Venezuela: Willingness to pay, "unless"
•President Maduro has reacted defensively to the worsening economic outlook, adding a familiar antagonist (the US) and a newer one (the market) to the “economic war” narrative
•Maduro says Venezuela is solvent and won’t default…
•…however, new rhetoric about a “financial blockade” suggests a crack in the armor of previously strong willingness to pay external debt
•Economic announcements continue to fall short: Maduro is not ready to hike gasoline prices, and only tweaks were previewed to the FX regime, no structural change
•We maintain our Neutral call on Venezuelan external debt, as we remain cautious despite the currently extreme valuations
President Maduro in several speeches over the past week has begun to weave a new thread into the “economic war” narrative he has used this year to defend himself from the country’s bleak economic results. The standard economic war narrative has largely blamed domestic economic elites and “speculative mafias” that are inducing inflation and scarcity to undermine the Maduro government. In recent weeks, the narrative has shifted, a reaction to oil and bond prices collapsing to new 5-year lows, and following the approval in the U.S. Senate of targeted sanctions against certain individuals in the Venezuelan government (revoking visas and freezing assets, but without any blanket sanctions impacting bilateral trade or financial access for the sovereign or PDVSA). Maduro has now incorporated a new set of antagonists into the narrative, characterizing US sanctions as a hostile action against the country at large. Maduro has also been insinuating that the US government is behind the oil price drop as part of an international political strategy. Harsh rhetoric against the US is hardly unfamiliar territory during the Chavez era.
The novelty of the economic war narrative is that Maduro is now also reacting to the recent fall in bond prices and implicating “rating agencies” for imposing a “financial blockade” against the country. While this is not the first time Maduro and Chavez have criticized negative market perceptions of the country, we are concerned that the path of this new rhetorical shift leads to a slippery slope. Maduro has said this week that markets are denying Venezuela credit it needs to overcome the impact of lower USD revenues amid lower oil prices, credit “to which Venezuela has a right,” according to Maduro’s public comments.
Moreover, for the first time under Chavismo, Maduro seems to have qualified Venezuela’s willingness to pay. In a public event on Saturday, December 13, Maduro made the following statement: “There is no possibility of default, unless we would decide to not pay anymore as part of an economic strategy for development. And that’s not the strategy that has been constructed in these years of economic thought laid out by Hugo Chavez” (Bloomberg news translation). To be clear, Maduro is still saying Venezuela will avoid default and pay external debt, and by linking Chavez himself to this strategy, it seems that he is insinuating to the domestic audience that this is a correct and legitimate approach. He also continues to contend that Venezuela is solvent, playing up the country’s strong track record of debt service and its ample reserves of oil and gas (first and fourth most in the world). Nonetheless, Maduro seems to be qualifying this strategy and at least trying on for size the type of rhetoric that could be utilized if a liquidity crisis eventually compromises the country's ability to service debt.
Previewing tweaks to the FX regime, but not much else
Maduro keeps previewing economic measures, but still without details. On Sunday, Maduro gave a wide-ranging hour-long interview to Chavez’s former VP and long-time journalist Jose Vicente Rangel (summarized in Spanish by El Universal: part 1 and part 2). Rangel asked pointed questions both on political stability and the government’s inability to execute measures to improve the economy. Despite Maduro having previewed that the session would include new economic announcements, there were few new details. Maduro did announce that the time is not right to increase gasoline prices, which would exacerbate inflationary pressures. Inflation must be brought back under control first, before the removal of gasoline subsidies might be considered next year (former PDVSA president Ramirez quantified the cost of the subsidy at US$12.5bn last year; we estimate costs to PDVSA of VEF300bn annually or 8% of GDP).
On the FX regime, only tweaks were previewed. Maduro mentioned that there would be adjustments to Sicad-2 (currently fixed just below USD/VEF 50), but suggested that the current regime with three highly controlled official platforms would be maintained. Maduro said Cencoex would continue to sell FX for food, medicine and priority goods at USD/VEF 6.3, while Sicad-1 (currently USD/VEF 12) would attend to the needs of the rest of the economy. As for Sicad-2, Maduro acknowledged that it had fallen short of expectations, but that going forward would incorporate “new elements” to make it more effective.
These comments reinforce our view that the multiple FX rates regime will be maintained, with more and more items being shifted up from lower rate to higher rate platforms. Most likely, the authorities will tweak the current Exchange Agreement 28 of April 4, 2014 (specifically Article 5) so that PDVSA and its partners can sell at least part of the dollars obtained from oil exports at the higher Sicad-2 platform; currently, export proceeds must be sold at the official Cencoex USD/VEF 6.3 rate. We believe that this would be a necessary and positive change, meeting a request from PDVSA and its partners that would improve the viability of JV projects and PDVSA cash flow. Such a change could reduce, at least on the margin, the degree to which PDVSA must rely on monetary financing from the Central Bank. However, without a credible, confidence inducing anti-inflation plan to accompany it, and with multiple rates still keeping arbitrage and rent-seeking channels open, this gradual approach to tweaking the FX regime seems insufficient to diminish extreme economic imbalances, especially amid lower oil prices. Indeed, the current oil price for Venezuelan crude (below USD $60/bbl) implies some $22bn less revenue in 2015 compared to 2014, a year in which it has already proven difficult to close external accounts. Overall volumes of USD for official imports should now face a significant drop from already reduced (though unreported) current levels. We maintain our view expressed in our November 23 Trip Notes that there is a very high degree of uncertainty about how the government will deal with BoP constraints without upsetting a tenuous political and social equilibrium in 2015. We maintain our Neutral call on Venezuelan external debt, as we remain cautious despite the currently extreme valuations.
Ben Ramsey (AC)
(1-212) 834-4308
[email protected]
J.P. Morgan Securities LLC
Ma Citgo quanto pesa sul giro d'affari di PDVSA? Mi rende perplessa questa cosa:
