Venezuela’s Got $21 Billion, Owes $21 Billion as Crisis Builds

By Katia Porzecanski

Of all the financial barometers highlighting the crisis in Venezuela, this may be the one that unnerves investors the most as oil sinks: The country’s foreign reserves only cover two years of bond payments.
The government and state-run oil company owe $21 billion on overseas bonds by the end of 2016, an amount equal to about 100 percent of reserves. Those figures explain why derivatives traders aren’t only betting that a default is almost certain but that it will most likely happen within a year.
The 42 percent collapse in crude in the past six months stripped President Nicolas Maduro of the one thing -- windfall profits for the country’s No. 1 export -- that was preventing a full-blown crisis. Even before oil started sinking, the OPEC member had depleted 30 percent of its reserves in the past six years, the result of billions of dollars of
capital flight triggered by the socialist push implemented by Maduro’s mentor and predecessor, the late Hugo Chavez.
“These are panic capitulation levels,” Kathryn Rooney Vera, an economist at Bulltick Capital Markets, said in an e-mailed response to questions. “Oil’s continued price decline is ratcheting up risk aversion to exporters, and even more so for an economy already as distorted as that of Venezuela.”
The cost to insure Venezuelan debt against non-payment over the next 12 months surged to about 6,928 basis points yesterday in New York, according to CMA data, widening the price gap over five-year protection to a record.
The upfront cost of one-year contracts implies a 61 percent probability of default by December 2015. Swaps prices show a 93 percent chance of non-payment by 2019. Venezuela’s benchmark bonds due 2027 have fallen for six straight days, reaching 43.7 cents on the dollar, the lowest in 16 years.

Interest Payments

The next interest payment on government bonds, due Jan. 13, is for about $70 million. Payments due on debt of the sovereign alone amount to about $22.4 billion over the next five years, surpassing the nation’s current level of reserves. Brazil’s supply of dollars is more than five times the payments it owes on all its foreign bonds, according to data compiled by Bloomberg.
At current oil prices, Venezuela will face a funding shortfall of about $25 billion next year, according to Citigroup Inc. estimates. Every $10 drop in Venezuela’s oil basket -- which has plunged about $30 in the past three months -- means a $5.7 billion loss in government revenue, according to the bank’s estimates.
“Venezuela looks to be just a mess,” Mark Okada, chief investment officer at Highland Capital Management, said yesterday in an interview in New York. Emerging markets in general will suffer in 2015, he said, as “they’re correlated and levered to the commodity cycle in such a meaningful way.”

Oil Exports

Venezuela, which has nationalized more than 1,000 companies since Chavez came to power 15 years ago, relies on oil for 95 percent of its export revenue. Chavez died in 2013.
The nation -- which imports 75 percent of its goods -- is plagued by chronic shortages of everything from milk to toilet paper amid the world’s fastest inflation. The economy is expected to shrink 3 percent this year and another 1.5 percent in 2015, according to the median estimate of 15 analysts surveyed by Bloomberg.
“It’s striking to me the lengths that Venezuela has gone to preserve dollars for debt service,” Cathy Hepworth, a Newark, New Jersey-based money manager at Prudential Financial, said in an e-mail Dec. 5. “The question is what will Venezuela do when there is no longer an ability to pay.”