Default would be catastrophic for Venezuela

From Stratfor

Venezuela’s state-run oil and natural gas company, Petroleos de Venezuela (PDVSA), has been ailing for some time. Low oil prices and political disarray have made it difficult for PDVSA to repay its debts, but the government has managed to do so by contracting food imports. The fate of the company has far-reaching implications for the country’s stability.

On Nov. 21, it came to light that the company had missed interest payments worth $404 million on bonds maturing in 2021, 2024 and 2035. It is not yet clear whether PDVSA’s failure to pay the bond interest stems from a cash flow problem. And the missed interest payments do not mean that PDVSA is in default. The company has a 30-day grace period ending in the second week of December. If it does not meet the payments by that date, then it will likely fall into default.

Depending on the reason for the missing payments, this could indicate serious problems for the company. If PDVSA does not have enough cash readily available to meet the payments, it could mean the company is dangerously close to default. That outcome would be catastrophic for Venezuela. The country depends on PDVSA’s oil and energy exports for around 95 percent of its export revenue. Venezuela’s imports are already contracting and a sudden default would make the contraction sharper, provoking more social unrest and increased emigration of Venezuelans to neighboring countries. A default at PDVSA would also cripple the economy, making long-term prospects for recovery dimmer and ushering in further political instability.

For its part, PDVSA has blamed U.S.-based Citibank and suggested that the financial entity’s delays in processing the debt payment are at fault. Citibank has reportedly been exercising additional caution in processing Venezuelan debt payments because of alleged malfeasance at PDVSA, including money laundering.

It is plausible that PDVSA will still manage to meet the debt payments and avert a default in 2017, particularly now that a successful debt swap earlier in October freed the cash-strapped company from around $2.8 billion in foreign debt payments due in 2017. But the longer-term prospects for the company are uncertain, as are the implications for the delicate political balance in Caracas.

 

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