Maduroa

Forecast here: Will Venezuela default on its sovereign debts in 2016?

The news from Venezuela gets progressively worse. This last week Coca-Cola suspended its operations in the country because of a lack of sugar cane crop. Lufthansa announced it will be cancelling its flights in and out of the country as of 18th June. Economic isolation is not good for the country, whichever way you look at it. The government has recently resorted to firing tear gas at protesters in the capital Caracas.

The evidence of a country and government in disarray are everywhere but does all this add up to a sovereign default? Governments tend not to default on their international obligations if they can help it. The current regime have always stressed that it would pay its bills. So let’s look at some evidence.

First things first, a default relates to a missed payment on debt issued directly by the government. This means, in effect, the does the government have any big payments due. Not really. Its shortest-dated bond currently in issue matures on 15th August 2018. There will though be, by my calculations, $1.4bn worth of coupon payments to make before the end of the year.

You don’t find that money behind the back of the sofa but Venezuela has huge oil reserves (currently rising in value) as well as plenty more gold and other FX reserves stashed in the Central Bank. Added to that, China has recently stepped into the breach to offer favourable loans in return for oil. Note also the dolartoday.com which tracks the black market price of the Venezuelan Bolivar has seen the local currency appreciate by over 10% since its recent lows of mid-March.

For a sense of which way the wind is blowing, it might be worth looking at how the state-owned oil company PDVSA deals with its own outstanding debt – it recently issued $310m worth of short-dated debt to its suppliers in lieu of payment. It has a $1bn bond maturing on 28th October of this year and $2.3bn worth of coupon payments on $59.6bn worth of outstanding US$-denominated bonds. A default on any of these payments would not strictly constitute sovereign default but would probably have the same practical consequences.

Further Reading

  • Find the latest black market FX prices for the Venezuelan Bolivar at DolarToday
  • Financial press speculation on the likelihood of a sovereign default (Barron’s – 28th May)
  • Deutsche Bank provide percentage probabilities of default based on the credit default swaps (CDS) market. (Explanation and calculations)

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