China is set to lend the cash-strapped nation of Venezuela around $10 billion in the coming months, Reuters reported on Thursday, citing a senior official at Venezuela’s state-run oil company PDVSA who is familiar with the matter.
According to the senior official, half of the loan will be part of a bilateral financing deal with the other half earmarked for the development of Venezuelan oil fields, Reuters reports.
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Fresh funds are a boon for financially squeezed Venezuela and will likely increase market confidence over the OPEC country’s ability to meet major debt payments and arbitration awards. Venezuelan bonds rose on Thursday following the news.
However, relief may be tempered as the loans appear largely earmarked and will only go so far in countering the steep tumble in oil prices and Venezuela’s severe recession.
The source told Reuters that the first $5 billion loan will be used for investment in a wide-range of projects with a five-year payment term, versus the usual three year term, and will be signed this month and deposited in Venezuela’s international reserves in April.
The other “special” $5 billion loan will likely carry a stipulation of hiring Chinese companies to boost production in PDVSA’s mature oil fields, the source told Reuters.
The “special” loan will be under a ten-year payment term and will be signed in June, taken out by Venezuela’s state development bank Bandes, and invested in 2015, the source told Reuters.
“China wants to decisively back investments in areas like mature oil fields so that PDVSA can rapidly increase its production,” the source told Reuters.
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Energy-hungry China is keen to have a foothold in Venezuela, which has the world’s largest oil reserves, as part of a broader trend in which Beijing provides billions in financing to ensure crude supplies. The loans often hinge on hiring Chinese construction, engineering or oil services companies.
The funds would provide welcome investment in Venezuela’s oil sector just as PDVSA’s pragmatic new leadership seeks to shore up output.
China has already loaned Venezuela over $45 billion in return for repayment in oil and fuel. The money is typically deposited in funds that focus on infrastructure and economic development.
Venezuela’s opposition politicians have voiced concerns over what they deem excessive reliance on China and decry a lack of transparency on the terms of the loans.
The Venezuelan government and PDVSA have been exploring various ways to shore up their coffers amid a tumble in global oil prices which has stung the South American nation that relies heavily on oil revenue which provides 96 percent of its hard currency.
Last week, Venezuela said that it paid off its 1 billion euro Global 2015 bond, however further challenges lie ahead as the government and PDVSA, together are required to make an additional $8.4 billion in debt payments for the remainder of 2015, including a $2.3 billion amortization on a PDVSA bond which is due in November.
Earlier this month, Venezuela was said to be in talks with Wall Street investment banks BoA and Credit Suisse in gold for cash talks where the Central Bank of Venezuela would monetize over 1 million troy ounces of gold held as international reserves in exchange for around $1.5 billion in cash.
Also earlier this month, the U.S. declared that Venezuela was a threat to its national security and has ordered targeted sanctions against seven officials.
U.S. President Barack Obama issued signed an executive order on March 9 that declares a “national emergency” amid the “unusual and extraordinary threat” to national security and foreign policy of the U.S. posed by the situation in Venezuela.