In effect, Venezuela has exhausted every single option it had. Turning PDVSA into a cash cow, responsible for 95% of exports and virtually the country’s only source of foreign currency, left the South American nation vulnerable. Now with China refusing to lend it more money and record low foreign reserves to tap into – Venezuela has about $12 billion USD left in foreign reserves – oil price recovery will not be enough to extricate the country from the hole it dug for itself.
Long lines now dominate the landscape in every city, with Venezuelans striving to find the most basic staples. The struggle gets worse by the day, as the economy is bound to contract by a whopping 10% this year, and inflation toping 475%. Now if PDVSA defaults on the bond payments it has to make, the final domino will fall.
The consequences could be catastrophic for Venezuela, its citizens, PDVSA and its investors, yet someone out there might profit from the impending debacle. OPEC members which have recently shifted their positions to enable oil price recovery, will find it easier to cut production if Venezuela sinks. Prices are almost guaranteed to jump if PDVSA folds in, but a sustained price gain will be more dependent on whether Venezuela is capable of avoiding a complete descent into turmoil and violence.
There is a serious risk of total collapse if PDVSA defaults. The oil industry requires a certain amount of stability to enable continuing production, and the conditions are ripe for the situation to worsen beyond a quick recovery. At this point it seems that a collapse could take years to recover from, and not even the most optimistic oil price forecast will be able to accelerate a recovery if PDVSA falls. Venezuela seems to be on a one way ticket to total collapse, and investors would be wise to keep an eye on the situation there in the coming weeks.
