Caribbean & Central America - February 2015 (ISSN 1741-4458)

The government led by President Danilo Medina has paid off 98% of its debt to Venezuela’s state-owned oil firm, Petróleos de Venezuela (Pdvsa), (which exceeded US$4bn), incurred under the Petrocaribe concessional oil provision scheme, thanks to a debt renegotiation agreement. The deal comes as Venezuela’s chronic economic crisis continues to deepen due to the crash in international oil prices, with renewed speculation that the Venezuelan government led by President Nicolás Maduro may seek a general renegotiation of Petrocaribe’s terms or even move towards terminating the scheme altogether in the near future. The DR’s move looks like an attempt to prepare for either of these scenarios.

Venezuela’s growing economic crisis had already fuelled all sorts of speculation in the DR about the future of Petrocaribe. In November 2014 the Dominican media was awash with rumours that, in a bid to alleviate its foreign currency shortage, the Maduro government was looking to secure a substantial cash debt payment from the DR. Unlike most of Petrocaribe’s beneficiaries, the DR has posted healthy economic growth in recent years and thanks to the Medina government’s adept management of the economy, the DR is currently in a relatively solid financial position [RC-14-01]. This makes it one of the few Petrocaribe beneficiaries that can safely be asked to pay its debt in cash rather than in kind. That the DR is one of Petrocaribe’s largest beneficiaries also makes the prospect of it paying in cash attractive for Venezuela.

One of the various rumours in the media suggested that as part of its bid to secure a significant cash inflow, the Venezuelan government was considering selling the sizable US$4.12bn outstanding debt (maturing in 25 years) that the DR had with Pdvsa to a third party prepared to pay a discounted but still substantial price for it. By December 2014, the international press was reporting that Venezuela was negotiating the sale of the DR’s Petrocaribe debt to US investment bank, Goldman Sachs, for 41% of its face value. The prospective deal was viewed with unease by some in the DR amid fears that Goldman Sachs could prove less pliant than Venezuela when it came to servicing the debt both in terms of how it is paid and the payment schedule.

With these negotiations still rumoured to be taking place, on 29 January the DR’s finance minister, Simón Lizardo, revealed that the Medina government and Pdvsa had agreed that US$4.02bn of the DR’s outstanding debt would be written off in exchange for a US$1.93bn cash payment. Lizardo said the deal was the fruit of debt renegotiation discussions “initiated by the Dominican government” over a year ago. He said that the funds came from the successful US$2bn issue of sovereign Dominican bonds in international markets conducted on 20 January (see sidebar), adding that the deal was beneficial for the DR as it managed to secure a 51% discount on the face value of the Petrocaribe debt, allowing the country to reduce its public debt levels. According to Lizardo, the deal means that the DR’s non-financial public sector debt will be reduced by US$2bn (the finance ministry estimates that the DR’s non-financial public sector debt rose to US$23.8bn, or 37% of GDP, in 2014).

Lizardo also highlighted that under the terms of the Petrocaribe agreement, the DR can currently pay up to 50% of its debt with Pdvsa over 25 years with a 1% interest rate but this could change in the near future. Lizardo added that the Petrocaribe agreement stipulates that if the price of Venezuelan oil falls below US$50 per barrel (/b), then Petrocaribe beneficiaries can only finance 40% of their debt, with the remaining 60% to be paid up front. With the price of West Texas Intermediate (WTI), the reference barrel for Venezuelan oil, currently hovering around the US$52/b mark, Pdvsa could soon move to start collecting its debts from Petrocaribe beneficiaries. Such a prospect is now much less daunting for the DR, whose total debt with Pdvsa now stands at a much more manageable US$96.5m.

• A good deal

Commenting on the renegotiation of the country’s Petrocaribe debt, on 3 February, Economy & Planning Minister Temístocles Montás said that the government had secured “a good deal”. Montás rejected the argument that by paying off the Petrocaribe debt by issuing sovereign bonds, the DR was swapping debt with a low interest rate for one with higher interest rates (the 30-year bonds offered a yield of 6.8% and the 10-year bonds a yield of 5.5%). He said that the interest rate to be paid on the debt was less important now that its principle had been reduced by over 50%; and that the government’s main aim is to reduce the country’s overall debt levels of around 50% of GDP to “a more manageable level”.