Venezuela Ogles Chavez’s Hidden Billions as Reserves Sink

Venezuela’s dollar-denominated bonds are trouncing the returns of the riskiest emerging-market borrowers as the government moves to gain greater control of $25 billion held at state-run companies.

Notes from South America’s largest oil exporter have returned 1.63 percent since the government published rules July 29 that require state oil company Petroleos de Venezuela SA and other public institutions to report dollar holdings to the central bank and obtain authorization to keep them. That compares with a 0.36 percent average gain for speculative-grade notes from 37 developing nations tracked by JPMorgan Chase & Co.

Venezuela can more than double its reported reserves, which fell to a nine-year low of $22.9 billion on Aug. 5, if it chooses to take control of all the dollars held by state enterprises as of March 31. Increasing its foreign-currency holdings would bolster Venezuela’s ability to repay $40.5 billion in obligations at a time when its borrowing costs, at 11.59 percent, are almost double the developing-nation average, according to Bank of America Corp. in New York.

“If the government would show even half of the dollars they have in off-budget funds in reserves, the market would be satisfied,” Francisco Rodriguez, senior Andean economist at Bank of America, who rates Venezuela’s bonds buy, said in a telephone interview from New York. “There is a lot of skepticism outside of the country about how much Venezuela holds in its off-budget funds.”

Hard Currency

An official at the Finance Ministry, who asked not to be identified because he isn’t allowed to speak publicly, declined to comment on whether the government intends to add dollars held at state institutions to reserves. The central bank didn’t respond to e-mailed questions.

Barclays Plc affirmed its overweight call on Venezuelan dollar debt July 30, citing the government measure on hard currency and the possibility it will be used to bolster reserves. Then President Hugo Chavez, who died of cancer in March, reduced central bank control over public entities’ cash holdings and shifted liquid assets from the bank to off-budget institutions that lack transparency, including the Fonden national development fund, Barclays said in the report.

“The resolution is positive because it will allow them to increase the international reserve position at any moment and reduce the disorder in the dollar accounts that favor corruption,” Alejandro Grisanti, a Barclays analyst based in New York, said in a telephone interview.

Gold Prices

Venezuela’s liquid cash reserves fell 31 percent in the first half of the year to $3.1 billion, the central bank said yesterday. The bank had 11.8 million troy ounces of gold as of June 30, which it valued at $18 billion, down from $20 billion as of Dec. 31.

The Finance Ministry official declined to comment on the level of reserves and the performance of the country’s bonds. Finance Minister Nelson Merentes said June 26 that he was working to increase international reserves.

A China-Venezuela development fund holds $16 billion in an off-budget account, while PDVSA, as the Caracas-based state oil company is known, has about $8 billion, Grisanti said.

“Merentes obtained the legal power to transfer money from these off-budget funds to reserves,” Asdrubal Oliveros, the director of Caracas-based research group Ecoanalitica, said in a telephone interview. “We’re going to see a surprise jump in reserves of up to $4.5 billion at any moment.”

‘Credit Positive’

The 23 percent decline in reserves this year is mostly due to a 43 percent plunge in the price of gold, which accounts for 72 percent of holdings, Rodriguez said. Because the central bank values its gold holdings using a six-month moving average, reported reserves may fall by $1.1 billion more if gold remains at current prices, Rodriguez said in an Aug. 8 report.

“The fact that Maduro has given control of these funds to the central bank is definitely a credit positive move,” Bianca Taylor, senior sovereign analyst at Loomis Sayles & Co. in Boston, said yesterday in an e-mailed response to questions. “However, it is not a panacea. Venezuela’s problems are deeply structural.”

Venezuela’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, have climbed 246 basis points, or 2.46 percentage points, to 893 basis points this year as of 12:06 p.m. in New York.

The extra yield investors demand to hold Venezuelan dollar bonds instead of similar maturity U.S. Treasuries narrowed three basis points today to 937 basis points, according to JPMorgan’s EMBI Global index.

‘Drought Levels’

Venezuela’s reserves have fallen to critical levels and the government must act to demonstrate that it’s shoring up holdings, according to Tamara Herrera, the chief economist at Caracas-based financial research firm Sintesis Financiera.

“We had to reach drought levels of international reserves for them to pass an obvious resolution that reduces uncertainty,” Herrera said in a telephone interview. “Now they have to demonstrate that they have control.”

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