Venezuela’s Reserves Fall to Five-Year Low Before Vote

Venezuela’s international reserves fell to near their lowest level in five years as the government boosts spending ahead of next month’s presidential election.

The central bank said reserves fell $300 million between Sept. 13 and Sept. 14 to $25.2 billion, nearing the lowest since July 30, 2007, according to figures released today by the central bank. Reserves dipped to $25 billion on May 31, and were below $25.2 billion two days in June.

Venezuela’s reserves have fallen from $42.5 billion in January 2009 as President Hugo Chavez orders the central bank to help fund social spending with the nation’s reserves as he seeks to win a third term in next month’s presidential elections. The decline in reserves are a signal that Venezuela will need to devalue its currency and curb spending following the vote, said Boris Segura, Latin America economist at Nomura Securities Intl in New York.

“Venezuela is highly vulnerable to sustained drops in oil prices,” Segura said in a phone interview. “You should expect an adjustment soon after the gubernatorial elections on Dec. 15.”

The central bank has transferred $3.5 billion this year and $45.7 billion since 2005 to an off-budget fund known as Fonden that Chavez uses to finance his social programs, according to calculations by Nomura.

‘Take Profits’

Venezuelan bonds were cut to marketweight from overweight today by JPMorgan Chase & Co., which said in an e-mailed report that the securities were “adequately priced” after a four-month rally.

Chavez, who has undergone two operations since June 2011 to treat an undisclosed form of cancer, will probably win presidential elections set for Oct. 7, the bank said, adding that it could not completely rule out a victory by opposition candidate Henrique Capriles Radonski.

“In considering the odds for the election outcome, we believe Venezuela credit is adequately priced and are inclined to take profits on our overweight position,” JPMorgan said in the research note.

Polls, Election

Chavez had 46.8 percent support compared with 34.2 percent for Capriles, according to a Datanalisis poll of 1,288 people taken between July 16 and Aug. 9. In an August Consultores 21 survey, Capriles had 47.7 percent support against 45.9 percent for Chavez. The survey of 1,000 people had a margin of error of 3.2 percentage points.

Barring extreme social tension and the unlikely scenario of a constitutional break, the “likely market correction following a Chavez victory should be muted,” JPMorgan said.

Petroleos de Venezuela SA, the state oil company, might issue another $3 billion in bonds before the end of the year to fund Chavez’s social housing project and invest in oil projects, JPMorgan said.

‘Unsustainable’ Mix

Capriles could remain the natural opposition leader if he loses by a small margin, remaining well positioned if Chavez’s health forces another election in 2013 or 2014, the bank said.

“Our longstanding overweight recommendation on Venezuelan external debt had been premised on the thesis that a competitive Capriles candidacy combined with the unknown variable of Chavez’s health would keep markets compelled by the upside that would likely accompany a more market friendly government,” JPMorgan said.

The yield on Venezuela’s benchmark 9.25 percent bonds due in 2027 rose 18 basis points, or 0.18 percentage point, to 10.98 percent at 3:51 p.m. in Caracas, according to data compiled by Bloomberg.

The bond’s price fell 1.18 cents today to 87.45 cents on the dollar, its largest decline since Aug. 9. Venezuela could default on its debt as early as the second half of 2013 if Chavez wins re-election next month and fails to shore up the oil-producing nation’s “increasingly fragile” balance sheet, Morgan Stanley said Sept. 14.

Chavez 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, Morgan Stanley analyst Daniel Volberg wrote.

(Corrects to show reserves hit five-year low May 31, not September, in headline, first and second paragraphs of story published Sept. 17.)
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