Missed Bond Payment Focuses Attention on Venezuela’s Economic Woes

Already pummeled by the volatile global oil market, Venezuela’s economic prospects suffered another blow this week when the government missed a payment on its short-term debt, focusing international attention on the country’s deepening woes.

As the No. 1 supplier of oil to the United States, Venezuela’s economic and political stability is closely watched. Speculation is mounting that the petroleum-dependent economy will devalue its currency, which would have a negative impact on the massive foreign investment the country has attracted in recent years.

The missed $130-million bond payment, which was variously blamed on a lack of liquidity and a bureaucratic snafu, was quickly rectified. But not before the Duff & Phelps credit monitoring firm downgraded Venezuela’s debt, a move that could ultimately increase its borrowing costs.

The incident is just the latest setback for a country whose once bright economic prospects have been eclipsed by falling oil revenue this year. Inflation has spiked to 38%, the economy is slipping into recession, and analysts see no comprehensive government solution at hand.

As a result, Venezuela’s leading stock market index has plummeted 50% so far this year, although stocks rallied Friday to break a six-day losing streak to close up 1.2%.

Its currency, the bolivar, has lost 10% in value against the dollar since Jan. 1, and analysts still complain that it is overvalued by as much as 45%, faulting the government’s currency support measures that have cost it $4 billion in reserves this year.

“It just keeps getting worse,” Merrill Lynch Latin American strategist Robert Berges said Friday.

Venezuela’s biggest problem is that it will collect up to $6 billion less in oil revenue than it had planned this year. It has cut only $3.8 billion so far from spending programs. Venezuela depends on oil for 60% of government revenue.

The budget shortfall could cause a fiscal deficit representing an alarming 6% of total economic output. A deficit of 3% or more usually is regarded by economists as a warning sign and an inflation harbinger.

Unlike Mexico, which Wednesday announced its third fiscal cutback to bring spending in line with a $4-billion drop in oil revenue, Venezuela has failed to adequately address the revenue shortfall from a fiscal standpoint, said Francisco Vivancos, an economist with Banco Mercantil of Caracas.

Mexico is expected to reach its goal of limiting its budget deficit to 1.25% of its gross national product, the sum total of goods and services.

Analysts said further spending cuts were politically untenable with a presidential election set for December. Further belt-tightening would mean a loss of jobs--and votes.

“The current administration will probably leave it to the next government to make the tough decisions,” said Berges of Merrill Lynch.

Acting in concert with Saudi Arabia and Mexico, Venezuela has led efforts to reduce oil output and work off glutted global inventories. By so doing, they hoped to provide a floor from which crude prices, down by one-third since December, could finally climb. Prices closed at $13.87 a barrel Friday, down from $13.88 on Thursday.

But even if ultimately effective, the measures will take months to work, and so the government must take additional measures in the meantime to restore investor confidence, analysts said.

If not a budget cut, then Venezuela should ask for international loans, impose major currency reform such as a sudden devaluation, or implement exchange-rate controls, Vivancos said.