Can teetering Venezuela afford to be so generous?

Can teetering Venezuela afford to be so generous?
By Kieran Lonergan - Friday, October 24, 2014

As Venezuela restructures its petro-loans from China to boost its
critically low dollar reserves, the question arises whether the move
will be enough to avert a default and whether similar petro-deals with
countries in Latin America are under threat.

In recent years, China has provided more than US$50bn in credit to
Venezuela, which has serviced the loans with 330,000b/d of "free" oil.

But the loan terms have been amended: Venezuela will now ship less oil
per day over a longer period of time, research firm Capital Economics said.

Meanwhile, the volume of oil sold in Latin America under a number of
similarly generous agreements (San José, Caracas, Integral Cooperation,
and PetroCaribe) has stabilized at around 250,000b/d since 2009,
according to the IMF.

The shipments of discounted oil, predominantly to Cuba, Argentina, the
PetroCaribe bloc and China, in combination with high consumption at home
on account of generous subsidies, means that despite estimated output of
around 2.1Mb/d, Venezuela has only been selling around 845,000b/d on the
open market, to the detriment of export revenues, according to Capital
Economics.

The China deal should boost export revenues by as much as US$5bn (2.5%
of GDP) a year, assuming the "free" oil shipments to China are halved to
165,000b/d, it added.

Nevertheless, the recent decline in oil prices to around US$85/b is
likely to offset any gains made by the restructuring of China's
petro-loans, the research firm said.

"If oil prices now remain flat [at around US$85/b], as we think likely,
then our estimates show that the government will need to cut exports to
China by around 280,000b/d to simply maintain the same level of export
revenues as last year," Capital Economics said.

"With China unlikely to accept such a sharp cut in oil exports, the
government will probably still find itself worse off despite
restructuring the petro-loans," it added.

To compound matters, recent settlements with Exxon Mobil (US$1.6bn) and
ConocoPhillips (US$20bn) over the expropriation of assets will likely
add to the country's external liquidity constraints.

Venezuela's foreign exchange reserves at the central bank have fallen to
around US$2bn, according to Moody's, and investor concerns are reflected
in yields on Venezuela's benchmark 2027 bond of nearly 18%, a five-year
high.

But opinion is divided, with a number of investment banks saying fears
of default are unwarranted.

While Capital Economics says the country will likely default in the next
two years, Bank of America Merrill Lynch (BoAML) says such an outcome is
"unlikely", as the Venezuelan public sector is not accumulating net
external liabilities at present.

The Venezuelan government is also showing signs that it takes its
obligations seriously, factoring in a price of US$60/b of Venezuelan oil
in its 2015 budget, compared with the current price of around US$76/b.

Deutsche Bank also says that despite the nation's economic
vulnerability, authorities have the ability and willingness to pay
external debts.

"We believe the administration recognizes the importance of access to
external financing and would be willing to take the necessary measures
and continue honoring external obligations," the FT quoted the bank as
saying.

Whether such "necessary measures" include cutting generous petro-deals
with allies in Latin America remains to be seen.

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