SPECIAL REPORT

ECONOMIC RESEARCH
January 19, 2015 - N5
Juan Carlos Rodado, Juan Jose Abad, Yuze Yuan

Venezuela: what if the country defaults?

Moodys downgraded Venezuelas government bonds to Caa3 last Tuesday, citing a substantial risk of
default. The risk of a balance of payments crisis/default is serious given the brutal collapse of oil prices, the
low level of liquid reserves, recession (-4.0% Y/Y on average in Q1-Q3 2014), inflation (63.6% Y/Y in
November), economic distortions and the risk of social implosion. As a result, President Maduro is
desperately seeking for fresh money in order to avoid a default. Even if it will be temporary, a default will
spark volatility in EM as many countries have also based their economic model on oil. China and Caribbean
economies will feel some pain but as always the most affected are Venezuelans who pay the price of years of
erratic policy choices.

1/ Insufficient oxygen
Venezuela is not able to cover its external
commitments due in 2015 with liquid reserves. This
is true for sovereign (5.8 Bns USD in capital and
interest) and PDVSA (6.0 Bns USD) bonds.
International reserves (20.7 Bns USD this week) are
not liquid enough. President Maduro is paying today
for President Chavez decision to hold reserves in
gold and in the most illiquid form: in the coffers of
the central bank in Caracas. In other words,
Venezuela has probably only around 1.5 Bns in liquid
reserves in deposit in banks (Table 1). The country
needs therefore to raise fresh money in order to honor
its international creditors. The sovereign has big
payments in March while PDVSA in October and
November (Table 2).
Table 1: Composition international
reserves (August 2014, Bns USD)
Gold in Venezuela

12.3

Gold abroad

2.8

DEG's

3.4

Deposit in banks

1.5

Position in IMF

0.5

Deposit in FLR

0.5

International reserves
Sources: Central bank, Natixis

21.3

Table 2: Scheduled debt paym ents in foreign

currency for Venezuela and PDVSA in 2015 (USD
Mns)
Due

PDVSA
Principal

Venezuela

Interest

Principal

Interest

Jan

Feb

214

577

Mar

2327

382

Apr

264

472

May

801

183

Jun

80

Jul

70

Aug

212

577

Sep

110

258

Oct

1415

264

472

Nov

2050

801

182

Dec

80

Source: Bloomberg

This explains President Maduros international visits

(China, Iran, Russia, Qatar...) and diplomatic efforts to
bolster oil prices. But it is probably pointless to ask
king Abdullah to adjust oil output with a noncooperative OPEC cartel and a booming shale
industry in the US. Saudi Arabia has one of the
lowest cash production cost (Chart 1) in the oil industry
and a sound financial situation with 734 Bns USD in
international reserves. Moreover, after spending 4
days with Chinese authorities, President Maduro
announced 20 Bns USD in new investments from
China. The funds are nevertheless earmarked for

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economic, energy and social projects and will be

progressively disbursed as the projects advance.

Chart 2
Fiscal break-even (USD/bbl)

180
160

40

Chart 1
Cash costs with royalties (USD/bbl)

35

140
120
100

30

Sources : NATIXIS

80

25

60
20

40

15

20
Sources : NATIXIS

10

China has already signed 38 cooperation agreements

and several credit lines repaid in oil. While the
government pledges Chinese investors will rush to
Venezuelas Strategic Development Zones, the truth
is that President Maduro was not able to raise fresh
money. Corruption scandals have weighed on the
relationships with Chinese authorities. Meanwhile,
President Correa who visited China a week ago got
a vote of confidence. Ecuador was able to obtain a
5.3 Bns USD on a 30 years loan with a 2.0% interest
rate from the Export-Import bank of China.
In addition, Venezuelas other allies are having a
rather complex situation with falling commodity
prices. This is notably the case of Russia, Iran and to
a lesser extent Qatar who has a lower fiscal breakeven (Chart 2). President Maduro who also visited
Russia should recall the latter cannot do much due to
its economic isolation and depleting reserves. To sum
up, even if Finance Minister Rodolfo Marco Torres
announced they already had the money for their
bonds due in March, a default (sovereign or
PDVSA) is our base case in the course of 2015
given the lack of room to maneuver. President
Maduro will very likely announce at his return some
economic adjustments that will not be enough to
restore confidence in our opinion.

Venezuela

Iran

Nigeria

Saudi Arabia

Venezuela

Russia

Nigeria

US

UAE

Mexico

Colombia

Iraq

Saudi Arabia

Russia

UAE

Qatar

2/ Not systemic, bad for Caribbean economies

How disruptive will be a default? It will of course
increase volatility in EM but this should be transitory as
Venezuela is not systemic. In the case of oil, even if
Venezuela holds the worlds largest oil reserves it only
produces 3.0% (2.4 m/b/d) of the global output and
exports less than 1.5 m/b/d.
The impact on Caribbean economies will be
nevertheless considerable. Many heavily depend on
PetroCaribes oil shipments. Venezuela finances up to
60% of the cost of oil shipments, allowing countries to
finance part of its oil purchases at 1% over 25 years.
The poorest of the political alliance of PetroCaribe,
including Nicaragua, Jamaica, Guyana and Haiti
receive in oil equivalent to over 10% of government
revenues (4% of their GDP). Even if Guyana, Haiti,
Belize and Jamaica are taking steps to reduce their
energy dependence the shock will be severe as
their economies are fragile and characterized by
strong refinancing needs (Chart 3). Cuba will also
suffer but this could be offset by the normalization of
relations with the United States. So far, Washington
has eased restrictions on business and travel but the
game changer is ending the economic embargo.
For the rest of the world the impact will be limited on
the financial side. Debt securities held by the rest of the
world totalized 8.1 Bns USD in 2013 vs. 79 million USD
for equity (Table 3). Moreover, bonds have clearly
changed hands from real money accounts to hedge
funds. The latter will very likely play the recovery value
on either the sovereign or PDVSA. China is exposed
through the loans granted to Venezuela. Chinese
authorities have granted around 50 Bns in loans since
2007 from which 24 Bns USD have already been paid
with oil at a discounted price. The collateral (oil
reserves) will nevertheless not move. Moreover, a new
devaluation is unavoidable in the coming days.
Importers, airlines, multinationals who have around 21
Bns USD trapped in the country will have to underwrite
their losses at weaker parity.

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Table 3: Portfolio Investm ent Assets in Venezuela in 2013

Equity Securities
Mns USD Share (%)
World

79

US

69

20

Total Debt Securities

Mns USD

100% World

Share (%)

8.149

100%

87% US

4.657

57%

UK

894

11%

Sw itzerla
d
Germany

754

9%

650

8%

Argentina

76

1%

Chart 3
Current account balance (%of GDP)

-5

-5

-10

-10
-15

-15
-20
-25
Sources : Datastream, NATIXIS

Belize
Dominica
Guyana
Haiti
Jamaica
Nicaragua

-20
-25

-30

-30
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

The impact is limited on the trade side. The lack of

dollars and recession has led to a massive squeeze in
imports. Trade with traditional partners such as the
United States and Colombia has declined (Chart 4 and
5). President Santos should thank former President
Uribe. Colombias managed to successfully diversify its
trade structure due to his dispute with President
Chavez. Exports to Venezuela represent only 3.9%
of total exports in the case of Colombia and less
than 3% in the other LatAm countries (Argentina
2.8%, Brazil 2.3% and Mexico 0.5%).

40

30

China
Brazil
Colombia
US
Russia
Mexico
Argentina

15

10

Sources : IMF

50

10

20

Source: IMF - CPIS

15

Chart 5
Venezuela: imports from (Bns USD)

Chart 4
Venezuela: exports to (Bns USD)
China
US
India
Netherlands antilles
Cuba
Singapore

0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Bottom line: Venezuelas default is a matter of time

and President Maduro is running out of it. Falling oil
prices do not help and there is not much President
Maduro can do as oil producing allies (notably Russia
and Iran) are facing their own domestic woes while
China has become stricter with its lending policies.
Moreover, the social situation is critical. Opposition
leader Henrique Capriles will announce protest
plans in the coming days as the situation is just
unsustainable on the economic front. Even if it will
be temporary, a default will spark volatility in EM as
many countries have also based their economic model
on oil. China and Caribbean economies will feel
some pain but as always the most affected are
Venezuelans who pay the price of years of erratic
policy choices.

50

40

30

20

20

10

10
Sources : IMF

0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

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