Venezuela is at a political crossroads, with an all-important parliamentary election set to take place in December. Meanwhile, the Venezuelan economy continues to deteriorate as the state seeks to stave off default and a brewing financial crisis.
The state-owned oil company PDVSA is looking to push off debt repayments that are due in 2016 and 2017, hoping to buy two more years of breathing room. Eulogio del Pino, the president of PDVSA, confirmed that the oil company completed debt payments of $4.2 billion that matured last month, and will pay another $1 billion due in the near future. But PDVSA is also seeking to work with bond holders to extend the deadlines for short-term debt until 2018 and 2019.
The comments from del Pino highlight the growing difficulty Venezuela is having in dealing with the collapse of crude prices. For a country that depends on oil exports for 95 percent of its export revenue, the bust in oil prices is hurting the South American OPEC member worse than most.
Bond prices for the government and PDVSA have collapsed, a development that del Pino blames on speculators seeking to drive down their value. Based on market sentiment, there is a strong consensus that Venezuela is facing the likelihood of default within the next year. Still, Venezuela thus far has been careful to meet debt payments, something that del Pino argued should give PDVSA credibility as it seeks to renegotiate maturity terms with bondholders.
But cash is running low. Gold reserves are falling sharply as Venezuela liquidates them to raise funds to meet debt payments. Also, the Wall Street Journal reported that Venezuela withdrew $467 million in cash reserves that it keeps with the International Monetary Fund, a sign that Venezuela is scrambling to raise as much money as it can. “Venezuela and PDVSA has a major liquidity problem,” Goldman Sachs analyst Mauro Roca told the WSJ. “If they are able to in some way to push those payments down the road through financial engineering they’ll be able to continue muddling along.”
Venezuela’s GDP could fall by 10 percent this year, the worst economic performance in the entire world. The country suffers from shortages of basic goods, including food and medicine. And inflation is running at around 85 percent, at least according to official estimates, which are likely vastly understating the true inflation rate. Crime rates are some of the worst in the hemisphere.
It is hard to see how the fortunes for Venezuela will improve in the near-term. Oil prices are showing very little sign of rebounding in a substantial way. Venezuelan officials have been pleading with OPEC to alter course and pursue a stronger price target. Venezuelan President Nicolas Maduro says that oil prices need to rise to $88 per barrel in order to guarantee global oil investments. “If the price of oil stays at $40, there will be a depreciation of investment, and within a few months we are going to see a price of $150, $200. Who does this suit? Nobody,” Maduro said on state TV.
His pleas fell on deaf ears. Saudi Arabia continues to dismiss calls from its fellow OPEC members to abandon its strategy of pursuing market share. “Let the market determine the price,” Saudi oil minister Ali al-Naimi said at a conference in late October.
Venezuela’s heavy crude fetches a lower price than some international benchmarks. While WTI traded for around $46 per barrel for the week ending on October 23, PDVSA was earning just $39.47 per barrel.
The economic crisis could quickly undermine political stability, especially with elections scheduled for December 6. Maduro’s mismanagement of the economy and the worsening economic crisis has cut into the popularity of the Chavista government. That would suggest that the opposition would score a major victory in the legislative elections in a few weeks, but there are few reasons to be optimistic about the fairness of the vote. On October 26, Maduro declared an “emergency” and said that he would activate an “anti-coup” plan ahead of the elections, an ominous development considering that the government routinely cracks down on opposition figures, jailing them on trumped up charges. And with state control of the media, the playing field is tilted in favor of the ruling party.
Late last month, Brazil withdrew its involvement in election monitoring after Venezuela rejected the officials Brazil put forward. Maduro is doing his best to keep international observers from scrutinizing the election.
The election will take place just as the OPEC meeting will be wrapping up in Vienna, which is expected to yield few benefits for Venezuela. All signs point to OPEC continuing its market share strategy, keeping a lid on any substantial price rebound in the short-run. That does not bode well for Venezuela as it teeters on the brink of catastrophe.