Venezuela bond default looms, say analysts

08/10/2010 | Thierry Ogier

Caracas is on the brink of economic and social disaster as debt builds up and the economy contracts, experts warn

Venezuela may be on the verge of social and economic “implosion” and default, a veteran Latin American commentator warned yesterday.

The Andean economy is expected to remain in recession this year and is entering its third consecutive year of contraction in private investment, former Colombian planning minister Mauricio Cardenas said.

After losing legislative elections last month, president Hugo Chavez may now take the largest Latin American oil producer up “a one way street that would take the economy to implosion”, as he now faces stronger opposition ahead of the 2012 presidential elections.

“I see a high chance of radicalization in Venezuela. That radicalization could involve greater state intervention in the economy, more nationalization, more confiscations and at the same time greater risks of severing the ties with the international financial community, which could imply a default.

“That is an extreme scenario, but it cannot be ruled out. It is a real risk, because I do not see this is going to have a happy ending”, Cardenas, director of the Latin America initiative at the Washington-based Brookings institution, said.

Last month, the Venezuelan minister of planning and finance Jorge Giordani denied any intention to default. “Venezuela has always honoured its commitments and will continue to do so. There is no possibility of a default. Keep this in mind,” he told a local TV audience.

Cardenas said if default were to happen, there will be a signal. “If we see more attacks on the private sector, more controls on the economy, then that’s a bad signal. If we see moderation, the risk of default is low.”

Venezuelan GDP is expected to decline this year by a further 1.3% this year after a 3.3% contraction last year.

“What is happening is structural, it is not only a recession,” Cardenas said. “It is causing an almost three year contraction in private investment, and a two year contraction in private consumption.

Daniel Volberg, economist at Morgan Stanley, said Venezuela’s willingness to repay its foreign debt may not be in question. “But its ability [to repay] is much more tricky.” Venezuela’s foreign debt has shot up to $61 billion at the beginning of 2009 to $70 billion in the second quarter of this year to an estimated $78 billion to $82 billion, according to Morgan Stanley.

Volberg said he doubted market willingness to finance new Venezuelan debt in the long term. While debt default was unlikely in the short term, “the risk is pretty much there” before next year’s elections. “This is a deterioration story,” he said.

Economists’ main current concerns lie on the reliability of official statistics. Volberg reckons there may be a $25 billion mismatch in the oil exports reported by PDVSA, the state-owned oil company.

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