Venezuela to default: practically unavoidable?
While Venezuela’s socialist president Nicolás Maduro is busy assuring bond investors that the economy will repay over $10 billion of its debt this year while economists hold the view that a default is ‘practically unavoidable’ for this emerging market Latin-American (ILF) country. The country has about $501 million in external debt, of which over 97% is US-dollar denominated. As the US dollar appreciates, Venezuela could find it increasingly difficult to repay this debt.
Oil slide led revenue crunch
Venezuela is facing an economic crisis. Oil, which accounts for 1/3rd of the economy’s GDP, about 96% of its exports, and at least 50% of the government’s revenue has taken a toll on the economic well-being of the nation. Since mid-2014, we saw global oil prices plummet from over $100 a barrel to just over $30 a barrel a February 2016. While oil has been recovering since then, it was trading at just over $50 a barrel towards the end of 2016; it’s still half-way from its early 2014 glory.
While the markets expect oil prices to recover further as we move ahead into 2017, Venezuela’s economic crisis is more urgent. The economy’s balance of trade stood at -$1,093 million in 4Q15 against $10243 million in 2Q14. Venezuela’s oil exports are currently trading at $21 a barrel. Ecoanalítica, a Caracas-based consultancy, calculates the country needs a price of $75 per barrel to balance its budget.
Growth contracted by 18.6% in 2016, following a 5.7% contraction in 2015. With food scarcity and inflation at 800% (year-on-year in 2016), the economy would sure need more than just oil price recovery to aid the damage. This risk-ridden economy’s 10-year sovereign bond currently yields 10.43%, duly accounting for the vulnerability of the economy to the rising US dollar (UUP).
Funds such as the iShares Emerging Markets High Yield Bond ETF (EMHY), the Arrow Dow Jones Global Yield ETF (GYLD), and the Market Vectors Emerging Markets High Yield Bond ETF (HYEM) have exposure to Venezuelan debt. Since much of Venezuelan debt is high-yielding courtesy the economy’s high-risk profile, the EMHY has returned 10.1% over the past 1 year. The GYLD has bagged 17.1% return, while the HYEM is up 11.7% during the period.