Venezuelan dollar bonds rallied the most in emerging markets after the country moved to allow for more dollar sales and amid optimism there will be a political fix to end protests that have left at least nine people dead.
The extra yield investors demand to own Venezuelan bonds instead of Treasuries fell 0.44 percentage point to 13.73 percentage points at 1:26 p.m. in New York, according to JPMorgan Chase & Co.’s EMBIG Diversified index. Dollar bonds due 2027 jumped 1.9 cents on the dollar to 68 cents, the highest price on a closing basis since Jan. 29.
In an effort to mitigate record shortages of everything from food to medicine that spurred a month of protests, Venezuela distributed rules today allowing state oil producer Petroleos de Venezuela SA, companies and individuals to buy and sell dollars in a regulated market. The move will create a new exchange rate for dollar purchases given the scarcity of foreign currency available at the official rate of about 6.3 bolivars per dollar as Venezuela bleeds reserves.
“There’s an attempt here to form a much more flexible system in which there’s going to be a significant role for market forces,” Francisco Rodriguez, a senior Andean economist at Bank of America Corp., said in a telephone interview from New York. “The government is devaluing.”
An upper trading band for the new currency market that’s below about 18 bolivars per dollar won’t ease pressures, according to Rodriguez. In the black market, Venezuelans pay about 88 bolivars per dollar.
The government partially devalued the bolivar last month by moving airlines, incoming foreign investment and travel allowances to rates set at auctions on a secondary system known as Sicad. There it has allowed the rate to fall from 11.3 per dollar to 11.8.
Investors will look to detailed regulations to determine the level of market openness the government will ultimately allow in its third dollar allocation system, Rodriguez said. Economy Vice President Rafael Ramirez said today the central bank is working on rules for Sicad 2, as it will be called.
“It will be a controlled, conditioned market,” Aura Palermo, a currency controls specialist at Caracas-based AP Consulting Group, said by telephone today. “This is not the opening up of a free market. Nowhere does it give the private sector ability to acquire dollars freely.”
Venezuela could sell new bonds for the Sicad 2 market, Ramirez said. The government is working to bring down inflation, he said. Annual consumer price increases have more than doubled to 56 percent during President Nicolas Maduro’s term.
Maduro is slated to meet with opposition leaders today in a bid to ease tensions amid protests over shortages of basic goods that have turned violent. Opposition leader Leopoldo Lopez, who has been detained by police, called on Feb. 12 for people to take to the streets to speak out against rising crime, the world’s fastest inflation and shortages.
Optimism about a potential solution to the protests is also helping to boost bonds, said Jorge Piedrahita, the chief executive officer of Torino Capital LLC.
“I urge caution simply because we are far from having a solution,” Piedrahita said in an e-mailed response to questions. “Things may get to be dormant for a time, but as long as the underlying problems are not solved then unrest may resurface very quickly.”
Bonds due in 2017 from PDVSA, as the state oil producer is known, surged 1.62 cents on the dollar to 75.22 cents. PDVSA is the “main beneficiary” from the new law as it has regained the freedom to manage its dollars, according to Asdrubal Oliveros, director of Caracas-based consultancy Ecoanalitica.