China has lent over USD 65 billion in recent years to Venezuela mainly via the state owned China Development Bank, making the Latin American country Beijing’s biggest overseas credit exposure. Now the Venezuelan economy is in melt down, a combination of a low oil prices which represent Venezuela’s main export along with the country’s socialist policies which have snuffed out the private sector and resulted in shortages of many household goods, including ironically for the holder of the world’s largest oil reserves – electrical power.
The crisis has gone beyond a severe recession and risks developing into a fully blown humanitarian crisis, as food and medicine shortages bite in some parts of country. Venezuela is dependent on food imports but the collapse in value of the Bolivar and a lack of hard currency has pushed up their prices and inflation has raced out of control -hitting over 300% in recent months. As a result there is a lot of pessimism in the country right now, political change is in the air as the opposition push for a so called recall election in a desperate effort to remove the Socialist incumbent President Maduro from office. .
Venezuela would appear to have two potential short term lifelines, a return to high oil prices which would replenish government coffers, or further financial support from China.
While oil prices have risen this year they remain below the break-even point for Venezuela and the country is close to default because it is so reliant on oil for its income.
Meanwhile foreign policy elite in Beijing are divided between those who want to continue backing the Caracas government – seeing it as key South American ally backing socialist policies and one that stands up to the US, others see a black hole of financial losses and an increasingly unreliable partner in the government.
The Maduro government recently reached agreement with the China Development Bank on rescheduling Chinese debt – including looser terms, longer tenor and other concessions. In a sense China had little choice, provide better terms or see Venezuela default and with it any chance of repayment. The deal is backed with oil as collateral but with the price of it so low right now – that is much less comfort than it used to be.
But the Chinese are not rolling over for Maduro completely, but are carefully hedging their bets and talking unofficially with Venezuela’s opposition parties to ensure they will be repaid in the event the recall election gambit works and they get into power.
The whole episode will make China much more wary of lending to developing countries with poor credit histories. For those nations who have borrowed from China the deal will be analysed carefully to determine if better conditions can be wrung from Beijing if they too run into financial difficulties.
