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Venezuela loses another lifeline

With the cutting of Chinese funding from Venezuela’s dwindling economic lifeline, the country edges closer to default. Nevertheless, China’s financial aid is likely to only go so far, and long awaited structural reforms are in need. A replacement of the current administration, if successful, would prove a boon for the country’s assets and would be welcomed by the international community, however new policies, reforms and an economic agenda would need to be quickly implemented.

Sep 14, 2016 // 4:49PM

Venezuela is looking one step closer to default after Schildershoven Finance reported that China has ceased to provide additional loans to the country.

According to the FT, China is Venezuela’s largest creditor, and since 2005 has loaned the country US$65bn.

Venezuela currently faces more than US$110bn worth of government debts, including that of state-owned oil company PDVSA. To make matters worse, its FX reserves fell further to US$11.923mn in July.

The country still owes China roughly US$20bn on its loans according to a source speaking to The Australian.

Despite the country’s current predicament, there is an incredible willingness to pay foreign creditors in Venezuela, to the point where the population lacks basic condiments said Thomas Christiansen, EM sovereign debt portfolio manager at Nordea Asset Management.

“It is not a question of solvency yet, but rather the fact that the economic policies currently in place are so poor, and the fact that they need drastic reforms soon.”

Christiansen added that if the country stays on the current trajectory there is no doubt that they will not be able to pay 10 years from now.

There will be a large indicator of how able the country is to organise its debts with the upcoming swap of Venezuela’s 2017s, which they are planning to do in the near future.

“The big question will be how successful this will be, which will be very telling.”

According to Christiansen, the country’s 2017s are the majority of the large maturities for the next few years, meaning if Venezuela is able to successfully swap these maturities, then it would create significant breathing space for itself.

The country already appears to be creating room for manoeuvre. The FT noted that the country was looking for a grace period where it would only pay the interest due on Chinese loans.

Despite the apparent significance of China to the solution to Venezuela’s debt problems, the country is unlikely to keep supporting the Latin American nation without it introducing major structural reforms.

However, the Christiansen argues that structural reforms are necessary despite the funding China has provided.

“It is unlikely that China could make a material difference on any more than the extension of a few maturities.”

Although Chinese funding may have been cut off, the country is still keen to secure the repayment of credit lines it currently has with Venezuela.

In June, the FT reported that Beijing was holding talks with Venezuela’s opposition to ensure that the country honoured its debts if current incumbent Maduro was removed.

The country will need to conduct a referendum to recall the incumbent Maduro. The CNE has to call for the referendum and a calendar, but in this instance the timing is significant.

If the CNE can call a referendum before January 10, they will be able to replace not just Maduro but the government. This is important because if the recall occurs after January 10, Maduro will be replaced with the Vice President, who can be selected by the current incumbent at any moment, meaning there could easily be a prolonging of the status quo.

“A recall and change in government is the only way to get a ‘political breakthrough’. The markets would likely take this very well, and Venezuelan assets would perform off the back of this.”

The country’s bonds are currently trading at distressed levels. And the Venezuela’s 2022 bond was recently yielding 33%.

Christiansen noted that following a change in government, there would need to be new policies, a more rational economic agenda and the implementation of reforms (particularly regarding the FX regime).

In addition, the authorities would need to approach the main international financial institutions such as the IFC as well as the international financial community including private investors. There would also likely have to be further debt exchanges.

Americas Macro Policy & Government

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