Fiscal Balance in Venezuela

Venezuela - Fiscal Balance

Venezuela receives a lifeline from bondholders

The bond swap saga of Venezuela’s state-owned oil company (PDVSA) came to an end on 24 October. Bondholders agreed to exchange 39.4% of bonds due in 2017, after the government had modified the original swap deal and extended the deadline four times. Although the swap was below the 50% objective outlined by the government, it provides some much-needed short-term relief to the cash-strapped oil company as it battles low oil prices, falling production and tight liquidity. The swap allows PDVSA and the government to kick its payments down the road until 2020, but it will not alleviate their debt burden nor solve the structural imbalances plaguing the economy.

Bondholders agreed to exchange USD 2.8 billion of debt maturing in 2017 for USD 3.4 billion of new bonds maturing in 2020. Although the figure fell short of the USD 5.3 billion the government was hoping to exchange, the swap will provide cash relief of just under USD 2 billion in 2016 and 2017. As part of the sweetener to encourage bondholders to accept the deal, PDVSA offered a 50.1% stake in Citgo, its wholly owned U.S. subsidiary, as collateral. The swap, however, will increase overall bond payments from 2018-2020 by nearly USD 3 billion. Mauro Roca, senior economist at Goldman Sachs, reflects on Venezuela’s new debt payment schedule and the insufficient support the debt swap is expected to provide to the economy:

“The temporary relief in PDVSA external debt payments becomes even less relevant when considering total external debt payments faced by both Venezuela and PDVSA. […]  As a result of the bond swap, external bonds payments for 2017 have been reduced to $8.10bn from $9.12bn, but have concurrently increased to $8.59bn from $7.51 for 2018. Moreover, the sovereign and PDVSA still jointly face an average yearly debt service commitment of $8.7bn until 2020.”

The first payments of the new 2020 bonds are due in Q4 2017 while the liquidity crunch that the country is facing shows no sign of improving. With international reserves staying at USD 12.0 billion at the start of October and falling to a record-low USD 10.9 billion on 27 October (the last reported figure) and oil output declining, the prospects of a default still loom large as the country has fewer economic buffers to avoid a sovereign debt default.