Chavez Win Called by BofA Sparks Selloff as Barclays Flops
Venezuelan state-oil company bonds tumbled after President Hugo Chavez won re-election by more than 10 percentage points in a vote that some polls had showed was too close to call.
Notes due 2017 from Petroleos de Venezuela SA, the company known as PDVSA, fell 1.72 cent to 88.02 cents on the dollar in New York, where volume was limited because of a holiday. The currency slid to a record low in unregulated trading. Chavez took 55 percent of the votes while opposition candidate Henrique Capriles Radonski received 44 percent, according to results based on 97 percent of the ballots.
Venezuelan dollar debt had been Latin America’s best performer this year, returning 32 percent on speculation Chavez, 58, would lose the vote or succumb to a two-year cancer battle, handing power to a government that would roll back his economic policies. While Chavez’s health remains in doubt, the margin of victory gives him room to extend government controls in South America’s biggest oil-producing nation, said Francisco Rodriguez, a senior Andean economist at Bank of America Corp. (BAC) who correctly predicted the election result.
Chavez’s win gives him “significant leeway to push forward his process of deepening socialism,” Rodriguez, who had forecast a five-to-eight point margin of victory, said by phone from New York. He said Chavez could nationalize more companies and broaden his use of socialist communes. “It weakens the long-term potential to pay for the country’s debt and lowers the country’s productivity.”
Bank of America’s prediction pitted it against Barclays Plc (BARC), which called Capriles the likely winner in an Oct. 5 report that reiterated its recommendation to buy Venezuelan debt.
Yields on the government’s dollar-denominated debt due in 2027 rose 43 basis points, or 0.43 percentage point, to 10.9 percent, according to the Swiss stock exchange. PDVSA bonds were the most actively traded dollar-denominated corporate securities by dealers today, with 71 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Rodriguez declined to estimate how big bond losses would be this week. He and his Bank of America colleague Jane Brauer cut Venezuelan debt to underweight from marketweight on Oct. 2, saying the rally overstated Capriles’s chances of victory.
The IBC Index from the Caracas Stock Exchange tumbled 13 percent to 352,663.7, with about $130,000 in shares changing hands. The index had rallied 31 percent last week.
Chavez, who sits on the world’s largest oil reserves and has driven away foreign investors with his seizures of companies, will maintain his “high state intervention” in the oil industry, Carlos Bellorin, a senior analyst at IHS Inc. in London, said in an interview before the election results were announced.
Oil production has declined 22 percent since Chavez first took office in 1999 to 2.72 million barrels a day, according to British Petroleum Statistical Review. The government, which relies on oil to fund about half its spending, says that the country is producing about 3 million barrels a day. Crude for November delivery fell 0.6 percent to $89.33 a barrel in New York.
HSBC Holdings Plc recommended today that investors cut their Venezuelan bond holdings to an underweight position “for the next few days” and buy some back after prices fall. Morgan Stanley said the selloff will be limited because oil prices near $90 a barrel and the country’s relatively high yields make the debt attractive even with Chavez staying in office. Goldman Sachs Group Inc. said losses wouldn’t be “very large” because most investors were expecting Chavez to win.
Bank of America and Barclays had the most outspoken positions on the election among major global banks. Barclays analysts led by Alejandro Grisanti, the co-head of Latin America research, wrote in their Oct. 5 report that investors were underestimating the chances of a Capriles victory.
Both Grisanti and Bank of America’s Rodriguez are Venezuelan. Both studied economics at Universidad Catolica de Andres Bello in Caracas in the early 1990s. Rodriguez, who earned his Ph.D. in economics from Harvard University in 1998, served as an economist in Venezuela’s National Assembly from 2000 to 2004.
Grisanti, who has run unsuccessfully for public office as a member of Capriles’s Primero Justicia party, said in an Oct. 5 interview that his Venezuelan ties helped give him “insight into the election” that guided his bond market calls.
The Consultores 21 polls that Barclays cited for its bullish bond calls showed Capriles widening his lead in the final days of the campaign. A Sept. 27 to Oct. 2 survey by the Caracas-based polling company gave Capriles a lead of 51.8 percent to 47.2 percent. Chavez had 44.7 percent support against 37 percent for Capriles, according to a Datanalisis poll concluded on Sept. 18, Credit Suisse AG said in an Oct. 5 report, citing the private survey.
“Definitely this time we misread the country’s dynamics” as Chavez’s landslide win “was not the scenario we expected,” Grisanti and Alejandro Arreaza, an Andean region economist at Barclays, wrote in a note to clients today. “Since the market has been skeptical about the chance of a victory for the opposition, we expect a limited selloff” in government and PDVSA bonds, they wrote.
Venezuelan bonds account for 9.3 percent of JPMorgan’s EMBI Global index, giving them the third largest weighting in the benchmark.
Chavez, a former paratrooper and a self-claimed socialist, has seized more than 1,000 companies, imposed price caps, controls on foreign-exchange trading and used rising oil revenue to fund popular social programs during his 14 years in office. The policies led to shortages of everything from electricity to sugar and beef and fueled higher inflation than any country tracked by Bloomberg after Belarus and Iran.
In unregulated trading, the bolivar weakened 2.3 percent today to a record-low 12.58 per dollar, extending its losses this year to more than 30 percent, according to Lechuga Verde, a blog that tracks the rate. The government sells dollars to buyers at two official exchange rates, 4.3 per dollar and 5.3. People and companies that can’t access those rates turn to the black market.
Capriles, the 40-year-old former governor of Miranda state, had vowed to unwind the controls, which he said breed corruption, while promising to create more private sector jobs and increase oil production.
An economic pickup that Chavez fueled by boosting government spending 30 percent in inflation-adjusted terms in the first half of the year helped pave the way for his victory, according to Rodriguez. Growth accelerated to 5.4 percent in the first six months of the year from 4.2 percent in 2011.
The economic rebound made Chavez’s victory “the logical scenario to expect,” Rodriguez said. “This justifies our underweight position. We’re keeping it, at least until we see the price adjustment we expect to occur.”
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