Archive for June 23rd, 2011

Best kept secret in Caracas? Chavez has PC?

June 23, 2011

Seems to the best kept secret in Caracas, Chavez has prostate cancer, his prostate was removed and prognosis is not so hot. The news and the uncertainty is spreading like wildfire, even the Wall Street Journal is running with it.

The story is, at least consistent with the way it has played out.

Revisiting Venezuela’s Debt

June 23, 2011

With the new debt announced two weeks ago and approved by now, it is interesting to revisit the country’s debt. First, let’s look at the evolution of local debt, which with the new Bill will now grow to Bs. 135 billion, as shown in the graph below:

Of course, this debt is not as worrisome, as it can always be devalued out of the picture. In fact, if you divide each year above by the exchange rate at the time (using the official rate of exchange), then the graph is as follows:

Despite the fact that total debt in Bs. went up from last year to this year, for example (I am including half of the new Bill as issued in 2011), local debt in US$ actually went down, thanks to the devaluation in January.

That is why foreign debt is more important. If one adds Venezuela’s and PDVSA’s bonds (I am not taking into account Chinese loans, other loans and the like), then you get the following graph, in which you can see the effect of all of the debt that PDVSA has been issuing in the last few years. Essentially the Republic’s debt has barely gone up, the increase in the graph below is all coming from new PDVSA issues. (I am excluding in the graph the payment of US$ 2.5 billion coming up on July 10th., but I am including US$ 5 billion as part of the new Bill, but I just learned that PDVSA issued today US$ 1.5 billion of PDVSA 2022 which it sold to the Venezuelan Central Bank. The latter is not included)

Finally if you add both local and total external debt you get:

Since GDP is US$ 235 billion, then Debt to GDP ratio is around 40% without the Chinese funds and other loans which would bring it up to 50% or so. (Of course, GDP is measured in Bs. at Bs. 4.3, so that the true GDP measure is lower)

The reason that many investors are not as concerned is that when you look at maturities:

You can see, that there is no bond due next year, only US$ 2 billion in 2013 and a little over US$ 4 billion in 2014. It is not until 2017 that things could get hairy, as over US$ 7 billion come due (Note there are two bonds due that year) and, of course, you have to pay interest.

The big problem is then the slope at which debt is increasing. Venezuela and PDVSA can not continue issuing debt at this rate, something has to give. Total debt payments each year are now US$ 4 billion. If no debt were issued between now and 2017, that year it will be US$ 7 billion in capital, US$ 4 billion in interest, that is a total of US$ 13 billion, not exactly a small piece of change. But the reality is that under current planning by then, Venezuela would have issued another US$ 40 or 50 billion in debt, which would almost double interest payments.

And that is the real problem, the current model is simply unsustainable when the country produces less oil each year and all of these bonds are issued not to invest, but to maintain a lower rate of exchange.