Venezuela’s economic, humanitarian and political crisis hit critical levels at the end of March, when Venezuela’s president and the Supreme Court of Justice initiated a process that will deprive the opposition-led National Assembly of legislative powers. It is worth noting that the present Supreme Court of Justice was deviously designated by the previous National Assembly just days before they finished their period, a move designed to make it completely obedient to the Venezuelan president. Two days later, due to the outcry of the international community, in particular by the Organization of American States (OAS), the Supreme Court tried to step back from its controversial dictatorial decision through a presidential order.
Venezuelans are living day-by-day in a total chaos, facing a very complicated situation with rising crime and corruption rates, daily electricity blackouts and shortages of both medicines and food. Venezuelans can’t get even the most basic lifesaving medical supplies such as simple antibiotics. This critical situation does not seem to have an easy solution, due to the fact that most of the goods have to be imported due to Venezuela’s record low productivity level. The reduction of cash flow due to low international oil prices, as well as the institutionalized government corruption, caused yet more protests, with the government once again using tear gas, water cannons and pepper spray alongside its paramilitary force - the so called “colectivos” (the civilian heavily armed branch of the “revolution”).
On April 12th, Venezuelan state oil company PDVSA is due to pay $2.05 billion to the bondholders. Not doing so will be considered as a default. As a measure to avoid default, PDVSA has been trying to negotiate new terms of a loan from Russian oil company Rosneft for months. Venezuelan state oil company has offered Rosneft a stake in a joint venture in the Orinoco Belt.
To achieve this loan, the approval of the Venezuelan National Assembly is constitutionally compulsory, which explains the decision taken by the Supreme Court of Justice to annihilate it. At the end of 2016, PDVSA used 49.9 percent of its shares in U.S. subsidiary Citgo, one of their best industrial assets, as collateral on its loan financing from Rosneft. This financial action enraged opposition politicians who argue a distressed government is hypothecating high-quality national assets. The risk of default is real and the best example was November 2016 when PDVSA missed coupon payments due on its bonds and had to activate a thirty-day grace period. The credit default swaps (CDS) are used by investors to protect themselves against the risk of nonpayment of a coupon, from the PDVSA’s CDS it is possible to calculate the implied probability of default of PDVSA, which increased to 56 percent in March from 40 percent in February. April 12th is not the only important date for coupon payments, still a further $3.5 billion in payments are due in October and November 2017. The country’s foreign reserves have plunged to $10.4 billion, according to the latest Venezuelan Central Bank data, which represents only 10 percent of Venezuela’s outstanding debt. Therefore, the risk of default for the rest of 2017 will remain high until political and economic stability is achieved.
Today, Venezuela’s democratic face has completely crumbled, showing the real face of a dictatorship. The Venezuelan people are famished and the only way they can put pressure on the government is to take the streets and ask for new presidential elections, as they have been doing for quite some time. While the Venezuelan regime is experiencing its lowest ever approval rating, the government has maintained its military branches in every key post in the Venezuelan administration, making a democratic solution unlikely. So far, the government has only engaged in empty dialogue, not attempting to move towards a democratic solution. Every time the government has needed “oxygen”, they use this so-called dialogue, while implementing harsher measures against the population.
It seems that the government is more concerned about how to pay its coupon payments rather than covering the population’s basic needs. This strategy seems to be the government’s way to cling to power, at least until 2018 when presidential elections are due.
By Luis Colasante for Oilprice.com
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