Venezuela is down to its last banker: China

Venezuelan President Nicolas Maduro (R) gestures after decorating China's President Xi Jinping (L) with a Venezuelan sash during an official visit in Miraflores Presidential Palace, Caracas on July 20, 2014.
Venezuelan President Nicolas Maduro (R) gestures after decorating China’s President Xi Jinping (L) with a Venezuelan sash during an official visit in Miraflores Presidential Palace, Caracas on July 20, 2014.

At a time when Venezuela is in dire need of financial backing, the country may be down to its last major banker: China. But even the economic powerhouse of Asia is closely weighing the risks of doing business with the struggling South American country.

So far, it seems China remains committed to the OPEC nation, at least according to Venezuela’s President Nicolás Maduro, who announced in early January that China had pledged another $20 billion in financing.

That’s welcome news as oil prices continue to plummet with no bottom in sight. The going price of Venezuela’s oil exports tumbled by about half to $41.33 a barrel this week after peaking last June, according to Venezuela’s Ministry of Petroleum and Mining. In order to balance its budget, Venezuela needs oil prices of at least $100 a barrel, according to calculations from Barbara Kotschwar, research fellow at the Peterson Institute for International Economics.

Right now, low oil prices are shattering Venezuela’s economy. The government in Caracas acknowledged in December that it’s in recession. Venezuela’s inflation rate, at 63.6 percent, is the highest in the Americas. Even the most basic consumer goods have ceased to be available, and visitors to the country who spoke to a CNBC reporter in neighboring Colombia this weekend reported people in Caracas using the local currency’s smallest notes in place of toilet paper.

When a key revenue source falls so dramatically, then it’s “almost inevitable that you seek financing to cover part of that gap,” said Francisco Rodriguez, chief Andean economist at Bank of America.

Financing is “not necessarily bad policy” if China offers a reasonable interest rate, he said. “You want to be able to adjust to these declines in a gradual way. Oil will go back up to $60 or $70, but Venezuela will want to cut the spending that it did at $100. But you don’t want to cut it to the level of $40.”

Since 2007, China has lent Venezuela more than $45 billion, of which an estimated $30 billion has been paid back in oil shipments, according Rodriguez.

Last week, Moody’s Investor Services cut Venezuela’s credit rating by two levels down to Caa3, but China is still “cautiously willing to support,” said Risa Grais-Targow, senior analyst for Venezuela at Eurasia Group, a political risk research firm, as long as it does not end up as a “lender of last resorts.”

“China doesn’t want to bail out Venezuela. If they did want to, they already would have,” she said.

China shares the same concerns as any other investor in Venezuela, Rodriguez said. “The country has a set of economic policies that are about to run it into hyperinflation, massive levels of scarcity and effectively, a large economic crisis and contraction. That’s not a country you want to lend to,” he said.