Venezuela to elude default, defying oil price rout

OREANDA-NEWS. January 27, 2016. Venezuela will avert a default by paying more than \\$4.56bn of dollar-denominated bond maturities due in first-half 2016, but its ability to meet greater total obligations later this year is less certain, finance ministry and central bank officials tell Argus.

President Nicolas Maduro has vowed that the government including state-owned oil company PdV will not miss any debt payments in 2016.

Finance ministry and bank officials dismiss widespread concerns that record-low oil prices have raised the odds that Venezuela could default on its foreign debt as soon as next month.

But the officials acknowledged a bleak outlook for second-half 2016 when a further \\$6bn of bond maturities come due, if weak oil prices persist.

PdV's average export price closed below \\$22/bl on 22 January, compared with the government?s 2016 budget assumption of \\$40/bl.

Energy minister and PdV chief executive Eulogio del Pino says the market?s "equilibrium price" is \\$60/bl, but Venezuela?s calls for Opec action have gone unheeded.

The government has sufficient cash reserves to cover this year?s first large debt payment totaling over \\$2bn of bond principal and interest due next month, including a \\$1.5bn sovereign bond that matures on 26 February, the finance ministry said.

Maduro is under growing pressure from radical elements of the ruling PSUV party to declare a foreign debt moratorium and redirect the money to social and infrastructure programs to bolster flagging popular support, a presidential palace official told Argus.

New economy minister Luis Salas is among the radicals advocating measures such as nationalizing banks and importers, and halting foreign debt payments until the price of oil rebounds, the official added.

But Maduro "must weigh the risk that not paying the foreign debt would immediately disrupt PdV's oil exports, alienate PdV's foreign partners and key lenders like China, and foster social and political turmoil in Venezuela that could force his resignation," the official said.

The government is taking steps to boost its cash holdings by negotiating more central bank gold swaps with potential investors in Switzerland.

Hard currency reserves at end-November 2015 totaled \\$14.75bn, of which gold bullion assets were valued at \\$10.97bn or 74.3pc of the total.

In an apparent reflection of reduced imports of food and other goods in chronic short supply, hard currency reserves bumped up to \\$15.5bn as of 22 January 2016. The bank has not updated the valuation of its gold bullion holdings since last November.

The central bank confirmed to Argus that about 27 tons of gold were flown from Caracas to Switzerland earlier this month, but declined further comment.

Venezuela's government swapped about 43 tons of gold reserves for \\$1.5bn in cash in April 2015.

The government is looking at other cash-raising options, include restructuring debts linked to preferential oil supply agreements, selling non-financial assets, and securing at least \\$4bn in fresh oil-backed loans from China, finance ministry officials said.

PdV separately is seeking to refinance over \\$13bn of bond debt that matures in 2016-17 and slash its operating costs in 2016 by over 28pc from \\$13.50/bl to under \\$10/bl, del Pino said yesterday.

Sales of some PdV assets such as US downstream unit Citgo, which was on the block last year, have apparently been ruled out for now because of legal implications related to Venezuela?s international arbitration obligations, but they could resurface later in 2016.

Venezuela's lowest oil export prices since 2003 already have disrupted PdV's ambitious plans to double crude production to almost 6mn b/d by 2020.

Dozens of tankers accumulated around PdV's Caribbean terminals in fourth quarter 2015 waiting for payment before discharging their import cargoes of light crude and naphtha used as diluent to produce exportable crude grades.

Executives with three oil companies holding minority stakes in PdV's Orinoco ventures confirmed they have been asked to cover the naphtha imports in 2016, declining further comment.

An official with the Venezuelan oil industry association (AVHI) that represents foreign oil companies said PdV's partners will likely balk unless the government cuts taxes and royalties, and starts to release over \\$5bn of profits and dividends trapped in Venezuela.

Del Pino is also pressing to raise local gasoline and diesel prices, while glossing over potential layoffs and non-oil divestitures.

The company recently approved a new collective labor contract raising average wages for over 85,000 unionized workers by 143pc over 24 months.