As Wall Street Speculates on Venezuelan Debt, China Invests in Housing Projects

Santa Elena de Uairen, September 23rd, 2014 (venezuelanalysis.com) – Over the weekend Beijing funneled another US$2 billion into the Joint Chinese-Venezuela Fund, for use in Venezuelan government’s ever-advancing housing mission. This morning the US finance journal Bloomberg fueled investors’ fears of default by claiming hedge funds are circling to fill in “a vacuum” in Venezuela’s bonds.

Additionally, on Monday, the International Centre for Settlement of Investment Disputes (ICSID) ruled that Venezuela must pay Gold Reserve, a United States Mining Company, US$740.3 million in compensation for the termination of its Las Brisas gold concession in 2009.

“The real story is the degree of hype and panic out there,” Daniel Friefeld of hedge fund Callaway Capital Management LLC told Bloomberg. “Everyone is running for the doors. Are there risks? Sure. But not to the degree people believe.”

Though the ICSIC ruling comes at a bad time, it is only a drop in the bucket where Venezuela’s debt is concerned. President Nicolas Maduro is due to pay an estimated US$4.5 million in debt just next month, and has sworn publicly that he is prepared to do so “down to the last dollar.”

However, the “hype and panic” is hardly caused by the amount of debt owed, rather by the perceived risk of default, though as Freifeld pointed out, it’s a revolving door. Between a calculating opinion article written by influential Harvard economist Ricardo Hausmann early this month and a downgraded credit rating from Standard & Poor’s (S&P) last week, Venezuelan debt is now the most expensive to cover of all developing nations.

Wall St. Speculation

After dropping the rating from a B-minus to a triple C+, S&P said in its statement, “We assign CCC+ ratings in instances where we assess that issuers face at least a one-in-two likelihood of default over the next two years.”

Bank of America Senior Andean Economist Francisco Rodriguez disagrees with those odds.

After a meeting with Venezuelan Economy Vice-president Rodolfo Marco Torres and the president of the Central Bank of Venezuela, Nelson Merentes, Rodriguez said S&P’s evaluation “misses a key part of the story,” by omitting how the country has reduced imports by 36 percent over the past two years, thereby improving its capacity to pay debt.

In a direct response to Hausmann’s article, Rodriguez wrote, “Default makes sense only when a country is insolvent… [but] it is very hard to make the case that Venezuela is insolvent.” Research carried out at Bank of America, he noted, proves that the “public sector’s net debtor position – the result of subtracting its external assets from its external liabilities – is no larger than 3.5 per cent of GDP.”

Still, Bloomberg’s article this morning indicated September’s atmosphere of uncertainty took its toll, with the high yield on government notes (averaging 15.7 percent) drawing the attention of hedge funds eager to invest in distressed assets.

President Maduro also responded to Hausmann’s article, calling the author a “financial hit man” on live television and accusing him of sabotaging the country’s economy. Hausmann served as planning minister of Venezuela under Carlos Andres Perez, the notorious president whose harsh neoliberal policies incited the powerful popular rebellion which eventually brought Hugo Chavez to the forefront.

Hausmann has since acted as an authoritative critic on Venezuela’s socialist policies from within the United States.

Yesterday the World Bank ranked Venezuela as the fourth largest economy in Latin America during 2013, and the 32nd largest in the world, with a Gross Domestic Product of over US$438 billion.

Venezuela possesses the largest of the world’s known oil reserves and has an estimated US$21.5 billion in currency reserves.

Chinese Investment

On Sunday a Chinese business delegation met with Venezuelan authorities to secure a bilateral agreement worth around US$2 billion under the Joint Chinese-Venezuela Fund.

Since 2008, China has channeled around US$50 billion to Venezuela through two funds that have supported over 200 development plans, including a project in the Orinoco Petroleum Belt.

Last year, five Venezuelan government officials were charged with embezzling some US$84 million from a Chinese development fund.

According to government officials, this US$2 billion will be used to continue the Mision Vivienda and Mision Barrio Nuevo initiatives, which build homes for low-income families and improve infrastructure in poor neighborhoods respectively.

Maduro said the accord would help them achieve the goal of six million homes either built or rehabilitated by 2019. So far, the mission has built over 558,000 housing units since 2011, according to government figures.

Venezuela ships 524,000 barrels of crude oil and derivatives to China per day, nearly half of which goes toward paying the loans. That amount is expected to increase to one million bpd by 2016.

Under Sunday’s deal, Chinese investment will also boost heavy industry in Carabobo and Anzoategui states.