By Richard Francis
& Robert Rowan
NEW YORK -- Venezuela's debt restructuring process will likely be long and complicated by sanctions and the challenging political environment, says Fitch Ratings. Political changes and a comprehensive and credible economic plan will be needed to gain the market's trust in the durability of any reform agenda and debt restructuring terms.
Venezuela defaulted on its sovereign debt on Nov. 14, 2017, failing to make interest payments before the end of the 30-day grace period. Since the default, the government has accumulated missed interest payments totaling nearly $700 million.
At the same time, state-owned oil company Petroleos de Venezuela, S.A. (PDVSA) also failed to make payments on its debts with accumulated missed interest payments totaling over $800 million. However, PDVSA has made some late payments over the last two months, signaling a differentiation of the government's treatment of sovereign and PDVSA debt payments, at least in the near term.
In early November, President Maduro called for a debt restructuring and called a creditor's meeting in Caracas, which yielded no concrete results.
In our view, the political and economic prerequisites for a debt restructuring are missing. Political changes would be required to address US sanctions and re-engage the broad international creditor community, beyond Russia and China. A comprehensive and credible economic plan will also be needed to address the severe economic imbalances, the deep and prolonged recession, hyperinflation and reverse the sharp decline in oil production.
The government has sought to by-pass the opposition-controlled National Assembly by creating a new Constituent Assembly with powers over all other government bodies in July 2017. Additionally, the governing Partido Socialista Unido de Venezuela (PSUV) party further consolidated power in the Oct. 15, 2017, long-delayed regional election when it won 18 of the 23 governorships at play. The results have weakened and effectively split the opposition, resulting in greater political control for the Maduro government. Political talks between the government and parts of the opposition are ongoing in the Dominican Republic but have yielded no substantial results to date.
The government has failed to outline a credible economic strategy to arrest the deep economic contraction and hyperinflation. The economy contracted by an estimated cumulative 36% over the last four years, with a further contraction of 14% expected in 2018. Hyperinflation has taken hold, reaching an estimated year-end rate of 2,616% in 2017 and accelerating into 2018. Any credit positive economic plan would also reverse the sharp decline in oil production. Oil represents more than 95% of the country's exports and historically, nearly 50% of government revenues. OPEC data indicates that Venezuela's total crude production sharply declined to 1,837 thousand barrels per day (tb/d) in November 2017 from 2,270tb/d in December 2016. Oil production will likely continue to decline in 2018.
Furthermore, US sanctions greatly complicate a restructuring. The sanctions prohibit US citizens or entities based in the US from entering into financial transactions with the government and PDVSA, including any dealings in new debt and certain existing bonds owned by the Venezuelan public sector.
A successful debt restructuring can only happen after the political and economic prerequisites are in place. The legal challenges will also likely be complex. The default is therefore likely to be long and protracted given the enormous challenges Venezuela faces.