Venezuela: heading for default?

The slump in oil prices has badly dented growth in Venezuela, but the damage is also self-inflicted.

16-6-3-Maduro-1200

President Maduro: losing military support?

Venezuela's economy "has gone from bad to worse to horrific", says Jason Marczak of the Latin America Economic Growth Initiative. GDP is set to shrink by another 8% this year after a 5.7% contraction in 2015, reckons the International Monetary Fund, which anticipates inflation of 500%. Venezuela has the world's biggest oil reserves and oil sales comprise 95% of the country's revenue.

The slump in oil prices has badly dented growth, but the damage is also self-inflicted: a "Bolivarian revolution" consisting of traditional state socialism (a populist spending spree, nationalisations of private firms and money printing) has had the traditional result. To conserve foreign exchange and meet its obligations, the government has clamped down on imports, which are now at a 12-year low, a policy that will exacerbate shortages.

Foreign reserves have dwindled to a 13-year low of $12.2bn. Gold makes up 70% of these reserves, and is being sold off rapidly. In the first quarter Venezuela ditched 16% of its gold to make ends meet, the biggest sale by a central bank in nine years. All this is designed to avoid a default on around $120bn of foreign debt, says Rick Gladstone in The New York Times.

A $7bn payment is due later this year. To complicate life further, some of the debt is held through the state oil company PDVSA, the main generator of revenue for the country. A default could trigger protracted lawsuits from bondholders abroad. "If you default on PDVSA, you have Argentina 2, and nobody wants that," says White-Bridge Capital Management.

The government may well avoid a default in 2016, Patrick Esteruelas of Emso told Bloomberg.com, but "next year's ability to pay will depend on imponderables, such as where oil prices will be and whether the current government will still be in office".

The political backdrop is deteriorating. President Maduro has been criticised by senior military officers, says James Hider in The Times. He may be losing the support of the army, "previously a linchpin of his stability".

Recommended

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Russian stocks suffer as the world fears it will invade Ukraine
European stockmarkets

Russian stocks suffer as the world fears it will invade Ukraine

Despite a booming economy, Russian stocks look extraordinarily cheap – but if it invades Ukraine, the Russian stockmarket will become all but uninvest…
14 Jan 2022
The booming jobs market points to inflation lasting for longer
Economy

The booming jobs market points to inflation lasting for longer

It’s a good time to be looking for a job, with plenty of vacancies and wages rising. But higher wagers are driving inflation up – and it’s not just a …
11 Jan 2022
The MoneyWeek Podcast: happy new year! Are we in for a year of misery?
Investments

The MoneyWeek Podcast: happy new year! Are we in for a year of misery?

Merryn and John ring in 2022 with the first podcast of the new year, discussing energy prices, house prices and interest rates, plus the definition of…
7 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022