Venezuela: heading for default?

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


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.

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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, 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".

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.