PDVSA’s Citgo is the next battleground between Maduro and Guaido

Six months ago, I wrote an analysis focusing on how to rebuild Venezuela’s economy.

It is time to look at the evolution of the situation.

The domestic transition is stopped for now: The combination of US sanctions, massive demonstrations and blackouts in the first part of the year has not managed to put an end to the Chavist experiment. The inability of the opposition leader Juan Guaido to win support from armed forces and the failed popular uprising have seriously undermined its credibility. His political capital is decreasing fast as he is unable to change the lives of Venezuelans. He still has the political and financial support of the United States, but many Latin American countries seem to be gradually moving away. A few days ago, the Latin American development bank CAF denied evaluating a loan of about several hundred million dollars to Venezuela, contradicting earliest comments made by Juan Guaido. It reflects wavering support from the capitals of the region.

The economic situation has temporarily stabilized: According to the National Assembly, inflation fell back to 23% m/m in September from 65% in August. Despite the decrease, the country is not following the road of successful exit from hyperinflation. It will certainly remain an issue in the long run considering the Maduro government, that is still in charge of the central bank, is reluctant to implement a monetary reform.

The bolivar has stabilized but trust in the currency is destroyed: Based on DolarToday data related to the evolution of the bolivar on the black market, the exchange rate has stabilized over the past months. However, the process of dollarization of the economy seems unavoidable. More and more consumer goods are directly paid in USD thanks to the remittances that families receive from abroad, and some are even able to run their own small business. 

The oil industry is literally falling apart: There is little hope for the oil industry in the medium term as underinvestment, US sanctions and less support from China and Russia are undermining the national oil company PDVSA’s refining capacity. Based on the available data, PDVSA’s refineries only operate at 10% of their capacity and crude oil production has fallen to 1 million barrels per day, which is almost 40% lower than the production in 2018.  

The next battleground is Citgo: PDVSA’s subsidiary CITGO is currently at the center of the legal battle in US courts between the Maduro government and the opposition leader Juan Guaido. This is the most valuable Venezuelan asset abroad _ valued at around $8 billion _ that will be at the core of the debt renegotiation process with creditors. 

As the debt belongs to various parties, it is rather difficult to precisely estimate it. Based on our estimates, the country’s outstanding debt is around $140-150 billion. We consider that roughly $60 billion are part of loan-for-oils deals with Russia and China, around $65 billion is due to international bondholders and the rest is related to arbitration awards granted to foreign companies following nationalization.

Over the past years, the Maduro government has refinanced PDVSA by giving CITGO’s shares as a collateral, without the authorization of the National Assembly. CITGO’s shares also served as a collateral for a multibillion dollars loan granted by Russia’s Rosneft. Until now, the opposition leader Juan Guaido has always said he will honor payments but, considering the unsustainable level of debt, it is getting increasingly likely that he will not necessarily honor these deals or find loophole, which starts to scare off creditors. In our view, it is becoming clear that Guaido’s top priority is not to repay “unauthorized” debt. Thus, the risk is elevated that PDVSA will default in late October on a $913 million bond backed by CITGO’s shares (called PDVSA 2020), which may further complicate the legal mess around Venezuela’s debt.