Venezuela on the brink of the chasm

By: Carolina Barros -
From: InterAmerican Security Watch

 

PDVSA debt, Chinese loan sink country in uncertainty

Venezuela is slithering from one uncertainty to another. The presidential health on one side and oceans of red ink on the other — fiscal balance in general and in particular PDVSA state oil company, the goose which lays the golden eggs, plunging into a debt estimated at 30 billion dollars while financing 70 percent of public spending. And in the middle of all this the election campaign with Hugo Chávez making a huge physical effort to appear “normal” in his quest to be re-elected a third time in the October 7 presidential elections.

Amid growing rumours of a military “auto-coup” to preserve a weakened Chávez in advance, the world panorama does not help either — economic crisis and the prospect of an armed conflict against Iran, the country of which the Venezuela of Chávez is the unconditional friend (and main beneficiary in Latin America). This scenario could change the luck of Chávez or his heir, whether within the line of succession or from the Unity Panel opposition grouping.

One might think that an attack on Iran, an internal crisis in Saudi Arabia and a possible closure of the Straits of Hormuz (through which 16 million barrels of oil from the Middle East and Asia pass every day) would benefit Venezuela. The specialists calculate that the outbreak of a conflict would send prices leaping up from the current almost 100 dollars a barrel to a peak of 290. But these specialists, like the Venezuelan economist Angel García Banchs, also point out that the state fiddles the oil production figures. PDVSA claims a production of 2.4 million barrels a day (which would mean an annual revenue of 88 billion dollars on the basis of an average figure of 90 dollars per barrel, as apparently reported by Venezuela’s Central Bank). But, on the other hand, “we all know,” says García Banchs, “that according to the Energy Information Administration (EIA) of the United States, Venezuela turns out 1.7 million barrels per day, making for an annual revenue of 62 billion dollars.”

“At the same time, financing the public debt accumulated by the state (the Bolivarian Republic and PDVSA) will require a minimum of 17 billion dollars annually in both 2013 and 2014 — i.e. 27 percent of oil exports at 100 dollars per barrel but 54 percent at half that price,” adds the economist.

It is further estimated that because of the almost non-existent investment in production, the number of barrels exported will not vary much in either 2013 or 2014 and nor will the government be able, in that period of time, to reduce the interest rates on the three major loans (known as the Chinese Fund) incurred with the Chinese. In these conditions a cocktail of rising interest rates in the United States in 2013-2014, insufficiently high petrol prices and a devaluation of the bolívar (forecast for next year) could lead to a situation in which servicing the debt reaches percentages higher than 35% of tax revenue.

That three-phase loan from the Chinese is having a boomerang effect. According to the deputy Miguel Ángel Rodríguez, the financial mechanism of the Chinese Fund had “a heavy financial impact on PDVSA” this year and led to the state oil company asking Miraflores government house for access to an extra 1.381 million dollars deposited in the BANDES Development Bank with the aim of covering “royalty payments and taxes, and the costs of extracting and refining volumes of crude oil and by-products for shipment.” In other words, to meet its commitments with the Chinese, PDVSA had to ask the state for extra funds from BANDES (which, together with FONDEN, are the two financial banks where PDVSA’s surplus export revenues go). In short, to accommodate the Chinese dragon, the Venezuelan dog ends up chewing its own tail.

The Energy and Oil Ministry — a portfolio headed by Rafael Ramírez, who is also PDVSA president (it’s all in the family) — affirms: “The financial impact of the crude oil shipments to China (some 430,000 barrels a day this year at an average of 90 dollars a barrel) over and above the PDVSA cash flow reaches 18.43 billion dollars, consisting of the costs of drilling and refining (the oil shipped), the payment of royalties and taxes and the unpaid shipments.”

The China Fund loan has various phases. The first is Heavy Fund I, created in late 2007 for which Venezuela delivered 100,000 barrels per day for three years at an average of 50 dollars a barrel in exchange for a loan of four billion dollars. In late 2008, the Chávez government passed the cap around again and negotiated Heavy Fund II with China’s state Development Bank — four billion more dollars in exchange for 130,000 barrels per day.

The third (not necessarily third time lucky) was agreed in 2010. The Chinese called it the Big Scale Fund and it extends to 20 billion dollars over 10 years with the pledge to ship 200,000 barrels per day, apart from renewing the first and second funds. In a nutshell, of the 1.7 million barrels per day produced by Venezuela, 430,000 are pledged to China. The experts adduce that this “represents a very heavy burden, requiring a structural solution.” Meanwhile, the disinvestment in exploration and other upstream activities is the order of the day.

As if this panorama (of disinvestment and an accumulated PDVSA debt estimated at 30 billion dollars) were not enough, the Chávez government, with its election campaign fully launched and more worried than ever over how to secure the votes, announced only last Monday the New 2021 PDVSA bond with an initial issue of 2.394 million dollars. The motive? To face up to the latest electoral junket requested by Chávez from the National Assembly last Friday — that before the next Labour Day on May 1, the Assembly pass a new Organic Labour Law with a “new” régime of retroactive social benefits. In translation, it is calculated that state pension arrears with the workers top 24 billion dollars. That is the estimated sum to be netted by the future emission of the PDVSA 2021 bond after plucking the last remaining feathers.

Bearing in mind that, according to the Venezuelan Observatory of Social Conflict (OVCS), last month with 489 protests was the most socially restless in Venezuela during the 13 years Chávez has been in power, the “life-belt” rip-off of the bond requested from the until now always generous PDVSA does not seem so demented.