Venezuela Risks Default If Chavez Wins, Morgan Stanley Sa

Venezuela could default on its debt as early as the second half of 2013 if President Hugo Chavez wins re-election next month and fails to shore up the oil- producing nation’s “increasingly fragile” balance sheet, Morgan Stanley said.

One “tipping point” could be the $4.3 billion in external debt payments that come due between August and November 2013, Morgan Stanley analyst Daniel Volberg wrote in a note to clients today.

Chavez, who is seeking to extend almost 14 years in power with another six-year term, has damaged Venezuela’s balance sheet through the nationalization of key sectors of the economy, endemic inflation and a lack of fiscal discipline, Volberg said. The policies are an “unsustainable” mix that heighten the risk of default on Venezuela’s $110.6 billion stock of debt, especially if oil prices tumble, Volberg wrote.

Government actions “may be taking Venezuela towards a crisis and potentially even a debt event that could come as early as the second half of 2013,” the report said. “Venezuela’s debt is no longer with large bank lenders as much as publicly traded bonds held by a dispersed group of creditors, which could make restructuring more challenging.”

At 11.6 percent of gross domestic product, Venezuela has the largest fiscal deficit in Latin America, while its international reserves have fallen by $17 billion since 2008 to $25.6 billion, Volberg said. Output by state oil company Petroleos de Venezuela SA fell to 2.72 million barrels a day in 2011 from 3.48 million barrels in 1998, according to British Petroleum’s statistical review.

Bond Yields

The yield on Venezuela’s benchmark 9.25 percent bonds due in 2027 fell 11 basis points, or 0.11 percentage point, to 10.77 percent at 11:27 a.m. in Caracas, according to data compiled by Bloomberg. The bond’s price rose 0.74 cent today to 88.80 cents on the dollar.

The cost of insuring Venezuelan bonds against default for five years rose four basis points to 737 basis points, according to prices compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to comply with debt agreements.

Chavez said Sept. 11 that he had 43.1 percent support against 30 percent for opposition candidate Henrique Capriles Radonski in the latest poll conducted by Datanalisis. He didn’t give details of the survey.

The two previous Datanalisis polls showed Chavez with a lead of 12.1 and 14.3 percentage points respectively, he said. In an August Consultores 21 poll of 1,000 people, Chavez trailed Capriles by 47.7 percent to 45.9 percent.

To contact the reporter on this story: Charlie Devereux in Caracas at cdevereux3@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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