February 27, 2011

Venezuela risk of default in 2012

According to Capital Economics, a research firm in London the next trouble spot could be Venezuela. “There is a growing risk that the government will default on its obligations in 2012,” its analysts wrote on February 17th. Some in the markets have taken fright, too: the country’s credit-default swaps imply a 50% chance of default by 2015. That may be overblown. Even so, Hugo Chávez, Venezuela’s leftist president, seems to be pulling off a dubious achievement by causing the bond markets to fear for the solvency of the world’s eighth-largest oil producer.

The chief cause of Venezuela’s travails has been Mr Chávez’s pillaging of PDVSA, the state oil firm. He has packed it with loyalists, starved it of investment and used it for social spending, cutting its output from 3.3m barrels per day (b/d) in 1998 to around 2.25m b/d, according to industry estimates. Of that, some 1m b/d is sold at subsidised prices at home or to regional allies, leaving just 1.25m b/d for full-price exports.

Meanwhile, the president’s hostility to business has devastated the rest of the economy. He has nationalised hundreds of companies and trumped up charges against their owners, causing much of Venezuela’s private sector to shut up shop and flee. As a result, the country has seen vast capital flight, and must import many goods that it used to produce. Non-oil exports have ground to a halt: petroleum now accounts for 92% of its dollar intake.

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