ANALYSIS - 'Risky' Venezuela can pay debt despite economy woes

CARACAS (Reuters) - It has a reputation as the world's riskiest sovereign bond issuer, but OPEC member Venezuela can easily pay its debt and even with mounting economic problems, leftist President Hugo Chavez is unlikely to default.

While a debt crisis in Greece roils global markets, it is South America's top crude exporter that credit default swap monitor CMA rates as most likely to break obligations on foreign currency bonds, even with oil prices above $80 per barrel.

Venezuela's global bond yield spread over U.S. Treasuries is the widest among countries listed on the benchmark JP Morgan's Emerging Markets Bond Index Plus (EMBI+).

Despite the high risk rating, Venezuelan paper is among the most traded emerging market debt, popular for its juicy yields and liquidity.

With overseas assets that total around $70 billion, Venezuela could clear its total foreign debt -- estimated by Caracas-based analysts Ecoanalitica at $56.6 billion -- with money to spare.

That does not mean that all is well with the economy, which Chavez is steering towards socialism but is still firmly connected to global capital markets by regular debt sales.

The economy shrank by 3.3 percent last year and likely fell again in the first quarter. It is also suffering from an electricity crisis that has hit manufacturing and industry, but many economists see GDP returning to positive territory by the last quarter of this year.

Chavez introduced currency controls in 2003 and says they have slowed capital flight, but billions of dollars flow out of the country every year. The controls distort prices and pent up demand puts pressure on the bolivar currency.

Venezuela is due to repay $11 billion of debt in 2010 and 2011 with lower amortization for the next few years, in all not much compared to its oil income.

"They are charging more for willingness to pay than ability to pay because if you look at the maturity dates compared to the amount of oil income, the gap is huge and you can pay comfortably," said Miguel Angel Santos of the IESA business school in Caracas.

Some fear that the volatile socialist could follow the lead of his Ecuadorean ally, President Rafael Correa, and default on bonds he deems illegitimate.

Alejandro Grisanti of Barclays Capital says the idea Chavez might simply chose to stop paying the debt is unrealistic, at least in the short term, since he has a lot more to lose than to gain.

"A default could be very costly, since not just Venezuelan but also PDVSA assets could be seized by bondholders," he wrote in a report last week.

State oil company PDVSA owns refineries worth billions of dollars in Europe and the United States which might be seized in the event of a default, along with oil exports.

The economic problems are hurting Chavez's popularity, and his grip on the National Assembly will likely be loosened in legislative elections in September. Even so, Chavez remains the favorite looking ahead to presidential elections in 2012.

'DIFFICULT TIMES'

Analysts say the negative view on Venezuelan debt reflects worries Chavez's profligate public spending and anti-business policies that drive up imports and feed capital flight will eventually lead to a shortage of dollars.

In a move well received by the market, Chavez devalued the bolivar currency in January, freeing up money to increase public sector spending prior to legislative elections and relieving pressure on dollar supplies.

But with savings rates of 15 percent well below annual inflation closer to 30 percent, deposits in Venezuela rapidly lose value. Along with Chavez's policy of widespread nationalizations, that encourages investors to seek out dollars.

Many economists say that high spending funded by oil, lower oil production, a shrinking manufacturing base, rising imports and double-digit inflation are not sustainable.

"At some point the long term arrives," Morgan Stanley analysts Giuliana Pardelli and Daniel Volberg wrote in a March note that warns of a possible dollar shortfall of $7.7 billion this year if current policies are adhered to.

"The trends are such unless you can somehow reverse all these drivers of supply and demand, most of which really comes from capital outflow, it looks like you are on the path toward pretty difficult times," Volberg told Reuters.

Volberg says his calculations are not meant as a forecast and that he expects the government will take action, perhaps by going to the markets for more financing. That would diminish net external assets and likely hurt bond prices.

The benchmark 2027 global bond has risen gradually in the last few weeks with yields now around 12 percent.

Government sources do not rule out issuing more global debt this year but say the focus is on meeting financing needs with debt sold in the local bolivar currency.

So far this year the government has drawn down about $5 billion from its foreign reserves. It has also sold $360 million in bonds aimed at propping up the bolivar, which has weakened on a freely floated market by about 15 percent to 7 against the dollar since January.

(Editing by Kenneth Barry)

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