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Venezuela’s Toilet Paper Crisis Igniting Bond Sale Talk

Toilet Paper-Less Venezuela Fueling Bond Sale Talk: Andes Credit
A man walks past posters of Venezuelan currency outside the Central Bank of Venezuela in Caracas on May 30, 2013. Photographer: Meridith Kohut/Bloomberg

Venezuelan Finance Minister Nelson Merentes is planning the nation’s first overseas meetings with creditors in nine years as a scarcity of dollars exacerbates shortages of everything from toilet paper to soap.

While Venezuela’s borrowing costs have fallen more than 400 basis points, or 4 percentage points, since its last sale of dollar-denominated bonds in October 2011, the 10.65 percent yield is double the average in emerging markets. Merentes said May 30 his trip to the U.S. and Europe this month is intended to clarify the fundamentals of the economy with investors to help lower the perceived risk in holding the oil producer’s debt.

Pressure has increased on President Nicolas Maduro’s 3-month-old government to accelerate the approval of foreign currency for imports after the political and economic upheaval left behind by Hugo Chavez, who died of cancer in March after a 14-year rule, sparked the Western Hemisphere’s fastest surge in consumer prices. Merentes, who took office last month after running the central bank, will be the first finance minister to visit investors abroad since 2004, increasing speculation Venezuela is preparing to sell bonds, according to Barclays Plc.

“The government’s strongest option is to issue debt to finance imports,” Munir Jalil, the head analyst at Citigroup Inc.’s Colombian unit, said in a phone interview from Bogota. “Finance ministers do roadshows to measure the appetite in the market for more debt and always make these trips when they’re thinking of issuing debt in the near future.”

Banker Meetings

Merentes told reporters May 30 that his meetings aren’t aimed at selling debt and that he will answer questions to help reduce borrowing costs. He said that he has already met with seven investment banks since taking over as finance minister.

Venezuelan dollar debt had its worst start to a year since 2008. The bonds, which returned 46 percent last year, rose just 1.1 percent in the first quarter, according to data from Bank of America Corp.

Lack of confidence in Venezuela’s ability to meet its debt obligations is due to misinformation, Merentes said. Central Bank President Edmee Betancourt said that Chavez’s death created “turmoil” in the economy and has “disturbed” the whole country.

The yield on the government’s benchmark 9.25 percent dollar bonds due in 2027 climbed 27 basis points, or 0.27 percentage point, to 10.69 percent at 4:27 p.m. in New York, the highest level on a closing basis since Nov. 16, according to data compiled by Bloomberg.

Imports Plunge

The nation, which has the world’s largest oil reserves, uses much of its oil production to repay loans from China or to subsidize allies including Cuba.

Venezuela, where about 70 percent of products consumed are imported or assembled from raw material shipped from abroad, is now facing shortages as the currency weakens and the lack of dollars means importers can’t pay. Brazil’s beef exporters association said shipments to Venezuela would fall 20 percent in May because they aren’t receiving dollars from Venezuelan importers.

The supply of dollars is drying up after Venezuela’s oil exports dropped 13.4 percent to a two-year low in the first quarter and the government suspended dollar sales.

Private-sector imports fell 11 percent in the first quarter from a year earlier due to the country’s economic slowdown and the curtailed access to hard currency, the central bank said on May 31.

Scarcity Index

The central bank’s scarcity index, which measures the amount of goods that are out of stock, rose to 21.3 percent last month, its highest level since January 2008.

Imports may have fallen 30 percent in March, according to estimates from Bank of America economist Francisco Rodriguez, who extrapolated from published data on exports to Venezuela from six of the country’s trade partners.

Previous declines of at least 10 percent in imports to Venezuela have signaled deep recessions, he wrote in a report on May 28.

Gross domestic product expanded 0.7 percent in the first quarter from a year earlier, the slowest growth since 2010. The median forecast of economists in a Bloomberg survey was that activity expanded 1.1 percent.

“It’s a planned economy of the Soviet type we saw last century and the results are similar,” Alberto Ramos, the chief Latin American economist at Goldman Sachs Group Inc. in New York, said in a phone interview. “They get billions of dollars from oil but they have to import everything else, which means there’s increasing demand for a finite and scarce supply of dollars.”

Bolivar Devaluation

On Feb. 8, the government announced a 32 percent devaluation of the bolivar to narrow the fiscal deficit and boost the supply of dollars.

The government also scrapped a central bank-administered market where government and state oil company Petroleos de Venezuela SA bonds were traded to provide currency to importers and replaced it with a cash-auction system.

Less than a month later, Chavez died, prompting the second presidential election in six months. Since then, there has only been one dollar auction of $200 million under the new exchange system while shortages in stores have worsened, pushing annual consumer prices up 29.4 percent in April, the most among 128 countries tracked by Bloomberg. Iran’s annual inflation was 41 percent in March, according to the International Monetary Fund.

Venezuela’s fiscal deficit in 2012 was estimated at 11 percent of GDP by Moody’s Investors Service after Chavez increased spending before elections in October.

‘Don’t Want’

While Chavez handed bondholders a return of 692 percent during his 14 years as president, Merentes may struggle to convince investors that Venezuela deserves lower borrowing costs, according to Siobhan Morden, the head of fixed-income strategy at Jefferies Group LLC.

“If you have a double-digit yield, it’s because people don’t want to provide you with credit,” Morden said in a phone interview from New York. “I don’t know what they could bring to the table to change our minds. If they’re going to convert people they need to change the speech.”

The bolivar has weakened 39 percent to 28.43 per dollar against the dollar on the black market this year, according to Dolar Today, a website that tracks the exchange rate on the Venezuelan border with Colombia. The official exchange rate for essential imports such as medicines is 6.3.

Government dollar bonds due in 2022 currently yield 11.07 percent, compared with 2.94 percent for similar-maturity bonds in Chile and 3.47 percent in Brazil.

Default Swaps

The cost to insure Venezuelan debt against default for five years rose 31 basis points to 873 basis points today, according to data compiled by Bloomberg.

Providing more dollars to the economy would boost imports, ease shortages and help slow inflation, said Kathryn Rooney, a strategist at Bulltick Capital Markets LP. The debate is over how to get those dollars.

“They’re going to issue bonds this year,” Rooney said in a telephone interview from Miami. “The question is when. The other solution is a devaluation which would ramp up inflation, which the government won’t want to do because it’s unpopular. Unless they want rioting in the streets, they’re going to have to do something.”

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