Chavez Choking on Bolivars to Spur Venezuelan Bond Sales
The bolivar’s plunge to a record on the black market is pressuring Venezuelan President Hugo Chavez to end the longest drought of dollar-bond sales in five years.
Venezuela hasn’t issued bonds denominated in U.S. currency since October last year, after selling a record $7.2 billion in the first 10 months of 2011, according to data compiled by Bloomberg. State-owned Petroleos de Venezuela SA, Latin America’s largest oil producer, last sold dollar-denominated notes in May. The yearlong drought is leaving the central bank without enough dollars for Venezuelans to buy at official fixed rates, sparking the bolivar’s 42 percent drop this year in the unregulated market. The bolivar declined 6.2 percent today.
Speculation is increasing that Chavez will boost debt sales to obtain dollars, halting the second-biggest emerging-market bond rally this year as he tries to devalue the bolivar to boost oil revenue and close a budget deficit. Yields on Venezuela’s benchmark bonds due in 2027 have risen 0.2 percentage point to 10.62 percent since Chavez’s election to a third six-year term on Oct. 7 disappointed investors who bet his defeat would end policies that repelled foreign investment and fanned inflation.
“To make this work they need to have a supply of bonds, so they need to issue,” said Jim Craige, who helps oversee $51 billion in emerging-market debt, including Venezuela and PDVSA debt, at Stone Harbor Investment Partners in New York. “It makes a lot more sense to do it with a weaker exchange rate than where it is right now, which in no way reflects reality.”
An official at the Finance Ministry who asked not to be identified because of government policy declined to comment on the possibility of a bond sale or currency devaluation.
Venezuela has about $38 billion in dollar bonds while state-owned PDVSA, as the company is known, has $32.5 billion in outstanding debt, according to data compiled by Bloomberg. Brazil has about $34.5 billion of dollar bonds outstanding.
Venezuela’s dollar bonds have advanced 33.6 percent this year, second only to the Ivory Coast, as investors speculated that Chavez, 58, may not be able to serve out a full term because of health problems. The former tank commander has cut down public appearances after undergoing three operations to remove cancerous tumors since June 2011.
The rally has pushed down average yields by 3.25 percentage points to 10.86 percent this year, JPMorgan Chase & Co. indexes show. Venezuela’s borrowing costs are still the second highest after Argentina’s among major developing nations and more than twice the 4.69 percent average for emerging markets.
The cost to protect Venezuelan debt against non-payment for five years has fallen 163 basis points, or 1.63 percentage points, this year to 764 basis points, data compiled by Bloomberg show. It rose eight basis points today.
The decline in perceived default risk is the largest in Latin America on an absolute basis, the data show. The contracts pay the buyer face value in exchange for the underlying securities or cash.
Since Chavez’s re-election, the bolivar has fallen 17 percent in unregulated trading to 14.79 per dollar today, according to Lechuga Verde, a website that tracks the rate.
Venezuelans use the black market when they can’t get access to the central bank’s Sitme exchange, which sells dollars to businesses for 5.3 bolivars, or the so-called Cadivi system that sells dollars at 4.3 bolivars for priority imports.
The country is weighing changes to the central bank system given the bolivar’s plunge in black-market trading, a government official with direct knowledge of the matter said in an interview Nov. 12. The central bank is selling fewer dollars on the Sitme to limit its losses, the official, who asked not to be identified because no final decision has been made, said.
He also said scrapping the Sitme was possible, without providing additional details.
Chavez has cut spending and restricted dollar supplies to local investors since beating presidential rival Henrique Capriles Radonski by more than 10 percentage points last month.
Inflation-adjusted spending fell 34.1 percent from a year earlier in the four weeks after the Oct. 7 vote, according to Bank of America Corp. The supply of dollars to the Sitme dropped 46 percent to an average of $23.1 million a day so far in November from an average of $42.6 million a day in the first 10 months of the year.
In the first nine months of the year, Chavez increased spending by 20.5 percent, according to data compiled by Bank of America Corp. that adjust for inflation.
While oil revenue over that span climbed to a four-year high of $72.6 billion, Chavez’s spending spree helped push the nation’s budget deficit to 7.8 percent of the economy, according to Francisco Rodriguez, an economist at Bank of America.
The shortage of dollars will prompt Chavez to turn to the bond markets, creating a glut that could depress prices of outstanding debt, according to Kathryn Rooney Vera, a strategist at Bulltick Capital Markets.
“There’s going to be some necessary issuance,” she said in an interview from Miami. “It makes sense, too, because you want to get it over with as soon as possible while you still have the political capital.”
Venezuela last sold dollar bonds in October 2011, when it issued $3 billion of 11.75 percent bonds due in 2026 to local investors seeking foreign currency. The last time the country went so long without issuing debt was between November 2005 and November 2007, according to data compiled by Bloomberg.
The government uses dollar bond sales to help maintain the value of its currency as well as to supplement its other mechanisms for allocating foreign currency. The bonds are sold locally in bolivars at the official exchange rate and importers can sell them on in the secondary market in exchange for dollars or euros.
Boris Segura, a Latin America strategist at Nomura Holdings Inc., says the slowdown in Sitme flows doesn’t mean the government must sell bonds. The central bank may be holding off on devaluation in order not to incur losses, he said.
Venezuela boosted local debt sales by 60 percent to 246 billion bolivars as of Sept. 30.
“The central bank had to pay the bill last time on the carry-over from just before to just after the devaluation,” Segura said. “They might be delivering dollars at a bare minimum so that the central bank doesn’t have to foot the bill when there is a devaluation.”
Chavez devalued the bolivar by 40 percent in December 2010. He first imposed currency controls in 2003 to keep money from leaving the nation after an attempt to oust him from power and a nationwide oil strike caused political instability. He tightened restrictions further in 2010 by shutting more than 50 brokerages that operated an unregulated currency market by swapping bonds for dollars. The market was replaced by the Sitme.
The currency controls, coupled with price caps on over 100 products and the nationalization of more than 1,000 businesses or their assets, has prompted Moody’s Investors Service to lower Venezuela’s foreign currency debt by three levels to B2 from Ba2 since Chavez took power in 1999.
The rating, five levels below investment grade, is the second-lowest among major economies in Latin America after Argentina.
While Chavez has relied on loans from China Development Bank to fund spending this year and the Sitme market had sufficient bonds to satisfy currency demand during the electoral campaign, the government will need access to more dollars as debt comes due next year, according to Henkel Garcia, the director of Econometrica, a Caracas-based consultancy.
The nation has about $2.3 billion in dollar debt that needs to be repaid in 2013, data compiled by Bloomberg show.
“They’re going to issue because in 2013 there’s a bunch of bonds maturing,” said Garcia in a telephone interview. “They’re going to have to address that and with the foreign currency flow we’re seeing at the moment you’re either obliged to issue or go to the Chinese. We’ll see a bit of both.”