17 de octubre de 2014 / 15:28 / hace 3 años

Oil price drop fuels Venezuela fears

NEW YORK, Oct 17 (IFR) - Tumbling oil prices caused Venezuela's international bonds to slide to five-year lows this week, re-igniting fears of a potential default for the dollar-strapped sovereign.

The country's 9.25% 2027 notes dropped by as much as 10 points in four days to a low of 54.5 on Thursday, while some of the most liquid notes issued by state-owned oil company PDVSA suffered similar losses, ending up in the low 40s.

Five-year credit default swaps for the country, which is home to the world's largest oil reserves, widened by as much as 514bp over the same period to reach 2,223bp on Thursday, indicating a default probability of close to 80%.

While the government has reiterated its commitment to servicing foreign obligations, a 20% slide in oil prices over the last few months has raised questions about Venezuela's ability to fulfil that promise.

Brent prices, which on Thursday reached a four-year low of US$83 a barrel, are already below the breakeven threshold for a number of oil exporters, including Bahrain, Oman, Saudi Arabia, Nigeria, Russia and Venezuela, according to Deutsche Bank.

The bank estimates a breakeven price of around US$160 for Venezuela. Even after accounting for a devaluation of the Bolivar from the current official exchange rate of 6.3 to 15.0, that level declines only to US$117, well above current prices.

"A price of US$95 per barrel is already a stress level for Venezuela, so this is definitely going to add some strain on the balance sheet of PDVSA and the sovereign," said Ben Ramsey, a Latin America analyst at JP Morgan. "But looking at their maturity profile, I don't see a hurdle that they can't climb over if they manage it properly and make the necessary adjustments."

Venezuela's upcoming maturities include a US$3bn bond issue from PDVSA coming due at the end of October and around US$4.7bn in principal to repay in 2015, according to Thomson Reuters data.

RESPONSE

Observers have been calling for a policy response that includes a devaluation as well as fiscal and monetary tightening, but political considerations are also likely to come into play ahead of parliamentary elections next year.

"It is going to become politically difficult to continue to manage scarcer petrodollar cashflow with current oil prices," said Siobhan Morden, head of Latin America research at Jefferies, who estimates the drop in oil prices has already resulted in a US$10bn loss in annual revenues for the government.

While there is little doubt the sovereign is walking a tight rope between paying foreign creditors and falling behind on domestic obligations, some believe the recent price action has gone too far and fears of an imminent default are overblown.

"People underestimate the effect of a debt default for Venezuela," said Arif Joshi, a portfolio manager at Lazard Asset Management which is overweight Venezuela. "They have a more symbiotic relationship with the international markets than people give them credit for."

A currency devaluation, the terming out of short-term debt maturities and a more consistent engagement with foreign creditors are some of the actions Venezuela could take in the short term to get back on track, said Joshi.

"Venezuela knows what tools they need to adjust and it is clear that they need to make those adjustments over the next three months or so," he said.

Others feel less optimistic about the government's resolve and appear more concerned about the country's diminishing ability to pay.

"Our concern is the country's capacity to service their debt under the current policy regime and that concern has become more acute over the last 18 months," said Matt Ryan, a portfolio manager at Boston-based MFS, which has been underweight the country since the beginning of the year.

"Venezuela has not been willing to implement a substantial devaluation of its currency, or the necessary fiscal and monetary adjustments that must accompany a devaluation," said Ryan. "I am not too confident that they will do it now."

A version of this article will appear in the October 18 issue of the International Financing Review magazine. Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Matthew Davies

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