Venezuela has been on default watch for months. Its credit rating is already in the gutter, at CCC at Standard & Poor’s. With oil now $20 lower thant it was when the S&P made that call, a default is no longer a question of if, but when.
A recent emergency economic decree is likely too late to save anyone but president Nicolas Maduro. After two years of inaction and the recent decline in oil prices, Barclays Capital analyst Alejandro Arreazaa said a ” credit event” in 2016 is ” increasingly difficult to avoid.” In other words, oil major PDVSA and the government it bankrolls is going bankrupt.
With oil under $30, Venezuela would need to use 90% of PDVSA’s oil export revenue to meet debt obligations to local and foreign creditors.
Figures released Wednesday by the Central Bank of Venezuela show that foreign currency reserves were just around $20 billion in the third quarter, but by the end of November they hit just $14 billion, the lowest ever. Net assets are also seen shrinking to around $24 billion, roughly $10 billion less than a year ago. Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap.
Maduro keeps reiterating his government’s willingness to pay its debts, but his anti-Yankee rhetoric and is hardline against multinationals there makes him hard to believe. The official position shows a lack of understanding of the magnitude and roots of the crisis, making for this default to be the biggest Latin America has seen since Argentina’s in 2001 and its more strategic default on the same debt in 2014.
Venezuela has about four weeks to figure this out or the first sovereign default of 2016 will come from the radical socialist government of Hugo Chavez and his successor Maduro.