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Protests Sow Doubt on Venezuela’s Debt Dedication: Andes Credit

Students Protest in Caracas
Students take part in an anti-government protest in Caracas. Photographer: Juan Barreto/AFP via Getty Images

Venezuelan bonds are posting the world’s worst returns on concern deadly street protests will force the government to prioritize buying food over paying debt.

Benchmark securities due 2027 tumbled 1.61 cent today to a two-year low of 63.5 cents on the dollar as of 12:52 p.m. in New York. The country’s dollar notes lost 13 percent this year through yesterday, the most among members of the Bloomberg USD Emerging Market Sovereign Bond Index, on speculation Venezuela will sell bonds or use dollar reserves at a decade-low to end shortages and stem the world’s fastest inflation instead of making interest payments. Globally, debt from developing nations has returned 0.5 percent in 2014 after a rally this month.

Pressure is mounting on President Nicolas Maduro to placate demonstrators calling for his ouster amid shortages of basic goods such as rice and paper and empty shelves at pharmacies. After at least three deaths this month during clashes between protesters and government allies, Maduro called on supporters to take to the streets today to counter a march planned by Leopoldo Lopez, the leader of opposition party Voluntad Popular.

“People are scared it could get out of control,” said Donato Guarino, a credit strategist at Barclays Plc in New York. “It could go wrong and there could be a default.”

Maduro banned street demonstrations for political enemies and has ordered the arrest of opposition leaders he accuses of conspiring with U.S. diplomats to stage a coup. Lopez was detained today by the National Guard as he prepared to lead followers on a march to downtown Caracas.

Default Probability

“I’m not going to step down,” Maduro told allies in Caracas on Feb. 15. “No one will remove me from the path of building the Bolivarian revolution.”

Protesters shouting “liberty” blocked the passage of the black Jeep Grand Cherokee transporting Lopez. Tear gas was fired to clear the passage for the police car.

Less than 3 kilometers (about 2 miles) from where Lopez was arrested, government supporters gathered in response to Maduro’s call for a march. While opposition members blocked highways and lit tires and branches, Venezuelan state television showed oil workers dressed in red at a musical concert in a pro-government “march for peace” outside the presidential palace.

Twitter Promise

Venezuela will spend 6.7 billion bolivars ($1 billion) to guarantee food and medicine supplies for four months, Maduro wrote on his Twitter account.

Shorter-maturity bond yields exceed those on longer-term notes by the most in six years, and the cost to insure debt against default is the highest since 2009 as dollar revenue declines amid a drop in oil exports to the U.S., the country’s biggest source of foreign currency.

The extra yield, or spread, investors demand to buy Venezuela’s $3 billion of bonds due 2022 instead of Treasuries rose 0.5 percentage point today to 15.51 percentage points, up 3.98 percentage points this year and the highest since the securities were sold in 2010.

Credit-default swaps to protect against non-payment for five years rose 1.09 percentage point today to a three-year high of 17.15 percentage points, implying a 70 percent probability of default in the next five years.

Venezuela has enough dollars for the economy’s needs, Maduro said on Feb. 12. A Finance Ministry spokesman declined to comment about the potential impact the street protests would have on Venezuela’s bonds.

Reserves Drop

Maduro, the political heir of late President Hugo Chavez, took over in April after winning the vote by the narrowest margin in 45 years. Before his death last March, Chavez had urged Venezuelans to support Maduro, then vice president.

Venezuela and state companies have $4.5 billion of bonds maturing in 2014 while debt service costs will be $13.3 billion, the most in at least seven years, according to Barclays.

The country’s international reserves have plunged 26 percent in the past year to $20.6 billion, and the government has plans to sell $43 billion in dollars to importers this year. Reserves minus gold were just $5.7 billion in November, down 5 percent from a year earlier, according to International Monetary Fund data.

Economic growth is forecast to slow for a third consecutive year, dropping to 0.75 percent in 2014, according to the median estimate of analysts surveyed by Bloomberg.

Meanwhile, Venezuela’s oil sales to the U.S. are plunging as North American shale oil output booms. Venezuela pumped 2.45 million barrels of crude a day in December, down from 2.9 million in 2012, a Bloomberg survey showed.

Pain Threshold

“If we’ve reached the threshold of pain in terms of economic strain, the alternative is imports funded with foreign debt,” said Siobhan Morden, the head of Latin American fixed income at Jefferies Inc. “The question is how many coupons can you collect before things get really bad.”

Even as the economy slumps and supermarket shelves empty, Venezuela will keep making payments on its bonds, according to Phillip Blackwood, who oversees $3.3 billion of emerging-market assets at EM Quest Capital LP in London.

“Politically it’s a disaster, on the streets it’s a disaster,” Blackwood said in an interview. “It’s a basket case, but it still has the ability to pay.”

Blackwood is buying state-owned oil company Petroleos de Venezuela SA’s 8.5 percent bonds due in 2017. The bonds amortize and the first $2.05 billion payment is due next year.

Scarcity Index

The bolivar’s 73 percent decline against the dollar on the black market in 2013 is fueling smuggling and worsening shortages of food and consumer goods in a country with the world’s biggest oil reserves. The central bank’s scarcity index reached 28 percent in January, the highest since the measure was created in 2005, meaning that more than one in four basic goods was out of stock at any given time.

The shortages are forcing Venezuelans to travel to Colombia to buy goods. Newspapers are closing down, with 12 shut in the past six months, because they have no paper to print on. Last year, the country ran short of toilet tissue.

“Bondholders have to start wondering where they are in the pecking order,” Daniel Volberg, an economist at Morgan Stanley, said in a telephone interview from New York. “The government’s priorities about how to spend dollars may change. It’s an uncomfortable position for bondholders to find themselves in.”

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