Another catastrophe deflected for the troubled nation of Venezuela.
Over the course of the last several months, the citizens of Venezuela have taken to the streets over a lack of access to food, corruption within the government, and rampant inflation. With an oil-dependent economy that has overturned over the last two years due to a sharp decline in crude oil prices, Venezuela and its people are struggling to gain access to consumer supplies.
However, despite the near thirty-one million Venezuelans facing this dire economic situation, President Nicolas Maduro has managed to maintain hold of the country’s biggest asset, Petróleos de Venezuela, S.A.
Petróleos de Venezuela, S.A, or PDVSA, is the partially state-owned oil and natural gas company. With activities consisting of exploration, production, refining, and exporting of the largest oil reserves in the world, total assets amount well into the hundreds of billions of dollars. Needless to say, PDVSA is the last strand keeping the fragile emerging economy from an even deeper recession.
Yet, despite the wealth of natural reserves the company controls and manages within the country, low crude oil prices have plummeted the short-term economic outlook for the organization as they seek to bring stability to the troubled economy. Due to PDVSA’s colossal borrowing during the years of extraordinarily high oil prices, Venezuela owes roughly $120 billion to foreign creditors, with much of that amount maturing over the course of the next several years.
As Venezuela’s recent recession has grown, PDVSA has faced intense scrutiny from economists and other neighboring countries as to the viability of the corporation. To confront these fears and prevent crisis for another day, PDVSA and investors have come to an agreement to swap $2.8 billion of bonds maturing this year for $3.4 billion worth of new bonds maturing in 2020.
Although this change does not seem significant in comparison to the total amount borrowed over the course of the last decade, this now gives PDVSA slight “wiggle-room” and the working capital needed to continue operations. Without this, PDVSA would face extreme hardships to continue operating normally and would most likely face default.
Many propose that Venezuela simply default on their foreign debt and begin re-negotiation talks with Wall Street. Theoretically, this could allow the company to talk through better terms and skip present payments out to creditors. However, much would be at stake if PDVSA did not payout any future bonds to foreign creditors, as foreign bondholder lawsuits could tie up the only valuable piece left standing for PDVSA, Citgo Petroleum Corporation.
Citgo Petroleum Corporation, or Citgo for short, is an American refiner and marketer of transportation fuels. With thousands of retail locations in the United States, Citgo supplies millions of Americans with gasoline. As a wholly-owned subsidiary of PDVSA, this is the primary reason why Wall Street investors re-negotiated bond terms with the company.
According to new terms reached during the bond swap, foreign bondholders could claim up to a 50.1% stake in Citgo should PDVSA default on their debt obligations. Citgo is extremely vital to PDVSA because it generates the majority of cash inflows, an essential need for Venezuela during this time of economic troubles.
PDVSA and Maduro have yet again dodged another bullet...for now. Although this bond swap has temporarily given the oil conglomerate enough time to get by and continue operating, more money will be due in the future. Foreign investors still cling to the hope that although PDVSA may not be as liquid as desired, solvency from the world’s largest oil reserves is enough of a guarantee.
With shortages of medicine, massive lines for basic necessities, and crime rates soaring through the roof, the Venezuelan people have experienced great sorrow. While this restructuring of debt has brought temporary economic relief to PDVSA and the Venezuelan government, this is only a short term solution to the much greater macroeconomic situation. By taking into account the current financial climate along with past tendencies towards foreign debt, Venezuela’s macroeconomic levels are not on a sustainable trajectory. This undoubtedly will (as it has in the past) cause political upheaval within the country, and most likely will continue to do so in the foreseeable future.
Read the second article of our VENEZUELA SERIES.