Will Venezuela pull through for China?

Despite the crisis, experts remain relaxed about a Venezeulan default on Chinese loans

As Venezuelan President Nicolas Maduro completes his second year in office, the country finds itself in the midst of a crisis. Venezuela is increasingly indebted to China, which has helped the country at a time when most international financial institutions will not provide loans. Today Venezuela owes US$ 61.5bn to China, not including interest.

Since April 2013, Venezuela has seen annual inflation increase from 40% to 60%, one of the highest rates in the world, surpassing even Sudan, which spent the entire period at war. In addition to shortages of food and other basic household products, the crash in oil prices has hit Venezuela hard. Down from US$ 105 last December, the price of a barrel is now less than US$ 60. Half of the country’s revenue comes from oil sales, and Venezuela’s international reserves fell by 50%, from US$ 43bn in 2008.

Compounded by a political crisis and US government sanctions, on April 16 Maduro announced another Chinese loan of US$ 5 billion to finance development projects. And it won’t be the only one. The president said he is negotiating new loans for the future, but did not provide details, “we are working on other areas, but when they are finalized we will provide information,” he said.

According to the Inter-American Dialogue’s database of Chinese loans to Latin America, by July 2014 Venezuela had already received US$ 56.3bn from Beijing. The amount is almost half the total US$ 119bn that the Chinese have lent the entire region since 2005. And it doesn’t include the US$ 5 billion that Maduro announced this month, or the further finance he claimed to be negotiating.

Some economists like Armando Armenta of Deutsche Bank doubt Venezuela’s ability to pay foreign interest fees and loan installments due this year. Others believe that Venezuela will still able to honor its commitments in 2015. The problem, they point out, is that if the price of a barrel of oil does not increase over the next two years, there will be a serious risk of default. According to the Organization of Petroleum Exporting Countries (OPEC), 25% of Venezuela’s gross domestic product (GDP) comes from oil which accounts for 95% of the country’s exports.

For the president of the Argentinian Strategic Planning Institute and China expert, Jorge Castro, a possible Venezuelan default does not worry the Chinese. “Despite the political, economic, and financial crisis that it is experiencing, Venezuela has never failed to honour its commitments to China, because it pays the debt with oil,” said Castro, who added; “there is no lack of oil in Venezuela, which owns the world’s largest reserves and is the fifth largest global producer.”

About half of the 600,000 barrels of oil that Venezuela sends to China every day are used to repay debts.

Wu Hongying, Director of the Latin America Institute at the China Institute of Contemporary International Relations, is not convinced that Venezuela’s condition is terminal, “once the oil price goes up, their repayment ability will strengthen,” she told Diálogo Chino.

Furthermore, bilateral cooperation extends beyond the mere reciprocation of loans and oil, Wu argues, adding that as a responsible country China should support its struggling partner. In July last year China and Venezuela upgraded their relationship to an ‘Integral Strategic Partnership’ which identifies education, health and tourism as other areas of mutual interest.

Alongside its need to ensure energy to maintain the country’s economic growth, China has, in recent years, become an important source of finance for many countries. In the case of Latin America, Chinese banks have not only expanded their portfolios but also provided funding for countries which have difficulties accessing international capital markets.

Venezuela has received the lion’s share of Chinese finance, more than twice the US$ 22 billion lent to the next biggest beneficiary, Brazil. The other two countries that have benefited most from Chinese banks are Argentina (US$ 19 billion) and Ecuador (US$ 10.8 billion), who have similarly strained relations with international creditors.

According to Castro, the decision to lend to countries that represent a risk in the opinion of many European and North American banks is part of China’s political and economic strategy, namely ensuring the supply of commodities needed for the country’s growth while increasing possibilities for commercial trade. Castro cites the fact that today China is the main trading partner of 144 of the 193 members of the United Nations (UN).

“China has become one of the most important sources of capital in today’s world,” said Castro. “At a time when interest rates linger around 1%, their lowest level in the history of capitalism, the Chinese are helping to finance infrastructure and development projects in countries that produce what they need.”

The main Chinese investor in Venezuela is China Development Bank, which has earmarked about US$ 28bn for infrastructure projects and US$ 6bn for the energy sector. Another US$ 2.4bn was invested in mining, US$ 691 million of which came from the Bank of China. Trade advantages and financing for housing were also granted.

Hong Lei, a spokesperson for China’s Ministry of Foreign Affairs, guaranteed that “China will, on the basis of equality and mutual interest, continue to develop this cooperative relationship, including economic programs.” But he did not provide further details about the promise of future investments announced by Maduro.

A month before the announcement, a senior official at the Venezuelan state oil company PDVSA was quoted in a report by Reuters as saying that Venezuela was negotiating a loan of US$ 10 billion from China. The first parcel, US$ 5bn, had already been disbursed. The second would be used to hire Chinese companies to help Venezuela boost its oil production.

Venezuelan oil exports fell from 2.43 million barrels per day in 2013 to 2.33 million barrels a day last year. According to Venezuela’s Minister of Petroleum, Asdrubal Chavez, the government is counting on 10 joint ventures with 20 private companies to increase production in the Orinoco region, where 1.3 million barrels per day are currently produced. “We want to reach 1.37 million barrels per day by the end of 2015,” said Chavez.