The Venezuelan debt ordeal
VENEZUELA is a federal republic located on the northern coast of South America spanning about 916 square kilometres of land with 31 million population. The country discovered oil in the early 20th century and has become the world’s largest oil reserve country. Oil export stands at 80 per cent of the country’s external trade and covers one-third of the GDP.
Today, the Bolivarian Republic of Venezuela is a member of the OPEC conglomerate and one of the top five largest producers with an estimated 2.2 million barrels per day. According to data in 2016, this country has the largest oil reserve in the world over 299 million barrels, surpassing Saudi Arabia by an estimated 30 million barrels.
Since the fall of oil prices in 2013, all major oil producing countries have been going through tight spending as the profit margin narrows down. Tracking back to early 2000, the rapid rise in oil prices have given Venezuela a horizon that has never been seen before, resulting a huge boost in government and social spending. The eventual de-stability between the income-gap in the local society finally leads to hyperinflation, economic depression, debt crisis and crime.
In mid-October, the Venezuelan Government failed to repay US$237 million in bonds coupons, bringing its total unpaid interest to US$586 million. Moving into November 2, there is another sovereign bond issued by the state enterprise PDVSA to mature at an estimated US$1.2 billion.
Some market investors hold their suspicions on the repayment status. Many fund managers are praying hard to have their champagne and party, otherwise will be super stressed in making countless explanations to their investors.
Meanwhile, Saudi state-owned enterprise Aramco’s spokesman reiterated that its seeking of IPO will be on track in 2018. Looking from the above situation, we deduce the price trend of crude oil may be detrimental next year as more supply will be added in-line of competition with shale oil.
In short-term outlook, crude prices are still in firm demand since OPEC and Saudi repeatedly affirm their production cut till next March. Notwithstanding the dollar’s strength holding well, the failure to escalate higher on the greenback value has helped the general commodity and oil prices to counterbalance against weak global demand.
While Venezuela stays as a focal benchmark in November for global investors, the debt instruments issued by many other oil-producing countries could be facing the same ordeal in next year. As oil prices may fall again after increasing shale oil and new revolution of electric vehicles, many oil-producing countries will also encounter an eventual selloff in their sovereign bonds with rising yields.
Moving into future years, we foresee a flight-to-quality may widen in spread from oil to precious metals. This will become a reality when the dollar’s value begins to wind down again for enhancing the infrastructure building throughout North America.