The volatility in oil prices which prevailed the headlines over the past months continued to push Venezuela towards distressed levels, which in turn resulted in an increasing default rate.

The model which was adopted by the late Hugo Chavez, in which the Government had nationalised companies, worked initially well until oil prices traded over the USD 100 per barrel, despite the inefficiency that such model had brought about over the years.

In fact, this inefficiency was relatively visible way back in 2013, when the domestic industry had shown signs of weakening, which in fact had led to political unrest.

At the time markets acted nervously, sovereign yields spiked, but Chavez had the right charisma to curtail the unrest and re-assure that the Government would be supportive for the deteriorating situation.

Surely, the revenues being generated at those oil price levels were supportive for Chavez talks, despite the continuously increasing inflation figures which were dragging the nation’s purchasing power lower. Figures back then were already at worrying levels of circa 52 per cent. Now the situation touched precarious levels of 131 per cent, a level of hyperinflation- defined as prices increases of 50 per cent or more a month.

When in mid-2014 oil prices were hovering around the US$ 90 per barrel, Venezuela commenced facing a troubled path due to the strain of lower revenues it was generating.

Now, with the country’s oil fetching about US$27 a barrel, it is estimated that Venezuela’s crude income will fall toward US$22 billion this year, according to Bank of America. Undoubtedly further pressure will prevail in terms of refinancing, which is clearly being reflected in the current yields of both sovereign debt, in addition to the debt issued by the state owed company Petroleos de Venezuela SA (PDVSA).

Currently Venezuela has USD35.6 billion of dollar bonds outstanding and owes USD67bn once interest payments are included. PDVSA, has US$33.5bn of bonds, and US$52.6 billion counting interest. In 2016 there is a sole sovereign bond repayment of US$1.5bn this month, whilst PDVSA has an upcoming maturity of USD1bn in October. At least some breathing space between the two payments with the country surely hoping for an uptick in Oil prices.

Chavez’s chosen predecessor, Nicolas Maduro who seems to have failed on his mentor’s steps in terms of Charisma and respect from his nation, is pushing for a cut in supply which should help for some sort of stabilisation.

In fact, in his extreme efforts last month Venezuela’s Oil Minister called on OPEC and non-OPEC producers to discuss the bolstering low oil prices and try to find a compromise on supply issues. Initially, Venezuela managed to gather some liquidity as it had stripped-off cash from Citgo Holdings, PDVSA’s U.S. refining, which however resulted in an unsustainable solution in line with declining oil prices.

Certainly moving in 2016 Venezuela faces a rocky path, as external imbalances will not only continue, but will be larger than previously anticipated. With lower oil levels the country’s current account deficit – other things equal – will be even wider; hence financing needs will be that bit larger.

In my view, financing needs are still very high relative to oil exporting earnings (which account for more than 70 per cent) under prevailing oil price assumptions.

Despite analysts perceive that this month’s repayment will be fulfilled, refinancing risks will remain high and thus spreads are expected to widen primarily if the oil saga will continue to hit the investment world. Over the past two years Venezuela was highly dependent on China in safeguarding the country’s interests, mainly in securing loans to repay its debt.

The question which should be posed going forward is whether Venezuela will keep on relying on China’s salvation factors and to what extent will it manage to muddle through. In my view further securing of loans might be in the loop, but the path of sustainability is well far from that desired.

This article was issued by Jordan Portelli, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.