Venezuelan Debt Tumbles Most Since 2008 After Chavez Re-Elected
Venezuela’s benchmark bonds plunged the most in four years as President Hugo Chavez’s re-election fueled concern he will extend government controls that have deterred investment and led to the region’s highest inflation.
The government’s bonds due in 2027 fell 4.61 cents, the most since October 2008, to 86.63 cents on the dollar at 4:10 p.m. in New York, according to data compiled by Bloomberg. Yields on the dollar-denominated bonds rose 69 basis points, or 0.69 percentage point, to 11.10 percent
Chavez took 55 percent of the votes in the Oct. 7 election, beating opposition candidate Henrique Capriles Radonski by a margin of more than 10 points after some polls showed the former paratrooper’s 14-year tenure coming to an end. Chavez will probably deepen policies, such as currency controls and nationalizations, that have driven investors from South America’s biggest oil-producing nation, according to analysts at Goldman Sachs Group Inc. and Bank of America Corp.
The re-election may “give Chavez a strong mandate to extend the socialist revolution given the big-margin victory,” Stuart Culverhouse, the chief economist at Exotix Ltd., said in an interview from London. “The market was disappointed by the election result. The pre-election euphoria has disappeared.
The extra yield investors demand to own Venezuelan debt over Treasuries widened 52 basis points to 987 basis points, according to JPMorgan chase & Co.’s EMBi indices. The gap touched a five-month low of 934 points last week.
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.
Chavez 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. 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.
‘‘The outcome is negative from the standpoint of creditworthiness,” Francisco Rodriguez, a senior Andean economist at Bank of America who correctly predicted the election result, said by e-mail. “A Capriles administration would have entailed the adoption of policies leading to higher economic growth.”
Capriles, the 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.
The selloff in Venezuelan bonds will be short-lived as investors look for high-yielding assets, according to Russell Dallen, the head bond trader at Caracas Capital Markets.
“As yields get tighter all around the globe, where else are you going to go?” he said in a phone interview in Miami. “Right now they have the willingness and the ability to pay.”
U.S. Treasury benchmark 10-year note yields have tumbled 16 basis points this year to 1.71 percent. They touched a record low 1.379 percent on July 25.
Notes due 2017 issued by Petroleos de Venezuela SA, the state-run oil company known as PDVSA, fell to 87.15 cents on the dollar from 89.74 cents last week, sending yields up 76 basis points to 11.96 percent.
Five-year credit-default swaps on Venezuela rose 68 basis points to 845 basis points, the highest level since Aug. 21. The contracts pay the buyer face value in exchange for the underlying securities or cash, and falling prices signal improving investor perceptions of a borrower’s creditworthiness.
Speculation that Chavez would lose the vote fueled a rally in Venezuelan assets in the weeks before the election, according to Dallen. Barclays Plc called Capriles the probable winner in an Oct. 5 report and reiterated its recommendation to buy Venezuelan debt.
Venezuela’s annual inflation slowed for a 10th consecutive month in September to 18 percent as the government kept price controls and boosted cheap imports before the elections. Prices rose 1.6 percent from a month earlier, when they gained 1.1 percent, the central bank reported today.
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