President Nicolás Maduro has said there’s a foreign conspiracy in action against Venezuela. On December 13, he
lashed out at the international credit-rating companies that assigned
junk ratings to his country’s foreign currency bonds, accusing them of
orchestrating “a vulgar, immoral financial blockade.”
The reality is simpler though, says Bloomberg Businessweek.
A 40 percent fall in oil prices this year is raising concerns that Venezuela is running out of dollars to pay its debts. The concerns have pushed up yields for the country’s bonds to levels not seen since the 1998 Russian financial crisis spurred a selloff in emerging-market debt. Credit-default swaps—financial contracts that insure investors against nonpayment - peg the likelihood of a default at more than 90 percent.
Maduro’s popularity is quickly decreasing amid
an economic crisis marked by widespread shortages and runaway inflation.
Gross domestic product contracted 3 percent this year and will shrink
1.5 percent in 2015, according to the median estimate of 15 analysts
surveyed by Bloomberg. The Central Bank of Venezuela hasn’t published
inflation data since August, when it reported prices were up 63 percent
in the previous 12 months - the fastest pace for any country.
“I just spent the last three hours looking for medicines,” says Alicia Gonzalez, a retired civil servant living in Caracas. “I can’t even begin to think about Christmas presents this year.”
More than 70 percent of respondents said Maduro shouldn’t be allowed to
finish his term, which ends in 2019, according to the results of a November poll by the Caracas-based consulting firm Datanalisis.
“Unless the government is able to generate a significant improvement in economic conditions during the coming year, it could lose its parliamentary majority and face a recall referendum in early 2016,” wrote Bank of America economist Francisco Rodríguez in a note to clients.
Following OPEC’s decision not to
rein in production to counter slumping prices, Venezuelan crude has dropped below $60 a barrel. (Maduro’s government had
lobbied for a reduction in output at the cartel’s November meeting.)
Venezuela needs oil to average $85 a barrel to keep up debt payments and pay for imports, even assuming it cuts handouts to regional allies and reschedules loans from China, says Siobhan Morden, head of Latin America strategy at Jefferies Group.
Prices of Venezuelan bonds fell to a 16-year low on Dec. 15 after Maduro said he had no plans to curb the domestic gasoline subsidies that eat up more than $15 billion of the budget each year. A reduction in cut-rate oil exports to Cuba and other Caribbean nations is not on the table either. Maduro has also resisted pressure from within his own cabinet to devalue the currency: The official exchange rate ranges from 6.3 bolívars to 50 bolívars per U.S. dollar, depending on the type of transaction. On the streets of Caracas, a dollar fetches 180 bolívars.
A money manager at New York’s AllianceBernstein Marco Santamaria
says Venezuela’s creditworthiness will remain in doubt even if oil
rebounds. The authorities had been running a deficit and depleting its
stock of foreign currency when crude was at $100 per barrel.
Reserves of international currency are at their lowest levels in a decade
and cover only about 40 percent of the debt due over the next five
years.
The president has declared that he has no intention of halting debt payments because
it would not be consistent with the course charted by his predecessor
and mentor, Hugo Chávez.
“There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development,” he said in the Dec. 13 speech.
However, according to London-based Capital Economics analysts, “The writing is on the wall for Venezuela,” they wrote in a Nov. 28 report. “We continue to think that a default is more likely than not in the next two years.”
