Venezuela's Willingness to Pay

José M. Barrionuevo Barclays Capital Director of Emerging Markets Strategy New York, April 3, 2003

Summary: Venezuela's willingness to pay its external debt is tied both to the country's sharp financing constraint and to Mr. Chavez's ability to resolve the political crisis this year. The authorities' willingness to pay has dropped markedly after the sharp drop in reserves in Q1, and they are unlikely to be willing to lose much more in dollar reserves as the year progresses. In this setting, investor participation in a debt exchange should remain limited as long as the political crisis remains unresolved.

With or without elections, Venezuela's ability to pay will be greatly hampered by falling oil prices after a successful resolution of the Iraqi War, suggesting a high chance of debt default in Q4. Given the remarkable inability of the Venezuelan opposition to unify and present a sole candidate, Mr. Chavez does stand a chance to win and stay in office through 2007, assuming the Supreme Court rules that he can run. As long as Mr. Chavez perceives that he can win a presidential election, every effort will likely be made to avoid default. Regardless of the political outcome, the likelihood of default continues to grow in Venezuela (ability to pay). Its timing, however, remains underpinned by the government's ability to solve the political crisis (willingness to pay).

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from Barclays Capital Markets-Ve03Apr3