Venezuelan government bonds rallied, with benchmark yields falling to a five-year low, after the government devalued the bolivar, helping cut the budget deficit by generating more local currency from its oil exports.
The yield on the dollar-denominated bonds maturing in 2027 dropped eight basis points, or 0.08 percentage point, to 8.61 percent at 1:40 p.m. in New York, according to data compiled by Bloomberg. The yield on state-owned Petroleos de Venezuela SA’s securities due in 2017 slid two basis points to 8.41 percent.
Venezuela, South America’s largest oil producer, weakened the exchange rate 32 percent to 6.3 bolivars per dollar, the nation’s fifth devaluation in nine years. President Hugo Chavez, who is recovering from cancer surgery in Cuba, ordered the move, Finance Minister Jorge Giordani told reporters Feb. 8.
“It’s a positive in terms of fiscal cash flow,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc. in New York, said in a telephone interview. “It produces more net fiscal revenue for the government.”
The extra yield investors demand to own Venezuelan debt over Treasuries narrowed 11 basis points to 694 basis points, according to JPMorgan Chase & Co.’s EMBI index. The cost of protecting Venezuelan debt against non-payment for five years with credit-default swaps fell 21 basis points to 601 basis points, according to prices compiled by Bloomberg.
Venezuela’s budget deficit almost tripled last year after Chavez raised spending on low-income housing and wages to gain support before the presidential election. The self-proclaimed socialist missed his Jan. 10 inauguration after winning a third six-year term in October.
Chavez raised spending by 25.5 percent, after adjusting for inflation, the year before the election in which he defeated opposition challenger Henrique Capriles Radonski by 11 percentage points, according to calculations by Bank of America Corp. That helped widen Venezuela’s fiscal gap to 11 percent of gross domestic product last year from 4 percent in 2011, according to Moody’s Investors Service.
The new exchange rate will take effect Feb. 13, when businesses open after the national holiday celebrating Carnival, said Giordani, who denied that the devaluation was aimed at narrowing the budget deficit.
“This isn’t a change that was done for fiscal reasons,” Giordani said. “We have sufficient revenue but we need to adjust the accounts. We need an increase in efficiency, and efficiency means spending less.”
Credit Suisse Group AG said bond gains may be short-lived as the bolivar devaluation threatens to accelerate annual inflation after reaching 22 percent in January.
“Gains from the devaluation will be fleeting,” Casey Reckman, Daniel Chodos and Di Fu wrote in a report today. “The government is unlikely to tighten fiscal and monetary policy sufficiently to contain inflation.”
In the unregulated market, where Venezuelans turn for dollars when they can’t buy greenbacks at the official rate, the bolivar weakened 2.5 percent today to 20.02 per dollar, according to Lechuga Verde, a website that tracks the rate.
Venezuela’s dollar bonds have returned 4.9 percent this year after Chavez’s deteriorating health triggered a 50 percent advance in the nation’s debt last year, almost three times the average for emerging-market bonds, according to JPMorgan.
The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, according to Caracas-based research company Ecoanalitica.
After devaluing the bolivar by 50 percent in January 2010, Chavez seized 41 retail stores that were majority-owned by France’s Casino Guichard Perrachon SA and threatened to nationalize others that raised prices in a bid to curb inflation.
Venezuelan officials also announced last week that they will close the central bank’s Sitme currency market used by companies to import items deemed nonessential by the government, which according to Bank of America will cut 2013 dollar bond issuance to $3 billion from $6 billion.
Sitme was created in June 2010 to replace a shuttered unregulated currency market operated by brokerages and trades between $50 million and $60 million a day in dollar-denominated bonds issued by the government or PDVSA.
Chavez hasn’t been seen in public since leaving for Cuba to undergo a fourth surgery for an undisclosed type of cancer Dec. 11. If he is is unable to finish his term, the government must call elections within 30 days of his stepping down.
The devaluation, while hurting the government’s popularity, probably wouldn’t do enough to help the opposition defeat Vice President Nicolas Maduro if elections were called in the next few months, according to Alejandro Arreaza, an analyst at Barclays Plc.
“The opposition was left very diminished last year,” Arreaza said in a telephone interview from New York. “This type of announcement helps a little bit, but they still need some time to organize themselves.”