Wall Street’s Venezuela Bond Bulls Can’t Convince LoomisSebastian Boyd and Pietro D. Pitts
Some of Wall Street’s biggest banks say that Venezuela’s new currency system is a signal to buy the nation’s bonds. Insight Investment Management and Loomis Sayles & Co. aren’t convinced.
Barclays Plc and Bank of America Corp. recommended the debt after the government said Feb. 11 that it will create a new exchange rate for dollars as it seeks to ease shortages of everything from food and medicine that have led to the deadliest protests in more than a decade. Since then, the notes have returned 11.5 percent, the biggest return in the Bloomberg USD Emerging Market Sovereign Bond Index.
Colm McDonagh, who manages $3 billion of emerging-market debt at Insight Investment Management Ltd., says he sold his Venezuelan bonds last month because it’s too soon to tell whether the plan to allow companies and individuals to obtain dollars in a regulated market will succeed. The protests against President Nicolas Maduro’s government have left at least 25 people dead since they began Feb. 12.
“It doesn’t solve their problems,” Bianca Taylor, a sovereign analyst at Loomis Sayles & Co., which oversees $200 billion, said by telephone from Boston. “Risks are increasing. You can see chaos bursting through. It’s becoming more obvious.”
Avianca Holdings SA today said it is cutting 73 percent of its flights to Venezuela after currency controls left the airline unable to withdraw funds from ticket sales in Bolivars.
A central bank spokeswoman, who asked not to be identified in accordance with policy, declined to comment on the timing and exchange rate of Sicad 2. The extra yield, or spread, investors demand to buy Venezuela’s bonds due in 2027 rose 0.2 percentage point today to 10.9 percentage points.
Companies and individuals will be allowed to buy and sell foreign exchange daily in cash or bonds in the so-called Sicad 2 market through banks and brokerages that will open local accounts for them, according to a resolution published in the Official Gazette on March 11. The central bank will publish an average exchange rate and is allowed to intervene to combat “erratic FX fluctuations,” the Gazette reported.
“By launching Sicad 2, the government is taking needed economic measures to promote production, reduce inflation and fight shortages,” Economic Vice President Rafael Ramirez told reporters in Caracas on March 11. “There will be no pre-set bands or ceiling, with the market determining the price of dollars. The central bank will intervene when necessary and under extraordinary situations.”
Dollar shortages have crimped imports, leaving supermarket shelves partially empty and pushing annual inflation to 56 percent, the fastest in the world.
Yesterday, an opposition march into central Caracas against police repression was broken up by security forces using water cannons and tear gas after the government hardened its stance against demonstrators. Police dispersed the marchers after blocking their way into the center of the city at the Central University of Venezuela. Protesters responded by throwing rocks at the police.
Venezuela maintains an official foreign exchange rate of 6.3 bolivars per dollar for essential imports such as foods and medicines. A dollar trades on the black market at around 78 bolivars, according to DolarToday.com, a website that tracks the rate on the Colombian border.
“Having an effective weaker exchange rate will go some way to adjusting the imbalances and scarcities, but we need to see how it actually operates,” said McDonagh at Insight, a London-based unit of Bank of New York Mellon Corp. that had $454 billion of assets under management at the end of last year. “Who will provide the dollars? The government? PDVSA? How freely can people access it? It’s too early to tell. We are standing back to see what transpires.”
The new system may sell $20 million to $30 million per day at a rate of between 30 bolivars per dollar and 50 bolivars per dollar, according to Deutsche Bank AG.
Francisco Rodriguez, an economist at Bank of America, said the new currency system will help close the nation’s budget deficit as the government sells its dollars at a higher rate.
Venezuela’s budget shortfall equaled 15 percent of gross domestic product last year, the biggest in the world after Kiribati, according to International Monetary Fund data.
“Anything they do to solve that problem and sell the government’s dollars at a high enough rate is a good thing,” Rodriguez said by telephone from New York. “There are growing signals that the government is willing to accept a high devaluation. It’s apparent that the government is moving in the direction of greater liberalization and that ministers are determined to let the market decide what the rate is going to be.”
Bank of America has an overweight recommendation on the country’s bonds.
The government does not have in mind a fixed amount of dollars that it will inject daily into the Sicad 2 market, Ramirez said March 11. Venezuela has sufficient dollars for the market, which will start operating in the coming hours, he said.
“The Venezuelan government has a real problem, a shortage of dollars, and there is a real risk that dollar assets will have a large chance of being expropriated in whatever fashion,” Russ Dallen, the head trader at Caracas Capital Markets, said in a telephone interview from Miami. “Sicad 2 will be like Sicad since the government will use an average daily price to clear trades. So the risk exists that a person or company participating in the market might not get anything since the government will decide who they want to give dollars to and how much they will offer.”