Fitch Ratings has lowered Venezuela’s junk bonds further into speculative territory, cutting the sovereign’s long-term foreign and local currency ratings from CCC to CC, just two notches from default. The agency said the imposition of US economic sanctions reduced the financing options of the government led by President Nicolás Maduro making default “probable”.
The US imposed its first set of economic sanctions on Venezuela on 25 August, prohibiting trading in some existing Venezuelan bonds, as well as any new debt. Fitch noted that the country’s external liquidity ratio “was weak before the sanctions at just 33%”. Indeed, Venezuela’s central bank (BCV) now reports reserves of just US$9.8bn, a new low, of which three quarters are in illiquid gold. Venezuela has additional FX liquidity in government-managed funds, “but these have likely declined and remain opaque in their administration and execution”, Fitch noted.
As such, the US sanctions “will work to exacerbate the country’s already-weak external liquidity”, it continued. “The expected reduction in the international reserve position in the context of sanctions will severely test the government’s capacity and willingness to continue with timely debt service”, it suggested, noting that the sovereign faces nearly US$3.7bn in external amortisations in 2018.
Reuters, on 30 August, reported that earlier US sanctions imposed on individual Venezuelan officials including the chief financial officer of the state-run oil company Simón Zerpa are also having negative consequences, with some oil exports to the US blocked as financial institutions refuse to provide letters of credit to potential buyers. Credit letters guarantee to a seller that a buyer will pay a specified amount on time when a shipment is accepted. Without this document shipments cannot proceed and no-one gets paid. The report suggested that Zerpa’s designation by the US was “deterring some businesses from investments with the company, as so many of its transactions are linked to the finance department”. “Blocking letters of credit for Pdvsa oil chokes off cash that is desperately needed”, the report noted, adding that the problem could spread “if banks refuse to extend credit to companies that have a commercial relationship with Pdvsa”. Moreover, financial entities negotiating with Pdvsa or foreign oil companies interested in funding projects in Venezuela may have no option but to avoid signing agreements involving Zerpa.
The obvious solution might be Zerpa’s official removal as Pdvsa CFO. Coincidentally however, Zerpa, nicknamed ‘El Chino’, is reportedly in Beijing negotiating a new debt swap deal with the Chinese authorities. Zerpa is plugged in – his father is Venezuela’s ambassador to China and he formerly ran the Venezuela-China Fund.
Juan Carlos Alemán, one of the delegates to the new constituent assembly (ANC), on 29 August, said that an announcement of a new Pdvsa bond buyback deal with China was imminent. The president of the ANC, Delcy Rodríguez, had also previously hinted at similar, saying that Venezuela was consolidating its strategic relationships with China, Russia, Iran, India and others. In this context, Zerpa’s removal at this critical juncture appears unlikely. However, one finance executive made the point to Reuters that even China’s Development Bank and Russian authorities “should be worried” about signing anything with Zerpa, as “they could be subject to collateral damage from sanctions, just by association”.
- Fitch said it expected Venezuela’s inflation to average over 600% by the end of 2017. President Nicolás Maduro has said the constituent assembly will shortly announce new measures to tackle inflation, which he says is ‘induced’. These measures are likely to focus on further price and exchange rate controls, which critics say have not only failed to work to contain inflation, but have in fact exacerbated it. Runaway money printing by the BCV to finance government expenditure is also a major source of inflation in Venezuela.