Since 2013, Venezuela's government, which has a near monopoly on the legal disbursement of foreign currency in the country, has cut imports in an attempt to safeguard its dwindling stock of dollars. The goal is to maintain access to the country's few foreign lenders at all costs, even if it means spurring inflation and exacerbating shortages of food and consumer goods. But this approach is unsustainable. Venezuela's high levels of public spending, combined with declining investments into the energy sector, the loss of foreign lending and severe economic distortions that encourage the arbitrage of currency and Venezuelan-produced fuel, have all sapped the country's public finances.
The lack of an economic cushion for public finances will keep alive the risk of financial default. Meeting foreign debt payments had been an essential part of the United Socialist Party of Venezuela's strategy to maintain access to foreign lending. During President Nicolas Maduro's tenure, the government began reducing imports to keep meeting those payments and lower overall spending. But roughly $16 billion in foreign debt payments is due in 2016, including interest payments. The government has already eaten through $7.2 billion in foreign reserves (32 percent of its total reserves) this year, and off-budget funds that previously bolstered additional spending, such as the National Development Fund, are likely heavily drawn down because of the reduced availability of dollars from oil exports. With few additional sources of revenue outside of state-owned Petroleos de Venezuela's income, default in the coming year is plausible. At this point, Caracas' likely options are to delay default by conducting a voluntary Petroleos de Venezuela bond swap or to sell its increasingly limited assets, although the success of these measures is highly dependent on investors' and bondholders' perceptions of the country. Impressions are likely to change one way or another since the Venezuelan opposition coalition has secured a two-thirds majority in the National Assembly, enabling the breakup of the United Socialist Party of Venezuela's hold on state institutions.
