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Possibly some breathing room

Thursday, November 9, 2017

Last week, the headlines would have carried the announcement that Venezuela would be seeking to negotiate some conditions to their existing debt. There was confusion over President Maduro’s interchangeable use of the words “refinancing and restructuring” which in the bond world carries two completely different meanings.

Regardless “The Economist” magazine was sufficiently moved to describe it as potentially the second biggest sovereign debt default in history.

Whatever happens next, it is likely to be both confusing and complex. Confusing due to the contradictory statements coming out of Caracas. Complex due to US sanctions and the fact that Venezuela owns a refinery in the US and this along with their oil exports can be “attached” to form part of compensation to existing creditors.

According to Bloomberg, Venezuela has at least $89 billion of debt that may require restructuring, some accounts suggest upwards of $100 billion.

We know $63 billion are traded, another $5 billion is owed to multilateral lenders, $17 billion to China and $3 billion to Russia.

Against this is just $10 billion in foreign reserves and there is a $1.1 billion payment on behalf of the state oil company that is due that they have indicated will be paid in full. The key issue for T&T, as it relates to any Venezuelan restructuring, is that it would provide a tangible indication of the stance of the international community in terms of doing business with the Maduro regime.

So, while our official position is that the matters related to Venezuela are internal to Venezuela and we will not get involved, this approach could end up being at variance with the rest of the international community.

Time will tell.

Based on the current assessment it seems that no US company can participate in any restructuring or refinancing process due to US sanctions that have been imposed.

Beyond that, many of the other countries from which the cash flows for purchase of sovereign debt would come from do not recognise the current government that is in place.

At last count this included 11 countries from Latin America inclusive of Mexico and Brazil and extends through much of the major OECD countries.

Ticklish situation

As this unfolds it represents a ticklish diplomatic situation for T&T especially as there is no doubt from our end that the discussions with Venezuela regarding gas supplies from that country are critical to our ability to meet our current gas shortfalls.

What is unknown is whether the impending debt restructuring/refinancing will be the catalyst for a change in government and how we will be viewed by a new administration after our willingness to entertain the Maduro regime.

Venezuela has, since the inception of the fall off in oil prices, been the obvious candidate for economic chaos followed by political and social unrest. However they are not the only one. Weekend events in Saudi Arabia have raised many eyebrows.

It was back in October 2015 I pointed out here that Saudi Arabia had risen to the third largest purchaser of arms in the world surpassing Russia.

At the same time I also pointed out that the presence of US shale meant that much of the political risk premium had gone out of the oil market. The Saudi war in Yemen and the proxy wars in other Middle Eastern countries did not impact the risk profile of the oil market.

Now we have a consolidation of power in the Kingdom following a change in the established successorship path, religious reforms, economic reforms and a restless under 35 population. This is happening at a time when there are concerns regarding the ability of US shale to generate real profitability at sub US$50 prices.

It appears, therefore, that both concerns about US shale and a risk premium is returning to the crude oil space with the commodity now being priced at its highest level since July 2015 at over US$60 per barrel.

The movement in oil prices is welcome news to T&T providing, of course, that we can get our levels of production to reverse its downward trend. We are currently hardpressed to meet our budgetary challenges and, as has been the case in both Venezuela and Saudi Arabia, there is a political dynamic to this more so for a democracy like T&T.

The Minister of Finance during the 2016 Budget presentation had this to say about our economic challenges:

“Accordingly, it needs emphasising that in the absence of a well-thought out adjustment strategy, let me repeat—in the absence of a well-thought out adjustment strategy; our fiscal projections will definitely show continued and sizable deficits over the next three years, a substantial reduction in our official foreign reserves and a rise beyond 60.0 per cent of GDP in our net public sector debt. This will be an untenable situation, which we must avoid at all costs, through prudent fiscal management.”

A number of actions have been taken to arrest the slide, however, we are still closer to the “untenable” situation with one year to go so a rebound in energy prices will provide some breathing space.

That breathing space is desperately needed because last week also provided strong hints that interest rate policies amongst the major central banks of the world would be less accommodating over time.

As this trend continues, and we continue to hold our domestic rates at current levels, the pressures on our currency exchange rate have become more pronounced.

There is an argument that it is extremely difficult to raise rates given our levels of private sector debt and need for government financing. It is also extremely difficult to defend the currency, which is necessary because of our low comparative rates, without greater hard currency inflows from the energy sector.

Maybe the current geopolitical undercurrents can give us a small bit of space to catch our breath. Hopefully we can use this space well.

Ian Narine can be contacted via email at [email protected]


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