Moody’s: PDVSA First Domino To Fall In Possible Venezuelan Default

A report from Moody’s Investors Service concluded that the odds are strong for Venezuela to fall into a debt default later this year, starting with state-run oil company Petroleos de Venezuela SA (PDVSA).

Moody’s observed that PDVSA owes a large payment this year and may be unable to meet it. This could become a "possible detonator" for a potential default or some other credit event since the government would be unable to make its own payments.

“The lack of external financing for Venezuela means that it is highly unlikely that it has sufficient hard currency to redeem all of its debt obligations this year,” according to a translation of the report by Jeff Reed for Oilpro on 21 June 2016.

In order to prevent both the Venezuelan government and PDVSA from undergoing a damaging default, Moody’s called for shrinking the gap in external funding. Doing so would entail seeking debt relief from China, finding additional financing, hoping for higher oil prices, or a mix of all of the above.

Moody’s warned that if a recall referendum is held this year against President Nicolás Maduro, then the government could prioritize the use of dollars for imports in order to boost his popularity ahead of the vote. The downside of such a move could increase the probability of a sovereign default.

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Oil is Venezuela’s main industry and makes up around 95 percent of the national export revenue, but the low price of crude has weakened its currency reserves. Thus, the Venezuelan debt is the most expensive in the world to insure against non-payment using credit-default swaps.

The International Monetary Fund forecasts Venezuela’s economy will contract by 8 percent in 2016, while the already sky-high inflation rate will climb to about 480 percent.

“Everything remains in flux, changing all the time,” Jaime Reusche, a senior sovereign analyst at Moody’s, said in an interview with Bloomberg. “The biggest difference of course has been the oil price which has increased since May, and since earlier in the year, so the oil price gives Venezuela’s external accounts a lot more stability and a lot more breathing room.”

By James Burgess of Oilprice.com

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