Venezuela! An economy in such bad shape that the Economist is now comparing it to Zimbabwe circa 2001.
Here is the logic behind a “no.” Venezuela has $52 billion of liquidatable external assets. It has internal assets that include 7,000 tons of gold deposits, worth about $274 billion. (Admittedly, that is gold under the ground.) Moreover, while Venezuela is importing a lot, the level of those imports is due to the country’s distorted exchange rate.
Of course, the Bolivarian Republic would default if default were costless. But it’s not. First, the country has a lot of external assets that creditors could try to seize. Second, Venezuela would run the risk that the receipts from its oil exports could be attached. According to Rodríguez, Ecuadorean oil prices fell almost 20% against Brent when that country defaulted and did not rise again until the 2009 buy-backs. He estimates that something similar happening to Venezuela could cost the country $5.2 billion per year. Third, if the price of Venezuelan oil goes back to $42, the country will be fine, and that will happen within a year or so.
If oil prices stay low, Venezuela will need to finance $25.4 billion in 2016. If they rise, those needs will drop to $20.3 billion. Either way, they can be financed, as this table shows:
|2016 oil price||$ 24.9||$ 41.3|
|External financing needs (bn)||$ 25.4||$ 20.3|
|Sources of financing:|
|Chinese fund renewal||$ 5.0||$ 5.0|
|Use of existing Chinese deposits||$ 2.5||$ 1.5|
|Mining concessions||$ 2.5||$ 2.0|
|Bond swap||$ 3.1||$ 3.1|
|Asset-backed loans||$ 5.0||$ 3.5|
|Sale of Petrocaribe trade credits||$ 2.0||$ 1.0|
|Net bond sales||$ 0.5||$ 1.2|
|Change in reserves||$ 4.8||$ 3.0|
Not all of these would be easy. Mining concessions means mining concessions granted by a government with a long history of expropriation. Asset-backed loans means issuing loans against assets (like Citgo refineries and stations) that might be attached in event of default. And as for the cost of default, well, I do not think Francisco is correct when he argues that Ecuadorean oil prices took a hit when the country failed to pay.
I suspect that Venezuela will avoid default his year, because it can. But in the next two posts, I will explain why it won’t be easy to take loans out against Citgo and show that Ecuadorean oil prices suffered no hit when that country defaulted. In other words, Venezuela will put off default for another year, but the costs will be higher and the benefits rather lower than Francisco calculates.