Venezuelan domestic debt smashes 13-year record

In need of more funds to cope with growing expenditure, the Venezuelan Government has broken debt records.

In the first half of 2012, the government strategy consisted of indebtedness in Venezuelan bolivars by selling financial institutions bonds and treasury bills for about USD 16 billion.

In discounting the due and paid debt, payables amount to USD 11.6 billion, the highest jump over the past 13 years as to liabilities of the central government. The number does not include state-run oil holding Petróleos de Venezuela (Pdvsa), the National Development Fund (Fonden) and the rest of the organizations used by the administration of President Hugo Chávez for the purpose of indebtedness.

After the increase, the central government debt climbs to USD 43 billion, 34% over the numbers recorded as of 2011.

The Central Bank of Venezuela (BCV) has set a strategy that enables the Ministry of Finance to sell banks an enormous amount of bonds and treasury bills.

Plainly, the BCV prevents the securities used to absorb the money in the market from competing with the bonds and treasury bills needed by the Ministry of Finance to increase the government income.

To make room for the bonds of the Ministry of Finance, in accordance with a current regulation, financial institutions may not keep a balance in bonds in the BCV higher than that recorded in November 2009.

Given this policy, the bonds issued by the BCV lost weight in the portfolio of financial institutions down to 27% between the end of 2011 and the first half of 2012.

For financial institutions, most of the bonds issued by the Ministry of Finance in the portfolio swell the money placed in long-term securities and raise the risk in the government creditworthiness.

From a positive standpoint, the benefits from State bonds are free from taxes and yield earnings that help sustain profitability.

The government of President Hugo Chávez would rather get into domestic debt than foreign debt. This is understandable, as the commitments are in local currency and at low interest rates.

Based on Barclays' estimates, ending this year overall debt, both in foreign and local currency, totals 51.6% of the Gross Domestic Product (GDP). This is more than twofold that of four years ago and not much leeway for Venezuela, which virtually exports oil only and, therefore, its destiny is bound to the price of the oil barrel.

As the debt cannot keep on growing ad infinitum, and everything shows that oil prices will not rise substantially amidst the European recession and slowdown in China, experts fear that after the presidential election of October 7, certainly this year, the government ought to take action to offset the expenditure-income mismatch.

Devaluation as a way to get more bolivars for petrodollars and cover a portion of the expanding spending and the debt owed to Venezuelan banks is latent.

vsalmeron@eluniversal.com

Translated by Conchita Delgado