Event

This month, Venezuela and its state oil company were declared officially in default by rating agencies. The ratings agencies' declarations are symbolically important but do not imply that creditors will take immediate action. Indeed, as a result of the default, creditors can seize the country´s vital oil shipments and seize assets overseas (such as PDVSA-owned Citgo in the US). However, for the moment, creditors are not banding together to take legal action against Venezuela's external assets.   

Impact on country risk

Given the poor liquidity and severe economic challenges, the debt default was long time due. The country has been hit hard by unorthodox policies (first exchange restrictions were imposed in 2003), lack of investment in productive capacity and especially low oil prices since 2014. Indeed, the economy, underpinned by the world’s largest oil reserves, relies heavily on oil revenues. As a consequence, the economy has been contracting with a cumulative 39% in 4 years. Moreover, fiscal deficit is expected to reach a high level of 18.5% of GDP in 2017, and inflation to skyrocket to about 1.100%. Furthermore, foreign exchange reserves are at a 20 year low, covering only 1 month of import. In addition, the black market exchange rate has soared to 7,000 times the official rate. The current account deficit has been relative modest, mostly due to heavy import compression which has led to a lack of medicines and other basic goods in Venezuela. Therefore, the fact that Venezuela has continued its debt payments in the past years is a bigger surprise than its recent default. A debt restructuring is likely to be very complex. Venezuela’s debts have been issued by various entities, with varied legal clauses, to multiple parties. Venezuela also owes money to China, Russia, Brazil and multilateral lenders, increasing the geopolitical complexity. On top of that, US sanctions block US-regulated institutions and investors from buying new Venezuelan bonds, as would be issued in a typical debt restructuring. The EU has extensive sanctions on the country as well. Hence, the likely outcome is a protracted period of financial limbo with various lawsuits, likely granting president Maduro further time in office. Due to the current economic situation, Credendo country risk ratings are likely to remain in the worse category in the coming year.

Analyst: Jolyn Debuysscher, j.debuysscher@credendo.com