Bonds-for-Chickens Barter Feeds Debt Selloff in Venezuela
Venezuela will pay for $600 million of food imports including milk and live chicks from Colombia with dollar-denominated bonds, a sign the nation is running out of money to address the chronic shortages of basic goods fueling the world’s fastest inflation.
Venezuela’s borrowing costs, which fell this month on speculation it would start a foreign-exchange system to boost the dollars needed to buy necessities from abroad and alleviate inflation of 45 percent, surged by the most in three weeks yesterday after El Nacional newspaper said China wouldn’t loan the cash intended to fund the change. Yields on the benchmark 2027 bonds rose 0.49 percentage point to 11.9 percent at 2:52 p.m. in New York today, the biggest daily increase on a closing basis since June 20.
With Venezuela’s foreign reserves plummeting to an almost nine-year low, the South American country is seeking to trade dollar bonds issued by state oil producer Petroleos de Venezuela SA for food, Colombian President Juan Manuel Santos told exporters Sept. 13. Investors such as EM Quest Capital LLP’s Phillip Blackwood say the bond selloff will deepen unless Venezuelan President Nicolas Maduro immediately introduces a more flexible currency-exchange model because the country imports almost everything besides oil.
“They’re at that point now where there is no other choice but to do something,” Blackwood, a managing partner who oversees $3.5 billion of developing-nation debt, said by telephone from London. “If it doesn’t come, then the market is going to be massively disappointed and will sell off dramatically.”
The issuance of new dollar debt is probable in the coming weeks as Venezuela runs out of options, Deutsche Bank AG economist Gustavo Canonero wrote in an e-mailed note to clients today.
A bonds-for-food agreement would help boost Colombia’s exports to its neighbor, which have slumped 60 percent from a peak of $6.8 billion in 2008 as producers struggle to get paid.
“The bonds that trade in international markets can be sold and converted into dollars,” Colombian Finance Minister Mauricio Cardenas told reporters in Bogota on Sept. 25. That’s “what our exporters need. We are studying the mechanism for that sale.”
Venezuela Vice President Jorge Arreaza told reporters in Caracas yesterday that Maduro had approved economic measures to fight an “economic war” and will guarantee the supply of Christmas food and toys.
An official at Venezuela’s Finance Ministry, who asked not to be identified because he isn’t allowed to speak publicly, declined to comment on how the government would pay for Colombian imports. He wouldn’t confirm the report in El Nacional about Chinese aid, which the newspaper obtained from a source it didn’t identify.
Shortages of goods in Venezuela ranging from sugar to beef are stoking consumer prices as importers struggle to obtain foreign currency. Inflation accelerated to 45.4 percent last month from 42.6 percent in July, the highest rate among 114 economies tracked by Bloomberg. The central bank’s scarcity index is 20 percent, meaning that one out of about every five consumer staples is out of stock at any given time.
Using external debt to buy basic goods “speaks volumes about the difficulties that the country is grappling with,” Marco Santamaria, who helps oversee $25 billion in emerging-market debt at AllianceBernstein Holding LP (AB) in New York, said by phone.
Venezuela Finance Minister Nelson Merentes said Sept. 17 that the country would unveil a new foreign-exchange system to increase the supply of dollars and narrow the gap between the official and black-market exchange rates.
One dollar buys 41.2 bolivars on the black market, compared with 6.3 bolivars at the official rate, according to rate-tracking website dolartoday.com, which tracks the exchange rate on the border with Colombia.
“We want to use this market to encourage the private sector to sell their dollars in a transparent, logical and rational way,” Merentes said in an interview on the Globovision television network, referring to the new system.
Speculation the new exchange system will increase the supply of dollars has given a boost to Venezuela’s bond market, EM Quest Capital’s Blackwood said.
Venezuelan notes returned 5.6 percent since Merentes said on Sept. 1 the government was drafting changes to its foreign-exchange system. That compares with a 2.9 percent average gain for speculative-grade notes from 37 developing nations tracked by JPMorgan Chase & Co.
“The expectation is that they actually deliver something at least,” Blackwood said. “It’s certainly not going to be a panacea, but it’s going to be an initial step.”
If the government fails to act, the bolivar may depreciate to 60 per dollar by December, Alejandro Grisanti, an analyst at Barclays Plc, said in an interview.
Venezuela’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, climbed 24 basis points, or 0.24 percentage point, to 889 basis points.
“If this becomes a bigger program, it certainly could start raising questions on what is the strategy in Venezuela,” Daniel Volberg, an economist at Morgan Stanley, said by phone. “Is there a longer term plan so you don’t issue long-term debt to buy food?”