How much debt is “manageable”?

According to IMF statistics, Japan’s general government’s gross debt for 2015 is 246% of GDP: the government owes 2.46 times as much as the Japanese economy as a whole produces in a year. For Italy, the number is 134%. The United States? 105%. And for Venezuela? A tiny 40%.

See, we’re doing great, right?

Except, of course, as with everything in Bolivarian Socialism, there’s a catch. Both numbers that go into making that debt-to-GDP ratio are in dispute. And the ratio itself can vary wildly depending on where you come down on those disputes.

Consider:

Official data is old and incomplete. The last known official GDP result is from the 3^rd trimester of 2014; official statistics about Central Government debt are from March, 2014; and other relevant information, like the status of Chinese loans amongst others, is mostly unknown.

What should be included as debt? Adding both external and domestic debt from Central Government, Pdvsa and Fondo Chino, Venezuela owes an estimated US$140 bln. (according to JP Morgan) and US$$190 bln. (according to Ecoanalítica). But there are other commitments that some argue should be thought of as debt. For example, we have settlements being forced against the Republic in international courts (like the ones for Exxon or Gold Reserve), and we have the Cadivi-Cencoex amounts approved but not cancelled – currency allocation the government supposedly owes the private sector.

These aren’t financial debt in the strict sense of the term, but they have an element of debtiness to them. In any company, these would be liabilities. Considering them, obligations may be over US$ 240 bln.

Which exchange rate should we use? If we want domestic debt or local GDP valued in US dollars, we have to make a choice amongst 3 official exchange rates, a black market exchange rate, or a different exchange rate estimated on our own.

Let’s consider first our 3 official exchange rates. IMF estimation for the current GDP in national currency for 2014 is BsF 3,145.4 bln. That would be US$ 499 bln. at Cencoex exchange rate (6.3 BsF/US$), US$ 262 bln. at Sicad (12 BsF/US$) or US$ 16 bln. at Simadi (196.9 BsF/US$).

Our choice amongst official exchange rates can take the Venezuelan economy from one the size of Austria to one the size of Papua Nueva Guinea. Of course, this translates into a very, very wide range for the debt-to-GDP ratios. For example, at the 6.3 rate, our debt to GDP ratio is about 33%. At the 12 rate, the ratio would be roughly 63%, while at the Simad rate, our ration would be well over 1000%.

Since Venezuela seems to be neither Austria nor Papua Nueva Guinea, calculations are generally made with an estimated exchange rate somewhere in the middle. Just as an exercise, suppose we said that GDP is about $150 billion, which would actually imply an exchange rate of about 21. This means our debt to GDP ratio is close to 100%.

Some estimate the exchange rate adjusting it for purchasing power parity, while others calculate a weighted average considering how currency allocations in the country might be. In this topic, all we officially know is that less than 2% of allocations from the public sector are made at the Simadi exchange rate. How the 98% of official allocations are distributed between Cencoex and Sicad, or how much of the country’s currency supply comes from the black market, are things unknown. Bottom line: the lower the exchange rate you estimate, the more “manageable” the foreign debt looks in relation to GDP.

The real question: can the debt be paid? Debt should be –and usually is- compared to GDP, to exports, and to external assets (like foreign exchange reserves, accounts receivable, and oil refineries abroad we could sell). Those numbers give us an approximation to how large the debt burden is, but according to some research from the World Bank, debt burden is only one of three significant factors for a “distress event” (that being the moment a country defaults, or refinances, or goes to the IMF for a loan and a “paquete”). The other two significant factors are the quality of institutions and policies, and shocks that affect real GDP growth. We can argue about how good we do on the burden factor, but it’s harder to dispute we do very poorly in the last two factors.

Venezuela has the worst institutions of the world, literally. And due to a hostile business environment and accumulating inefficiencies and distortions, the economy is in recession since the first semester 2014, when oil prices were still close to US$ 100 per barrel. Then oil prices fell, so we got a recession on top of a recession, with people facing rising scarcity, inflation, growing informal markets, increasing poverty and crime.

In this context, both Pdvsa and the Central Government have chosen to honor their commitments and prove their financial strength. Last March, the Central Governmente paid EUR 1 bln. plus interests for its Eurobono 2015. Tomorrow, Pdvsa will pay interests for the Petrobonos 2015 and 2016. Those choices show the Republic and Pdvsa currently find the burden of their debt still tolerable, and default looks like a terrible choice to make –because it is.

The context in which that decision is being made can change. The debt burden might seem heavier some months from now if oil prices remain low, if no more loans come from China, if our local economic crisis gets even worst, and if we have no PetroCaribe receivables left to sell, no more gold abroad to swap, and no more capacity to issue debt from Citgo.

We are already having a hard time accessing foreign financing options, and we are depleting our assets without even being able to stop our foreign exchange reserves from falling. So maybe we’ll gather enough resources to pay our debt for the next years and maybe the willingness of the Central Government to honor its commitments will remain strong.

Maybe we’ll manage, for now, but markets don’t put Venezuela at the top of risky debt in the world (behind Ukraine) for nothing. Something to think about while people try to convince us that our debt burden is completely manageable.