Venezuela’s New Devaluation Positive for Bondholders, BofA Says

Venezuela’s second devaluation in less than two months is positive for bondholders as the government looks to narrow a fiscal deficit fueled by a pre-electoral spending spree last year, Bank of America Corp. said.

The system of dollar auctions announced yesterday will enable the government to buy bolivars for less than the official rate of 6.3 per dollar, Bank of America analysts Francisco Rodriguez, Jane Brauer and Flavio de Andrade said in an e-mailed report. Venezuela last month devalued the bolivar by 32 percent to close the 2012 fiscal deficit estimated at 11 percent of gross domestic product by Moody’s Investors Service.

The February devaluation narrowed the deficit to 6.2 percent of GDP and the new system could reduce that further to 3.9 percent, depending on the average exchange rate established in the auctions, Bank of America said. The cash-only system is positive for Venezuela bondholders as it reduces the likelihood that the government will sell foreign debt to obtain dollars as it did under the central bank’s previous currency market, known as Sitme, which was eliminated last month.

“The system will also allow the government to sell some of its dollars at a weaker exchange rate, ensuring a greater flow of bolivars to its coffers and further easing fiscal constraints,” Bank of America said in the report. “We see these announcements as the continuation of the set of macroeconomic adjustments that the administration is undertaking to correct for last year’s pre-electoral spending expansion.”

Former President Hugo Chavez, who died of cancer March 5, established the Sitme system in 2010 that worked through swapping local currency bonds for dollar-denominated debt after he shuttered a similar system operated by bond brokerages. While the Sitme offered an implicit exchange rate of 5.3 bolivars per dollar, the unregulated market’s rate was free-floating. The system of dollar auctions represents a return to flexibility in the exchange rate, Bank of America said.

“The resulting introduction of a new flexible rate is a remarkable change for a country that had eliminated all vestiges of exchange rate flexibility,” Bank of America said.

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