There are plenty of reasons why BlueBay Asset Management LLP cut its holding in Venezuelan bonds, from the empty shelves in the supermarkets of Caracas to a nationwide dearth of spare auto parts.
But few were more compelling than the satellite photograph of Puerto Cabello on the Caribbean coast, home to the country’s biggest port, which shows a once-vibrant terminal bereft of vessels.
“If you can see a country’s economic decline from space, you know it’s in big trouble,” said Graham Stock, the head of emerging-market sovereign research in London at BlueBay, which reduced its holdings of the nation’s debt to below-benchmark levels. He estimates Venezuela’s imports have declined by as much as 50 percent in the last two years.
Read More About Venezuela’s Debt Schedule
The investment company that manages $50 billion dismissed warning signs last year about Venezuela’s ailing economy and bought the country’s dollar debt, which returned about 50 percent in 2016, Stock said. But the government has depleted its foreign currency reserves to $10.4 billion, near a 15-year low and the equivalent of about 10 percent of its total outstanding debt, according to data compiled by Bloomberg.
President Nicolas Maduro’s administration has used up all of its buffers, Stock said. It now has to choose between repaying bonds and importing even less food at a time when bakers are being questioned by the public prosecutor for using flour supplies to make sweets.
Default Risk
Authorities risk social unrest if they cut spending, but they will also struggle to find assets to collateralize new borrowing, said Stock, who sees the probability of a default at about 50 percent this year from 30 percent.
“The government effectively stopped publishing economic data,” Stock said. “We don’t know what inflation is, we don’t know what GDP is, the central bank governor hinted that inflation last year was around 700 percent and he was fired.”
The rebound in oil isn’t strong enough to help Venezuela make external debt payments, Stock said. While Brent crude has risen about 25 percent from a year ago, it’s still about half the average price for 2014. The nation is home to the world’s largest proven oil reserves, according to data compiled by Bloomberg.
“We are now less confident about their ability to get through 2017,” Stock said. “You get to a point where you can’t compress activity any more.”
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