Venezuelan Foreign Exchange Cash Flow in 2020 and External Financing Possibilities by 2021

The opacity of fiscal figures (among others) remains an important feature of the Venezuelan economy. This blog discusses potential sources of funding for Venezuela for 2020 and 2021 and their main implications.

By 2020, an estimate of that cash flow would be like the one shown in the table below.

1. In Venezuela, three aspects have converged to impair the financial situation, especially cash flow in currencies. First, a sharp drop in oil production and consequently exports. According to OPEC sources in direct communication with the Government (different from the secondary figures based on data from six qualified sources), oil production decreased from 1,020,000 barrels per day in 2019 to an estimated 590,000 barrels per day by September 2020. Second, there is a drop in the price of crude oil from US$ 60 per barrel in 2019 to US$ 35 per barrel in 2020. The effect of both variables has significantly diminished the value of oil exports and consequently foreign exchange income. Third, Venezuela since its external debt default in November 2017 has closed the voluntary debt market for both the Government and Venezuelan oil company (PDVSA) to which restrictions were added by sanctions by the US government. In addition, China’s financing declined significantly in 2020, although from March 2020 it stopped collecting the amount owed through oil handling which in practice resulted in implicit financing. While Russia, on the other hand, has not provided liquid assets to Venezuela but rather goods, such as medical equipment and supplies, spare parts for weapons, among others.
2. The value of total imports represented a drop of approximately 30% compared to 2019, given the limits to the ability to import imposed by the decline in oil exports and the lower willingness to import by the private sector (using its own external assets) in the face of high economic uncertainty.
3. Remittances experienced a shrinkage from approximately US$ 3 billion in 2019 to US$ 1,000 in 2020 because of COVID-19 and its impact on Venezuelan migrants.
4. With a level of exports and imports reflected in the table above and the restrictions of external financing, the growth of the Venezuelan economy is severely compromised.
5. The BCV’s foreign currency reserves at the end of September 2020 stood at US$ 6,462 million, which involved a $200 million fall during 2020, representing around a quarter of their value at the time Maduro took power in 2014.
6. For its part, PDVSA’s debt balance with the BCV at the end of September 2020 reached US$ 18,400 million, which shows the magnitude of the monetary financing deficit of the public sector. This figure accounts for approximately 25% of the GDP, which continues to fuel Venezuela’s hyperinflationary process since 2017.
7. Creating a foreign currency cash flow for Venezuela by 2021 from the point of view of revenues and expenses faces fundamental difficulties. First, it is unknown the estimate of oil exports and its respective prices (from the Budget Law of 2021 submitted to the National Constituent Assembly). Secondly, the external service debt is also unknown since the Indebtedness Law has not been published. The recent Anti-economic blockade law, as we discussed on our 21 October blog (1), will further increase this opacity of critical economic information in Venezuela.
8. In the following points, we will discuss the main elements that are expected to characterize the 2021 landscape of the Venezuelan external sector. These are conditioned on the total or partial resolutions of the current political crisis and the policies the US government have relative to sanctions imposed on Venezuelan government officials and public corporations.
9. The recovery in oil production will depend on the possibility of making investments of approximately US$ 5 million to increase production by 50,000 barrels per day and thus releasing export balances once gasoline-processing increases to alleviate current shortages.
10. The price of the barrel of oil always presents uncertainties. The permanence of COVID-19 and the regarding approval or application of vaccines, shows that at least during the first half of 2021, the international oil market would maintain the 2020 pattern with oil prices ranging from about US$ 40 per barrel for the WTI, which will represent US$ 34 per barrel for the Venezuelan basket.
11. Continuing the default on external debt and freezing relations with multilateral financial institutions shows no likely improvement in the flow of financing to Venezuela, therefore the significant external constraints are expected to persist. The contribution of fresh money by China, Russia, and Turkey looks unlikely. Their aid will focus on some goods, equipment, and inputs. China is significantly exposed to Venezuela and neither Russia nor Turkey has a strong grip to make loans to improve BCV reserves and feature imports.
12. Therefore, while imports may improve from the low levels of 2020, it is not expected to be any significant increase to provide the economy with the raw materials and capital goods needed to revive the economy, particularly in the non-oil sector. The challenge for Venezuela would be to ensure a proper level of imports of equipment and supplies for the oil sector to progressively lift the sustainable production of crude oil. Something that under the Maduro regime is unlikely to occur.
13. Considerations about other financing options:

• Opening the gasoline market to the private sector: this involves changing the Internal Market Hydrocarbons Law that reserves this sector to the state. This will require looking for local or foreign investors who are willing to make investments in the sector and sell gasoline at international prices.
• Deliver and return companies that were seized by the state to their owners. This is the case of the agricultural supply company “Agroisleña”. This company filed a lawsuit in the International Centre for Settlement of Investment Disputes (ICSID), and it is unlikely that under the current conditions they will agree to resume activities in the company.
• Privatize cement, steel, aluminum, among others. In this context of the global recession, few actors will want to invest in sectors where demand for these resources is stagnant, especially if these investments would be significant.
• In the communications sector, there could be new investments if service tariffs are systematically released and the regulatory framework improves, but the low purchasing power of Venezuelan households imposes restrictions to such strategies.
• Tourism is where the capital attraction is easier. However, there are restrictions on basic services that complicate the operation of that sector. In addition, the current restrictions on international aviation and the general levels of crime in Venezuela must be considered.
• There is an opportunity in the capital market through stock issues. It is a good option to remunerate bolivars (Venezuelan currency) and obtain financing, given the high bank reserve requirements.
• The expectation of the Maduro regimen to attract foreign direct investment is severely compromise by the Anti-economic blockade law, given the negative initial assessment made by foreign investors from the US, Western Europe, and Japan.

Dr. Jose Pineda is a Venezuelan economist who has served as the Deputy Director of Research at CAF and as a senior advisor to multiple UN programs. He has also served as Chief Economist of VENAMCHAM, and as consultant for the Venezuelan Ministry of Finance and the Venezuelan Central Bank. He is currently a Senior Technical Advisor at DevTech Systems, Inc.

Sources:

1. For a more detailed discussion, see Devtech’s special note on this law. 
   “Anti-economic blockade law”: the most recent desperate measure of Nicolás Maduro in the Venezuelan crisis