Venezuela squandered oil riches, now faces default

Opinion: Venezuela squandered oil riches, now faces default
By Christopher Sabatini @CNNMoney December 14, 2014: 9:33 AM ET

NEW YORK (CNNMoney)
Christopher Sabatini is the senior director of policy at Americas
Society/Council of the Americas and founder and editor-in-chief of the
hemispheric policy magazine Americas Quarterly. Follow him on Twitter:
@ChrisSabatini.

If you ever had a desire to invest in oil rich Venezuela, you may want
to hold your money.

The government, first under the self-proclaimed revolutionary government
of President Hugo Chávez and now under his handpicked successor Nicolás
Maduro, has managed to squander one of the longest, greatest oil booms
in history, not just misspending the oil windfall that at one point
reached $133 per barrel, but also destroying the country's domestic economy.
As a result, Venezuela teeters on the edge of default on its debt.
Related: Wall Street bets on Russia and Venezuela defaults
Venezuelan benchmark sovereign bonds are now trading at 22 cents on the
dollar--a shocking, sad situation for any petro-state, now made urgent
with oil selling at around $60 per barrel.
The risk of default stems from the broad economic disaster wrought by
the past 15 years of revolutionary government. At more than 60%,
Venezuela has the highest inflation rate in the region, a result of
government profligacy that produced a fiscal deficit reaching 12% of GDP
and public debt at 26% of GDP by 2012. Part of this has gone to the
government's popular social missions that provide free access to health
care and education to the poor as well as subsidized food through state
stores.
The larger problem is the gasoline subsidy that makes filling your SUV's
gas tank in Venezuela (and there are many) the cheapest in the world and
the hangover of former President Chávez' revolutionary ambitions both
domestically and globally, supported by Venezuelan oil patronage.
A gallon of gasoline today costs a driver around 18 cents per gallon,
but costs the Venezuelan government $15 billion a year to maintain.
Similarly, thanks to former President Chávez' regional ambitions, the
Venezuelan oil give-away program to allies in the Caribbean
basin---supplying to Cuba, for example, around 100,000 barrels of oil
per day--costs the Venezuelan people an estimated $7 billion a year.
Related: Cheap gas could kill U.S. oil export ban
As a result, according to Deutsche Bank, Venezuela needs oil at $120 a
barrel to meet its spending needs.
The $21.6 billion gold and hard currency reserves that the Venezuelan
central bank reported in November this year were only enough to pay 60%
of the country's debt due by 2017. And with oil prices where they are
now, there's little hope of those coffers being filled again soon. All
of this leads to the question how long the government can last on the
current course.

India's oil spoils
Only 16% of Venezuelans had faith that the president could steer the
country out of its economic crisis, according to an October survey. To
avoid default and meet other looming domestic and international demands,
the deeply unpopular government and president has three options. None of
them are easy and not one of them alone will be sufficient.
Devalue Venezuela's wildly overvalued currency. Right now the government
is operating a byzantine, multi-tiered exchange rate system with the
official rate of 6.2 bolivares to the dollar, but with parallel rates
for designated goods. On the black market, though, the bolivar is being
exchanged at 165 to the dollar. To shore up reserves, the government
will have to devalue somewhere at least close to the market value of the
bolivar. The problem is that under Venezuela's oil and import dependent
economy--oil accounts for 96 % of exports while the country imports most
of its basic food and basic needs--that will mean sharply rising costs
for consumer goods and inputs. For a government that has built its
popular support as a champion of the poor and working class, the
resulting spike in living costs would be a huge blow to its fast
dwindling popular base.
Cut costs. President Maduro has already in a public speech promised to
reduce public sector spending by 20%. The question is where. The
government's much promoted social misiones? An already strapped police
force in a country that already has one of the highest murder rates in
the world? One likely area is a reduction in the state's generous
gasoline subsidy. But when that was tried in 1989, under a different
government and in a different era, it provoked massive rioting and
looting in Caracas. The other easier route is to end the government's
petroleum patronage to the Caribbean. But that course would wreak havoc
on countries such as the Dominican Republic and Jamaica that depend on
both the subsidized oil and the hard currency they receive from
re-selling it on the global market. And that's not to mention Cuba for
whom Venezuela's lifeline represents roughly 15 % of GDP in its
crumbling socialist economy and on whom President Maduro depends for
strategic political advice and intelligence.
Ask the Chinese for a fast-cash infusion. Venezuela's Foreign Minister,
Rafael Ramirez, has already made the rounds to China and Russia hat in
hand. China already holds over $45 billion in Venezuelan debt--to be
paid back in cheap oil--and is unlikely to dig as deeply in its pockets
as Venezuela needs. And after 14 years of courting rogue regimes and
leaders like Vladimir Putin's in Russia and former president Mahmud
Ahmadinejad's in Iran, all of the so-called friends of Venezuela are
themselves in equally dire straits with in both cases sanctions taking a
bite alongside plunging oil prices.

Low oil prices are a double-edged sword
The easiest--though far less effective--option is blaming the yanquis.
And that, predictably, is the one Maduro has chosen, especially after
the U.S. Congress voted to impose visa sanctions on Venezuelan officials
who violated human rights during the crackdown on opposition protesters
earlier this year. Railing against the U.S. is a tried and true tactic,
but unfortunately it won't improve the lives of Venezuelans, and fewer
and fewer citizens are buying it.
No one knows if Venezuela will default on its sovereign debt, though the
alternatives are fading fast. One strong disincentive to stiffing
international lenders, though, is that it could leave the country open
to have its international assets seized, including the state-owned CITGO
refineries.
One thing, though, is clear. While investing in Venezuelan debt may be a
bad idea now, investing in Miami real estate may be a good one. I
suspect in the next year we'll be seeing a lot of the Venezuelans who
cashed in during the past decade's boom years leaving for safer ground.

http://money.cnn.com/2014/12/14/news/economy/venezuela-debt-default-citgo/index.html?section=money_news_international