Capital suggestion: Venezuela’s debt

From 2007 to 2014, China lent Venezuela a wholesome $63 billion. A decade ago, Venezuela’s Petroleos de Venezuela (PDVSA) – the Venezuelan state-owned oil and gas company – entered into an oil-for-loans deal with China’s state-run China National Petroleum Corporation (CNPC).

Under the agreement, Venezuela borrowed the amount from China and “agreed to pay back in crude and fuel deliveries to state-run Chinese firms”.

Lo and behold, in 2014, the decade-long oil boom ended. According to the Foreign Policy magazine, “With most lending agreed to when oil hovered at more than $100 a barrel, as it did for most of 2007-2014, it seemed a good deal for both sides. However, when oil dropped to close to $30 a barrel in January 2016, this caused Venezuela’s price tag for serving its debt to explode. To repay Beijing today, Venezuela must now ship two barrels of oil for every one it originally agreed to”.

According to Reuters: “At the end of January 2017, [the] PDVSA was late on nearly 10 million barrels of refined products…with shipments delayed by as much as 10 months. It also failed to make timely deliveries of another 3.2 million barrels of crude shipments to CNPC”.  The report added: “Because oil accounts for almost all of Venezuela’s export revenue, PDVSA’s crisis extends to a citizenry suffering through triple-digit inflation and food shortages reminiscent of the waning days of the Soviet Union”.

According to CNBC, the satellite business news television: “PDVSA clearly does not have enough oil or money to satisfy its many creditors. At this point, everybody is trying to collect pending debts from PDVSA by receiving cargoes. But production is not enough”.

Foreign Policy further opines: “Large-scale lending projects without a focus on their economic viability and the repayment capacity of the borrowers are hardly the soundest basis for financial diplomacy of the sort China is attempting to practice. At best, it will lead to mutual suspicions and tensions between lender and borrower. At worst, it will prove financially ruinous for countries burdened with debts they cannot repay in foreign currency they do not possess. With oil prices down, the country is unable even to repair rigs or pay workers to generate income, and the government now faces the prospect of a mass uprising. But Venezuela’s ruinous state has more to do with China than one might think”.

Kevin Daly, an emerging market debt specialist, told the Financial Times, “The backdrop suggests we are moving closer to a credit event. The [Venezuelan] government is becoming more dysfunctional, the protests are becoming more fevered and it does feel like there could be splits in the government and military”.

Ricardo Hausmann, Venezuela’s former planning minister and current Harvard University professor, has called Venezuela’s debt “hunger bonds”. He has alleged that the current government is “siphoning money away from food imports to meet interest and principal payments on country’s…external debt”.

According to Al Jazeera, “Venezuela’s capital, Caracas, has seen almost daily demonstrations in recent weeks, some of which have turned violent. The country is in the middle of a crippling economic crisis that has led to high food prices and a lack of basic goods”.

Lo and behold, “Venezuela’s bonds are [now] the highest-yielding of any emerging market security due to concerns about default”.  Foreign Policy concludes that “Venezuela’s road to disaster is littered with Chinese cash”.

The writer is a columnist based in Islamabad.

Email: farrukh15@hotmail.com

Twitter: @saleemfarrukh