Barclays Recommends More Exposure to Venezuela on Fiscal Changes

Barclays Capital said investors should increase exposure to Venezuelan debt as the government prepares to devalue the currency and raise taxes to improve its fiscal position before presidential elections in 2012.

While Venezuela may increase its total debt load to $112 billion in 2011 from $60.5 billion in 2008, the government still shows willingness and ability to pay and may buy back bonds to bolster prices, Barclays’ Alejandro Grisanti and Alejandro Arreaza wrote in an e-mailed report today.

President Hugo Chavez, who devalued the currency in January for the first time since 2005, may weaken the three government-set exchange rates 15 percent next year, to push through unpopular economic measures before 2012 when he’s up for reelection, Barclays said.

Venezuela, the largest oil producer in South America, may sell $10 billion of bonds next year between the government and state oil company Petroleos de Venezuela SA, after issuing about $7.5 billion of dollar securities this year, the report said.

“We don’t think the issuing spree will offset the positive effects of the expected devaluation, possible additional fiscal measures, the country’s capacity to pay, and the likelihood of a brighter political outlook,” Grisanti and Arreaza said.

Barclays recommends buying 5-year credit default swaps to take advantage of the difference between the market price and recovery value, the report said.

The cost of protecting Venezuelan debt against non-payment for five years with credit-default swaps fell 57 basis points to 1,180 yesterday, according to data compiled by CMA DataVision. 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 adhere to its debt agreements.

The government is studying plans to raise the value-added tax to 15 percent from 12 percent and may create a tax on local gasoline sales, Barclays said. Venezuela sells its heavily subsidized gasoline for about 12 cents a gallon.

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