Venezuela has begun to pay the $4.5bn in debt maturity payments owed by the sovereign and by oil company PDVSA.
But while bondholders may breathe more easily, analysts say devaluation is needed urgently as the country continues to suffer excess demand for dollars.
In the last week of September, Venezuelan bond prices had hit lows not seen since February, as some investors wondered about the country’s capacity to make the huge payments due in October.
Ricardo Hausmann, a former minister for planning, suggested Venezuela should choose to default on its international bonds as it was already defaulting on its suppliers and people with policies that led to shortages.
Russ Dallen, head trader at Caracas Capital Markets, said the attention Hausmann’s article brought to Venezuela’s debt payments possibly increased the government’s determination to make the payments.
“Effectively we had a member of the opposition coming and saying it should default,” said Dallen. “The publication of Hausmann’s article forced Venezuela to make sure they didn’t default.”
Following the payment, the bonds duly rebounded somewhat. Venezuela and PDVSA’s maturity schedule is now relatively spread out until 2017, said Dallen. However the country received a further hit to its cash levels on Thursday as the ICC ruled it owed Exxon Mobil $1.6bn for the expropriation of an investment in the Orinoco in 2007.
Taking into account double recovery reimbursements from Exxon, Barclays said the net payment to Exxon should be around $1bn-$1.2bn — far below Exxon’s claim of $6.5bn. But the ruling has triggered a similar claim by refiner ConocoPhillips for which Barclays expects Venezuela to have to pay around $4bn.
IMPORT CONTRACTION
Yields on Venezuelan debt remain lucrative. PDVSA’s 8.5% notes due 2017 offer more than 24%, while the high coupon 12.75% are at more than 18%.
Nevertheless Francisco Rodríguez, Bank of America Merrill Lynch economist, has an overweight recommendation on Venezuelan debt, and never worried that the sovereign would default in October.
He told Emerging Markets the market was not paying attention to the fact that the country’s imports have fallen around 40% at the same time as it faced a reduction of dollar inflows.
“There is a perception in the market that Venezuela needs an economic adjustment,” said Rodríguez. “But the market is missing the import contraction.”
It is wrong to believe Venezuela is running out of dollars, said Rodríguez. In fact, the country is spending less. However, the limited availability of dollars at the artificially low official exchange rate drives the black market and contraband exports, and restricts the quantity of goods available at official prices.
“When they see shortages on the shelves, many people assume Venezuela is running out of dollars,” said Rodríguez. “But when you see they’ve cut imports massively you can see that they have adjusted — just via prices, not quantities.”
While lower spending is favourable for bondholders, lower imports are of little consolation to a population facing shortages of basic goods. One Caracas-based official at the IMF meetings expressed his worry that availability of even traditional Venezuelan Christmas feast hallaca may be restricted this year as people struggle to buy beef and corn flour.
“Venezuelan citizens are paying an excessive cost for this adjustment,” said Rodríguez. “The government is shooting itself in the foot here. It’s eroding its capacity to pay for goods and service by effectively handing out a dollar subsidy to some people, and paying for that via inflation tax.”