Venezuela Weekly Report
- 2018 started out carrying with all the economic problems from 2017 in an exacerbated way, and the government’s response is the launching of the Petro
- After EMTA’s recommendation on the VENZ bonds we saw signs of recovery in the market, and the gap between PdVSA and VENZ was reduced by more than 40% according to our proprietary indices
- There is no clear panorama on the political arena, but results from the negotiations between the government and the opposition are being widely demanded
After a rough 2017 in economic and social terms, 2018 seems to be continuing in the same direction with the first days of the year presenting numerous difficulties in the performance of the economy, with inflation continuing in its skyrocketing trend and with an exacerbated shortage of food that has turned into some events of local protests and lootings, especially in small cities in the countryside. On the other hand, the government’s response is focused on a proposal to battle all the financial and economic inconvenience the country has been suffering lately: the “Petro” cryptocurrency.
Venezuela Weekly Report
- We expect that by 2018 the Venezuelan economy will continue to shrink at a rate between 6% and 8%; Official data confirms a 16.5% decrease in 2016
- The country entered into hyperinflation in the last months of 2017, with the AN estimating year end inflation in excess of 2,000%; while setting no limits for 2018
- After the failure of 2017´s FX system, the government makes a new bet aimed at crypto currency. Our view is that it can hardly replace traditional currency as it has no universal acceptance
- We see a stronger PDVSA for 2018, supported by better relations with foreign oil companies from allied countries
- We estimate cash oil exports in 2017 to amount to USD11.5bn and an average production of 2.1mbpd
As we end 2017 and estimate scenarios for 2018, we start by mentioning the unexpected release of official economic data for 2016, whereas for 2017 we will use as reference the statistical work that the National Assembly has carried out this year, especially regarding inflation. For 2018 we predict it being a difficult year in the economic arena and one where the government will probably try to capitalize its current political strength.
Regarding GDP performance, we make reference to Venezuela’s most recent 18-K filing with the SEC on 21 December, which evidenced the economy’s 3 year decelerating performance as of year-end 2016. In detail, it showed 2016’s economy contracting officially by 16.5%, reflecting a contraction of 9.9% in the oil sector and 16.1% in the non-petroleum sector. Given the high level of contraction for 2016, and given that 2017 will be the fourth consecutive year in this trend, we see that 2017 contraction will stand below 2016 levels, probably reaching -12%. Considering the base scenario of no significant change in the government’s policies and its possible further concentration of power if winning presidential elections, Venezuela’s economy in 2018 will continue contracting but at lower levels, possibly around 6% to 8%.
Venezuela Weekly Report
- The naming of the new president of CITGO was the start of a series of moves in the national oil industry and the Executive branch trying to fight corruption, ending (so far) with the detentions of former heads of PDVSA and Oil Ministers Eulogio Del Pino and Nelson Martinez
- New Oil Minister Manuel Quevedo had a quick international debut by participating in the OPEC meeting where the output cut agreement was extended for 9 more months
- We address ISDA’s announcement on CDS auctions for VENZ and PDVSA bonds. Meanwhile, Clearstream said that they received the cash for the PDV’27 payment but that it will be retained until solving an inquiry on the “irregular manner” it was done
We have had a couple of busy weeks after President Nicolas Maduro ordered a revamp of the oil industry to fight corruption. First, the President decided to name Asdrubal Chavez as the new head of CITGO after Jose Pereira, the company’s acting president (at the time), and other 5 vice-presidents were detained – for more details, check our 24 November Weekly Report PDVSA’s Calling Out its Peers. Nonetheless, one of the most important announcements was the one of Major General Manuel Quevedo as Oil Minister and President of PDVSA.
At first glance, Quevedo’s move might be considered as negative due to several reasons, starting from the fact that he does not have experience in the industry and is replacing two characters with much more experience in the oil sector – Eulogio Del Pino and Nelson Martinez. Furthermore, it remains to be seen the impact of his naming in the debt renegotiation process but creditors might see with less confidence that key positions for the country’s economy are being held by a less market-friendly individual.
In spite of all this, we still believe that the ideology that Manuel Quevedo will follow through his stint will be the one that President Nicolas Maduro and the rest of the Executive branch have preached so far, thus he is unlikely to bring a turnaround to this general view. In this respect, the fact that one of his first statements was that PDVSA has the capability to honor its financial obligations serves as one example of this. Therefore, we don’t see debt restructuring negotiations being affected significantly as a consequence of his naming.
From our standpoint, Quevedo, the former Housing Minister, will instead serve the main roles of commanding a cleansing of PDVSA – after the myriad of arrests and investigations of different corruption schemes – and reinforcing political support towards President Nicolas Maduro. In the meantime, Quevedo’s move provoked also a cabinet reshuffle, with his former position now being occupied by General Ildemaro Villarroel while former governor – and head of the tax authority – Jose Vielma Mora will take charge of the Foreign Trade and Investments Ministry.
Venezuela Weekly Report
- In the framework of the IV Forum of Gas Exporting Countries, PdVSA GAS VP Cesar Triana confirmed discussions with JV partners aiming to obtain financing in exchange for oil & gas projects
- Crystallex and Venezuela have apparently reached what could be the largest settlement
- PdVSA announced it has initiated the transfer of the coupon payments for the PDV’20 and PDV’22
The IV Forum of Gas Exporting Countries (FPEG for its words in Spanish) was the event of the week, taking place in Bolivia starting Tuesday 21 ending today, with Venezuela playing a key role in talks and proposals and even making some announcements about future plans.
In this regard, PdVSA GAS’s VP Cesar Triana made reference to the plans that the company is trying to deliver in order to help recover its production levels throughout different financing strategies, highlighting the talks that the company is holding with its JV partners: Rosneft, Eni, Repsol, and Statoil. The talks will be initially intended to obtain credit for oil & gas projects; which in our view defines the new strategy of PdVSA to get fresh financing while, at the same time, avoids the obstacles imposed by US sanctions. We view these intentions targeting a production recovery as positive, as this is a critical issue that must be addressed in order to guarantee an improvement of future cash flows; especially if they want to take advantage of higher oil prices, and if they want to reverse the current decreasing trend in its production. On this specific matter, Triana stated that they plan to increase oil output in around 500kbpd for 2018.
Continuing with the search of routes to avoid US sanctions, it is well known that the state-owned oil company is also trying to negotiate the change of currency for some payments made in US Dollars to Chinese Yuan or Russian Ruble. However, we don’t see this very successful as these currencies are not the most attractive options for the majority of suppliers, which would prefer harder currencies. In the restructuring matter, Triana said that efforts are going well as, according to their information, most creditors are concentrated in China, Russia, and Europe. He also hinted that as they are currently having cash flow problems, their aim is to find some debt relief into extending payments for a longer term.
Finally a Settlement?
After numerous attempts from gold miner Crystallex to fight the expropriation of its assets in the country, it seems that yesterday November 23 they finally reached an agreement with the Venezuelan government, according to the information provided by unofficial sources. This agreement is expected to be ratified today at a court in Ontario and it is expected to be the largest settlement agreed by the government, moving into a range of USD1bn – the amount settled with Gold Reserve – to USD1.4bn – the amount awarded by the ICSID to Crystallex.
Venezuela Weekly Report
- Uncertainty around the November 13 meeting was the leading theme this week, as more information is expected to be disclosed at the event according to Finance Minister Simon Zerpa
- Principal Payment for the PDV’17 was made, boosting both Sovereign and PdVSA curves. Meanwhile, CORPOELEC missed the end-of-grace-period coupon payment, making ELECAR’18 enter into default … for only a couple of hours
Last Thursday November 2, the market was surprised as President Nicolas Maduro announced that the Government would start a “refinancing and restructuring” process – as reported in Our last Venezuela Weekly Report – and, even when we expected to get a clearer picture this week, this has not been the case. However, yesterday morning the new Finance Minister and PdVSA CFO Simon Zerpa stated that investors should attend Monday’s meeting in order to get more details. This announcement – in our view – was intended to persuade investors to come to Caracas, as they presented it as the only option to get any disclosure regarding both Venezuela and PdVSA bonded debt; nevertheless, there has been no clear answer from the investor’s side, and uncertainty increases.
In detail, the decision to carry out a meeting in Caracas with a committee comprised of sanctioned officials does not seem like an appealing option but, like a sort of a clearing path, the U.S Treasury Department decided to release a statement in which they informed that U.S investors are allowed to attend the meeting as long as they don’t engage into any agreements or transactions with sanctioned individuals. Nevertheless, this kind of “permission” did not seem to cause a widespread effect among investors and – in our opinion – the level of uncertainty generated by the government around the place, time, and the agenda is making the meeting look less attractive.
Sanctions and OFAC Statements
We see that sanctions play a confusing role this week, not only regarding attendance but also for any restructuring feasibility, as doubts emerge on whether the government will be able to make a restructuring program without the approval of the National Assembly (“AN” in Spanish) or if US persons could participate in any new deal, as it would be considered new debt. On this matter, the OFAC released a statement yesterday in which they argued that they could consider releasing new licenses for individual cases of new debt, depending on the circumstances; and, in this case, we can interpret the renegotiation as one of the circumstances. However, even with a license, they may require this new debt to be authorized by the AN. Even when the AN’s approval can be seen as an obstacle, we believe that in this specific case the renewed dialogue between the government and the opposition could play a key role, considering this to be a negotiation element for both parties.