World Economy

Venezuela Enters “Tragic” Terrain

Venezuela Enters “Tragic” TerrainVenezuela Enters “Tragic” Terrain

The International Monetary Fund says Venezuela inflation will blow past 700% this year.

In a note published Friday, IMF Western Hemisphere Director Alejandro Werner said inflation would more than double in the economically struggling South American country in 2016, reaching 720%, AP reported.

Venezuela already suffers from the world’s highest inflation rate. The IMF estimates that inflation was running at 275% last year.

Last week, Venezuela’s Central Bank published economic data for the first time in more than a year. The bank said inflation reached 141.5% by September of last year.

Werner says Venezuela’s economic troubles are leading to widespread shortages and “exacting a tragic toll.”

  Feeling the Strain

Plunging crude prices are wreaking havoc on the finances of oil companies and oil producing countries across the globe.

But among the major oil exporters, no one arguably is feeling the strain of Brent’s descent toward the $27 a barrel mark as much as Venezuela.

Of the country’s $122.9 billion of external debt, some $10.5 billion are due for repayment this year.

While Caracas has so far been able to keep paying its foreign bond creditors by selling assets, securitizing oil debts and raiding its foreign reserves, analysts warn a default is becoming increasingly difficult to avoid in 2016 given the huge drop in oil prices.

As Exotix Partners, a research firm specializing in equity and fixed income, research pointed out in a note this week: Crude oil exports are virtually the only source of hard currency in Venezuela. If Brent oil prices average $40/barrel and WTI $38/barrel, then the Venezuelan crude oil export basket could be at $35-36/barrel. “We recently downgraded Petroleos de Venezuela S.A. 24, 26, 27 and 37 bonds to Hold from Buy, as we believe that multi-year low oil prices increase the odds of a credit event over the next 6-12 months”.

  Less Income

The problem is not just that crude accounts for 96% of Venezuela’s export revenues. Years of economic mismanagement also means the country now imports much of the food and consumer goods that it used to produce. During the boom years, this was not a problem. But low oil prices means there is less hard currency around to pay for imports and shortage of basic goods—from milk to toilet paper—has become a fact of life in Venezuela and a source of growing social discontent.

Alejandro Arreaza, analyst at Barclays, argues that Venezuela simply does not generate enough oil income to pay its debts, fund its imports and service its foreign bonds. Moreover it is also running out of assets to liquidate.

Venezuela’s international bonds have plunged to distressed levels, with many trading at around 36 cents on the dollar after the government said last week that the economy shrank 7.1% in the third quarter and inflation has soared to 141.5%.

Credit default swaps traders meanwhile are pricing in a 79% chance that the country misses a payment over the next 12 months, according to Bloomberg.