Venezuela Liquidates Gold, other Assets as Crisis Worsens

Teetering on the brink of catastrophe.

By Nick Cunningham,

Venezuela is at a political crossroads, with an all-important parliamentary election set to take place in December. Meanwhile, the Venezuelan economy continues to deteriorate as the state seeks to stave off default and a brewing financial crisis.

The state-owned oil company PDVSA is looking to push off debt repayments that are due in 2016 and 2017, hoping to buy two more years of breathing room. Eulogio del Pino, the president of PDVSA, confirmed that the oil company completed debt payments of $4.2 billion that matured last month, and will pay another $1 billion due in the near future. But PDVSA is also seeking to work with bond holders to extend the deadlines for short-term debt until 2018 and 2019.

The comments from del Pino highlight the growing difficulty Venezuela is having in dealing with the collapse of crude prices. For a country that depends on oil exports for 95 percent of its export revenue, the bust in oil prices is hurting the South American OPEC member worse than most.

Bond prices for the government and PDVSA have collapsed, a development that del Pino blames on speculators seeking to drive down their value. Based on market sentiment, there is a strong consensus that Venezuela is facing the likelihood of default within the next year. Still, Venezuela thus far has been careful to meet debt payments, something that del Pino argued should give PDVSA credibility as it seeks to renegotiate maturity terms with bondholders.

But cash is running low. Gold reserves are falling sharply as Venezuela liquidates them to raise funds to meet debt payments. Also, the Wall Street Journal reported that Venezuela withdrew $467 million in cash reserves that it keeps with the International Monetary Fund, a sign that Venezuela is scrambling to raise as much money as it can. “Venezuela and PDVSA has a major liquidity problem,” Goldman Sachs analyst Mauro Roca told the WSJ. “If they are able to in some way to push those payments down the road through financial engineering they’ll be able to continue muddling along.”

Venezuela’s GDP could fall by 10 percent this year, the worst economic performance in the entire world. The country suffers from shortages of basic goods, including food and medicine. And inflation is running at around 85 percent, at least according to official estimates, which are likely vastly understating the true inflation rate. Crime rates are some of the worst in the hemisphere.

It is hard to see how the fortunes for Venezuela will improve in the near-term. Oil prices are showing very little sign of rebounding in a substantial way. Venezuelan officials have been pleading with OPEC to alter course and pursue a stronger price target. Venezuelan President Nicolas Maduro says that oil prices need to rise to $88 per barrel in order to guarantee global oil investments. “If the price of oil stays at $40, there will be a depreciation of investment, and within a few months we are going to see a price of $150, $200. Who does this suit? Nobody,” Maduro said on state TV.

His pleas fell on deaf ears. Saudi Arabia continues to dismiss calls from its fellow OPEC members to abandon its strategy of pursuing market share. “Let the market determine the price,” Saudi oil minister Ali al-Naimi said at a conference in late October.

Venezuela’s heavy crude fetches a lower price than some international benchmarks. While WTI traded for around $46 per barrel for the week ending on October 23, PDVSA was earning just $39.47 per barrel.

The economic crisis could quickly undermine political stability, especially with elections scheduled for December 6. Maduro’s mismanagement of the economy and the worsening economic crisis has cut into the popularity of the Chavista government. That would suggest that the opposition would score a major victory in the legislative elections in a few weeks, but there are few reasons to be optimistic about the fairness of the vote. On October 26, Maduro declared an “emergency” and said that he would activate an “anti-coup” plan ahead of the elections, an ominous development considering that the government routinely cracks down on opposition figures, jailing them on trumped up charges. And with state control of the media, the playing field is tilted in favor of the ruling party.

Late last month, Brazil withdrew its involvement in election monitoring after Venezuela rejected the officials Brazil put forward. Maduro is doing his best to keep international observers from scrutinizing the election.

The election will take place just as the OPEC meeting will be wrapping up in Vienna, which is expected to yield few benefits for Venezuela. All signs point to OPEC continuing its market share strategy, keeping a lid on any substantial price rebound in the short-run. That does not bode well for Venezuela as it teeters on the brink of catastrophe. By Nick Cunningham,

Argentina too is running out of money fast, as it tries to kick the moment of truth down the road with ever more desperate actions. Read… Currency Controls Strangle Argentina, But Hey, “Take it up with the Next Government, We’re on Our Way Out”

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  7 comments for “Venezuela Liquidates Gold, other Assets as Crisis Worsens

  1. Bob Miller says:

    “If the price of oil stays at $40, there will be a depreciation of investment, and within a few months we are going to see a price of $150, $200. Who does this suit? Nobody,” Maduro said on state TV.

    This guy is good, almost as good as George W.. ” “Governments accountable to the voters focus on building roads and schools—not weapons of mass destruction.” (N.B.: The U.S. has 10,000 nuclear weapons)

  2. Spencer says:

    The gold bullion banks are licking their chops over the gold. Having backed Venezuela into the economic corner, the ultimate prize is now for the taking. At 367 tons, this makes for a mighty sum to hypothecate into the gold suppression market. Well done G.S..

    • Nick Kelly says:

      Who is GS?

    • If you look at back in history, Venezuela’s sale could very well mark the bottom for gold. This would be very similar to the UK selling gold in 1970/71 and 1998/99. The Uk in 1999 (now called the “Brown Put”) sold off over half of their gold reserves, deciding that gold was a relic of days gone by and that they could do better investing in foreign currencies and treasuries.

      They lost money – a move they will never be able to live down. How much depends on who you ask. The number ranges from $1billion to $10 billion.

      But, that has got to pale against the gold sale in 1971…at the historic low at the time.

  3. MC says:

    PDVSA has a problem. While its production costs used to be low, they are rapidly rising as rigs age and cannot be replaced or properly upgraded as the company is both starved for capital and the Venezuelan government’s attitude to foreign investors, especially in the oil sector, is hardly conductive to large, long term investments.
    There have been attempts to strike deals with both Rosfnet and CNPC, but negotiations have been dragging on for a long time and resulted in little more than small scale cooperations. Neither the Russians nor the Chinese are particularly happy about the conditions offered.

    With production costs rising, it means the full breakeven price of oil to finance Chavismo has increased, and it keeps increasing. There are various extimates floating around, but it’s now probably north of $120/bbl. And this is without taking into account the need to repay the debts both PDVSA and the government are incurring right now.

    Very much like fracking, Chavismo was sustainable only with extreme oil prices on a upward trend. And barely so: while Saudi Arabia was able to both spend large sums on defense and “social peace” programs and build huge foreign currency reserves for rainy days such as these, Venezuela spent every last penny it took in and more, if inflation figures are anything to go by.
    And while Saudi Arabia is presently contemplating deep budget cuts to help better cope with budget shortcomings (which will probably remain in place once oil prices pick up to help rebuild reserves and pay down debts), Venezuela is letting Chavismo run wild.
    To the best of my knowledge there have been no attempts to weane Venezuela’s overdependence on oil, for example by rebuilding the once profitable cattle industry Chavez destroyed by lifting restrictions on land ownership, nor the most glaring excesses of Chavismo are being eliminated. The system is pretty much being allowed to deteriorate on its own, hinting at the fact Maduro’s only preoccupation is to have enough money to pay his pretorians.

    Maduro can hope all he wants Saudi Arabia will reduce production just to help him out, but the reality is the Saudi have their own plans and care nothing about non-Gulf OPEC members such as Venezuela, Nigeria and Algeria. In fact they would probably welcome a split to “teach them a lesson” and I suspect they would not be above allying themselves with their archnemesis, Russia, to further their own goals.

  4. NY Geezer says:

    The sentences quoted by Bob Miller also caught my attention. These oil producers protest much too much.

    Now I can see that the situation in the oil markets has become a no holds barred battle for market share, not if the future, but now. I had some doubts when the Saudis first asserted that they were first and foremost concerned about market share, but not any more. The producers are all desperate for market share today, not in the future. They act as though they fear that there will be a diminishing market in the future for their products.

    I believe that fear is justified. I am far from an expert in this area, but I have done some initial research.

    Electricity today makes up a larger and larger portion of the world’s energy mix, and electricity comes from multiple sources including solar and wind, the renewables.

    I was surprised recently to read how affordable solar has become. From 1977 to 2014 its cost has been reduced dramatically from $76.67 per watt to $0.36 per watt. This has apparently caused a rush to solar. China plans to increase the portion of solar connected to its grid from11.3GW to over 100GW by 2020, and in 2014 alone, Japan added 9GW of solar to its grid, which is more than twice the amount of solar previously connected to the grid.

    Although I do not know the specifics for the cost per watt of wind energy, I do know that like solar, the cost has been dramatically reduced, and more and more wind energy is being added to the grid.

    And, most alarming if you are an oil producer is that fact that the electric car is beginning to take hold in the collective mind of the public as an alternative to cars powered by internal combustion engines.

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