Looming debt payments leave Caracas exposed

Financial sector executives expect Caracas and PdV's debt to continue accumulating this year as crude output slides

Venezuela's government and state-owned oil company PdV have combined debt of more than $3bn due before the end of this year, an amount equivalent to more than a third of the central bank's hard currency reserves of $8.44bn.

Both are already in default on $6.4bn in sovereign and corporate debt accumulated over the past year. Financial sector executives consulted by Argus say the government will accumulate more arrears during the rest of 2018 as PdV's production continues to decline, although part of the payments could be made.

President Nicolas Maduro's government could theoretically tap the bank's reserves to cover its fourth-quarter debt maturities. But with the bank's liquid cash reserves presently a little over $1bn, some gold holdings would have to be sold to secure the cash needed to pay this year's liabilities. Gold accounts officially for almost three-quarters of the central bank's reported hard currency reserves, but it is unclear if all of the reported gold assets are under its control.

Crude exports provide over 95pc of Venezuela's annual hard currency revenues, and international oil prices have strengthened in recent months. But the country's tumbling production has cancelled out any potential gains from higher prices. PdV's weekly average export price, reported by the energy ministry, climbed to just over $73/bl as of 28 September compared with $50/bl a year earlier. Crude output declined to about 1.2mn b/d last month from 1.95mn b/d in September 2017, according to Argus estimates and official production data communicated to Opec by the energy ministry.

The crisis has prompted Caracas to solicit more financial support from Beijing and Moscow. China recently committed to a series of joint ventures in Venezuelan oil and minerals, but has resisted the country's calls to reschedule oil-backed debt.

Caracas has this month launched a redesigned version of its petro — a controversial financial instrument that it calls a "digital currency", the value of which will be set by a weighted basket of Venezuelan commodities that includes oil, gold, iron ore and diamonds. The instrument is widely seen as a hollow and possibly fraudulent way for the government to tackle the financial crisis.

Good cop, bad cop

Venezuela's looming debt obligations include $500mn that PdV pledged to pay US independent ConocoPhillips before the end of November— the first instalment on a $2bn settlement of an arbitration claim stemming from the 2007 takeover of the US company's Venezuelan assets. If PdV does not meet the payment, it risks the restoration of judicial seizures of its Dutch Caribbean oil assets that ConocoPhillips lifted after the settlement was reached in late August.

Combined sovereign and PdV bond maturities totalling $1.598bn are due in October, including an $842mm amortisation payment and an associated $107mn in interest on a PdV 2020 bond, both due on 27 October. The principal payment has no grace period, but the interest settlement has a 30-day window.

The PdV 2020 bond is backed by 50.1pc of the shares in PdV Holding, the indirect parent of PdV's US refining subsidiary Citgo. This is the only bond that PdV and Caracas have honoured since falling behind on the payments a year ago. The other 49.9pc of PdV Holding is pledged to Russia's state-controlled Rosneft for a 2016 oil-backed loan of $1.5bn. Combined sovereign and PdV debt maturities in November total a further $1.22bn, followed in December by over $242mn more, according to Caracas Capital Markets.

Caracas blames US financial sanctions, first imposed in August 2017 and since tightened, for cutting off its access to capital. The sanctions were extended in March 2018 by the US Treasury to include the petro in all its variations.