Will Venezuela really go bankrupt?

The Economist is asking that question,
Oil leak
Could one of the world’s top petroleum producers really go bankrupt?

EVER since Greece plunged into a sovereign-debt crisis in 2009, investors have focused on which European country might be next. According to Capital Economics, a research firm in London, however, 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.

The PDVSA numbers are questionable:
VenEconomy: Venezuela’s Whoppers, Fibs, and Tall Stories

Now, Eddy Ramírez, an oil man who has spent many years in the industry, has also challenged many of the claims made by Rafael Ramírez during his rendering of accounts before the National Assembly.

Ramírez (the oilman) maintains that Ramírez (PDVSA’s president) was lying when he said:

That PDVSA’s workers were responsible for the absurd decision to invest some US$500 million from their pension fund in a hedge fund in Connecticut. Untrue! The fact is that decisions regarding the pension fund are the responsibility of PDVSA’s financial director and have to be approved by the company’s board of directors.

That the 20,000 plus workers who were fired in March 2003 had “sabotaged” the oil company’s operations during the December 2002-March 2003 national strike. False! The fact is that PDVSA refused those workers access to the facilities so preventing them from doing their jobs from December 8, 2002.

That now PDVSA is publishing its financial statements on its web page. A half truth! The report of PDVSA’s financial statements for the third quarter of 2010 published on the company’s web page (a) is incomplete; (b) was published late; and (c) was posted only in English. The truth is that the “old” PDVSA used to publish accurate, compete reports on time and in both Spanish and English.

That the current subsidized oil prices are costing PDVSA around US$1.5 billion a year. A whopper! The loss for selling fuel below the cost of production is in the region of US$6 billion.

That PDVSA’s total financial debt was US$24.9 billion as at September 30, 2010, compared to US$21.4 billion at the end of 2009. Bull! The minister failed to mention in his report the US$9.1 billion of new debt issued by PDVSA in the fourth quarter of 2010 and at the start of 2011.

As you can read in The Economist’s article, it’s more than just the mismanagement of oil production; it’s also the capital flight induced by Chavez’s nationalizing and raiding of the private sector, the raiding of the rainy-day fund from oil proceeds, the unpaid public sector workers, the increase of net public debt, and the unknowns, such as Fonden,

Moreover, since 2005 the government has squirrelled away $39 billion in a separate, unaudited fund called Fonden. Although analysts do not know how much of this has been spent, some part has probably been saved. There are rumours that the president is hoarding hard currency to prepare for 2012, when he faces a difficult re-election battle that will cost him money. The recent spike in oil prices caused by unrest in the Middle East will surely give Mr Chávez some extra breathing room. And at a pinch, he could probably turn to his friends in Beijing for a new loan.

The issue is not just simply oil revenues, but with oil reaching over $100/barrel, Venezuela will not go broke just yet. Instead, Chavez may still have sufficient funds to carry him through the next election.

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