The Daily Journal – Current prices of Venezuela’s sovereign bonds largely reflect market expectations of a future external debt restructuring and a recovery in oil production, according to a report by Oxford Economics.
The consulting firm argues that the recent rally in Venezuelan bonds, which it forecast in a February analysis, continues to rest on solid market fundamentals.
“Bond prices largely reflect the risk of a deep restructuring and remain close to fair value. The market rally of recent months, which we anticipated in February, appears sustainable,” the report, cited by Bloomberg, states.
Two factors drive bond valuations
Oxford Economics explains that it based its valuation on two main approaches.
The first examines the country’s macroeconomic sustainability and its ability to service its debt. According to the firm, those factors depend primarily on the size of Venezuela’s external debt and the recovery of its oil industry.
The second evaluates the incentives facing both the Venezuelan government and creditors. Under that framework, both sides must choose between a rapid restructuring that delivers higher recoveries for bondholders or a more comprehensive process that strengthens the country’s long-term financial sustainability, even if negotiations require more time.
External debt could reach US$240 billion
The report incorporates a scenario recently outlined by the Financial Times, which suggests that Venezuela could disclose an external debt of nearly US$240 billion, a figure significantly higher than the estimates Oxford Economics previously used.
Even so, the firm believes Venezuelan bonds continue to trade near their fair value.
“The lack of reliable data creates uncertainty about the amount of debt eligible for restructuring,” the report warns, noting that analysts still lack a definitive picture of the country’s external obligations.
Oxford Economics estimates that debt owed to multilateral organizations would remain below US$5 billion, while arbitration awards would total between US$20 billion and US$25 billion.
The report also includes approximately US$64 billion in international bonds and nearly US$48 billion in past-due interest (PDI), which Oxford Economics describes as unusually high.
In addition, the firm notes that uncertainty still surrounds Venezuela’s bilateral debt with China and Russia, whose terms could shape future restructuring negotiations.
Oil recovery supports current valuations
One of the report’s central arguments is that current market valuations rely on expectations of a substantial recovery in Venezuela’s oil production.
Oxford Economics considers it likely that crude output will reach between 2.1 million and 3 million barrels per day by 2037, providing the foundation for the country’s future debt-servicing capacity.
Although the firm acknowledges that the recent earthquakes have intensified Venezuela’s economic crisis, it cites international examples showing how oil production can recover rapidly after periods of collapse.
“Oil production commonly rises between 50% and 70% within just four years once recovery begins after a collapse,” the report says.
Debt restructuring could restore access to financing
Oxford Economics argues that a successful debt restructuring would allow Venezuela to regain access to official financing and reconstruction funds at average interest rates of about 3.5%.
The firm also projects that the country could return to international capital markets by 2031, with borrowing costs near 9.5%.
According to Sergi Lanau, Director of Global Emerging Markets Strategy at Oxford Economics and author of the report, a reasonable restructuring framework would reduce external debt to 80% of gross domestic product (GDP) over ten years while keeping annual debt service at an average of 3.5% of GDP.
However, Lanau warns that the absence of formal participation by the International Monetary Fund (IMF) could lead both sides to adopt less demanding targets.
Despite the opportunity created by the world’s largest proven oil reserves, Oxford Economics concludes that Venezuela’s reconstruction needs will continue to limit the country’s ability to allocate larger resources to external debt payments for several years.
