Venezuela Bonds Rally as Opposition Wins Majority in Congress

  • Opposition wins at least 99 seats out of 167 to be awarded
  • Price on government bonds due 2027 rises most since June

Venezuelan bonds rallied the most in six months after elections handed the opposition alliance a majority in Congress for the first time in 16 years, a blow to President Nicolas Maduro and his continuation of the late Hugo Chavez’s ideology.

Venezuela’s $4 billion of securities due in 2027 rose 2.50 cents to 44.62 cents on the dollar at 12:13 p.m. in New York, the biggest increase since June. The yield fell 125 basis points, or 1.25 percentage point, to 23.07 percent. Yields on bonds sold by state oil company Petroleos de Venezuela SA due in 2026 fell 90 basis points to 21.13 percent.

Bond investors are wagering that a stronger opposition will act as a check to the type of policies that have left the country reeling from triple-digit inflation, a shortage of dollars, empty store shelves and an economic contraction. A qualified majority of three-fifths or two-thirds would grant the opposition even more powers to challenge Maduro, who himself called the vote a “wake up call.”

“This rebound has been a natural result of a positive election outcome,” Morten Bugge, who helps manage about $2.5 billion of emerging-market debt, including Venezuelan bonds, at Global Evolution A/S, said by phone from Kolding, Denmark. “It will take time, but we may start seeing a positive reform process.”

The result is another blow to South America’s block of left leaning leaders, who were ushered in following Hugo Chavez’s rise to power in 1999. The opposition won Argentina’s presidential election last month, ending 12 years of rule by President Cristina Fernandez de Kirchner and her late husband, while Brazilian President Dilma Rousseff is facing impeachment procedures as her country’s economy is mired in recession.

Venezuela’s bonds have rallied since August as investors anticipated the opposition to gather momentum leading to the elections. The bonds returned more than 18 percent this year through Dec. 4, the second best in Latin America after Argentina, according to data compiled by JPMorgan Chase & Co.

While a two-thirds majority could give the opposition a shot at reversing some of the economic damage, there’s unlikely to be a quick fix. The economy is expected to contract 10 percent this year, according to the International Monetary Fund. Economists polled by Bloomberg see inflation of about 124 percent.

The price of Venezuelan oil, which accounts for 95 percent of its exports, has slumped 45 percent this year to $34 a barrel. As government revenue plummeted, Venezuela has depleted its cash, sending foreign reserves to near a 12-year low of $14.6 billion.

“The election results, so far, do not guarantee a change or adjustment in economic policy and we expect governability to remain challenging,” Stuart Culverhouse, the chief economist at Exotix Ltd, said in a research note today.

Moreover, the opposition is a disparate group of left and right-wing parties that have no common goal beyond removing Maduro, and may struggle to bring about changes that could produce a more sustainable rally in Venezuela’s sovereign bonds and debt issued by its cash-strapped state-oil company PDVSA, Culverhouse wrote.

While investors expect Maduro to honor a $1.5 billion government bond due in February -- the securities are trading at more than 93 cents on the dollar -- they are all but certain that the country will default in coming years. Credit-default swap traders put the odds of non-payment in five years at 94 percent, more than any other country in the world.

“For now they are fine, but 12 months ahead, if oil remains at $40 bucks, they
will have a serious situation unless parliament really puts on radical reforms,” Bugge said.

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