Despite high oil reserves, Venezuela is a high-risk country

President Hugo Chávez presented last week his annual report and accounts at the National Assembly. On that occasion, he asserted that Venezuela has certified that it has the largest oil reserves in the world (297 billion barrels). However, despite this overwhelming wealth, Venezuela is perceived by investors as a high-risk country and has to pay high interest rates to borrow more money.

The country risk, a benchmark measuring the spread between the yield an investor demands in order not to buy US Treasury bonds and purchase instead Venezuelan sovereign bonds started the week at 12%, a percentage that exceeds by far Colombia's (2,36%); Brazil's and the average (3.92%) of all emerging economies.

In theory, for holding the largest oil reserves in the world at a time when the price of the crude oil barrel is higher than USD 100, investors should view Venezuela as a low-risk country because it has enough funds to ensure the payment of its debt.

The amount of debt should neither justify that Venezuela has been ranked as a high country risk. Although Venezuela's debt has grown rapidly in the last two years compared to the size of the economy, debt accounts for 53.9% of GDP, at the official exchange rate. This ratio can not be considered excessive or too high.

Debt traders think that the Venezuelan government and state-run oil company Petróleos de Venezuela (Pdvsa) have issued too many bonds over the past two years. Therefore, the supply of debt instruments exceeds the demand. As a result, an imbalance makes a negative impact on the price of Venezuelan securities.

The demand could be higher if Venezuelan banks could hold more sovereign bonds in their portfolios. Nevertheless, the ceiling set by the financial authorities for the purchase of dollar-denominated debt instruments is low and brokerage firms have been eliminated on charges of speculating with the US dollar, following a frenzied process of seizures carried out by the National Superintendence of Securities.

Last week, the Central Bank of Venezuela sold Pdvsa bonds due in 2021 and the instruments, which were sold at a discounted price, produced a high yield (16.59%) to investors, whereas the bonds of Nigeria, a politically instable country, reported a yield of 6.71%, which is 60% less than the Venezuelan bonds.

Translated by Gerardo Cárdenas