Collapse of Venezuela’s Black-Market Bolivar Spills Into Bonds

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The freefall in Venezuela’s bolivar is reminding bond traders of the nation’s ability to deliver swift and painful losses.

Its dollar-denominated sovereign bonds have lost 4 percent in May, the worst in emerging markets. That's a reversal from the first four months of the year, when the bonds were the best performers.

The nation’s currency has plunged 21 percent in the black market this month as President Nicolas Maduro’s administration prints more bolivars to pay budget expenses. Some analysts see it as a distressing signal that Venezuela is running low on dollars, which it needs to pay debt. It may also be a sign that the country would rather risk having hyperinflation emerge than devalue its official exchange rate.

“It shows a clear scarcity of dollars,” Siobhan Morden, the head of Latin American fixed-income strategy at Jefferies Group LLC, said from New York. “It starts to become a vicious cycle. Dollar scarcity causes inflation, which is what the black-market rate shows, and as the crisis worsens it creates higher demand for dollars. And there’s still no political commitment for economic reform.”

The price of Venezuelan oil fell 50 percent in the second half of last year, leaving the country struggling to find enough dollars to pay for imports of basic goods. Oil accounts for more than 95 percent of the country exports.

International Reserves

Venezuela’s international reserves fell to an 11-year low of $17.4 billion on May 26, even as the country’s oil prices rebounded from a six-year low of $38.80 a barrel in January.

The country’s inflation is estimated to be the fastest in the world at more than 100 percent, according to Bank of America Corp. The government hasn’t reported official inflation statistics since December.

Venezuela’s official primary exchange rate is 6.3 bolivars per dollar -- less than a 50th of the black-market rate of 351.92 bolivars.

Because the government sells its dollars so cheaply, and only under tight rules, it doesn’t generate enough bolivars to cover domestic commitments, according to Barclays Plc.

Analysts at the bank estimate that Venezuela’s public sector deficit for 2015 could reach 30 percent of gross domestic product; two-thirds of that deficit would be covered by printing money. That means the money supply could increase almost threefold this year, implying the black-market exchange rate could fall to 600 per dollar.

Hyperinflation Concern

“The concern bondholders should have with Venezuela isn’t that the parallel rate is spinning out of control, it’s that the country is building toward hyperinflation,” Francisco Rodriguez, the chief Andean economist at Bank of America Corp., said by phone from New York.

While Venezuela in February introduced a new government-sponsored money-changing system that was supposed to have a floating exchange rate, analysts have said the posted rate of 199.062 bolivars per dollar doesn’t reflect the true supply and demand.

“It’s a concern,” said Michael Discher-Remmlinger, a money manager at Deka Group in Frankfurt. “The changes in the foreign-exchange regime had been one of the few hopes for investors that there could be reform from the current government. But it now looks like there’s not enough FX supply for domestic demand.”

What’s stopping Venezuelan bonds from falling further? Yields are so high that if the country doesn’t default, the rewards will be ample. In the first four months of this year, Venezuelan bonds returned 24 percent, the most in emerging-markets.

Then again, there’s the risks. Barclays on May 20 changed its view on the bonds to neutral from overweight, citing the government’s inaction in the face of the oil shock.

“A major collapse of the bolivar is not good news and is sign of massive shortage of dollars, and massive inflation pressure,” Regis Chatellier, a strategist at Societe Generale SA in London, said in a message. Inflation pressure “eventually affects the ability to repay the external debt.”

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