel

    Although still somewhat scared by their Excel file errors, I believe the Harvard economists Kenneth Rogoff and Carmen Reinhart are very much worth listening to. On October 16, they said that Venezuela is so badly mismanaged that real per capita GDP today is 2% lower than it was in 1970, despite a 1000% increase in oil prices.

    The rating agencies all place a negative outlook on the national debt as the ratings are listed as Moody’s Caa1, S&P CCC+ (Substantial Risks) and Fitch B (Highly Speculative).

    Looking deeper into the national accounts one can establish that Chávez and Maduro have accumulated unpaid bills of $3.5 billion for pharmaceuticals, $2 billion payment for food, and nearly $4 billion owed to airline companies.

    Venezuela already has accumulated many domestic defaults and given the economy is spiralling ever downward, an external default is highly likely and aggressive vulture funds are circling as they sense another Argentina moment.

    Recently Maduro has criticised the Reuters news agency for daring to publish articles that were critical of Venezuela’s economic problems. However, he cannot ignore that fact that the latest phenomenon to grip the capital city is for “pop-markets” to appear, ready to sell illegal, black market consumer goods at prices far higher than the price floor that the government has imposed.

    Prices are set so ludicrously low, that companies and producers cannot make a profit. This means that farmers grow less food, manufacturers cut back production and retailers carry reduced inventory. Consumers are increasingly turning to such pop-ups as they find the access to certain consumer items that are not the “basics” are becoming increasingly rare.
    They will pay excessive prices if it means they are able to obtain what they want, when they want it. This is simply creating another gaping hole in the revenue collection net of the state government.

    Maduro may attack the US and other Latin American countries such as Columbia for waging an economic war on Venezuela. However, patriotism is always the last refuge of the economic scoundrel.

    – Edited by Gayle Bryant

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