How will Venezuela Deal with a PDVSA default?
While debt servicing has been a government priority, declining external liquidity and a deteriorating domestic situation (three-digit hyperinflation, shortages, and a political crisis between the government and the National Assembly) make it a daunting task.
By 2020, the country must repay 30 percent of the external debt due to expire in the next 23 years.
Venezuela can get access to liquidity via three main ways.
The first option is to borrow directly on the financial market which implies that the country must pay an increasingly prohibitive risk premium due to investors’ fear of sovereign default.
The second option, used intensively in recent years, is to borrow from allies, and especially China.
Since 2009, Venezuela has borrowed at least $60 billion from China (through the Venezuelan-China fund) in exchange for selling oil at a discounted price. Loans were used to pay foreign manufacturers and repay external debt, such as in 2015. This exchange of good practices persisted as long as oil prices were quite high and Venezuela’s political situation was fairly stable. Since 2016, China has made a strategic move to reduce exposure to Venezuela which resulted in the repatriation of Chinese oil engineers (who filled local labour shortages), the end of financial aid, and reduced oil imports.
In this context, it is quite unlikely that Venezuela will be able to count on China for repayment of its loans, which increases the probability of sovereign default in the medium term.
The last option is through the national oil company, PDVSA (Petróleos de Venezuela SA). As the country’s main source of income and access to foreign currency, PDVSA is key for those seeking to gain a real appreciation of Venezuela’s disarray and economic future.