Goldman Doubts Oil Rally Is Enough for Venezuela: Andes Credit

Venezuelan bonds are posting the world’s best returns after a surge in the price of oil, the country’s biggest export. Goldman Sachs Group Inc. and Morgan Stanley say buyers are unwise to bet $115-a-barrel crude can fix a broken economy.

The government’s dollar-denominated notes have gained 4.5 percent since rebels took over swaths of northern Iraq on June 11, stoking concern that crude production will be hurt and pushing Brent oil prices over $115 for the first time since September. While the return was more than 14 times the average for emerging-market debt, the extra yield of 8.84 percentage points that investors demand to own Venezuela’s bonds instead of U.S. Treasuries is still the highest in the world.

Any extra cash generated by the OPEC member’s oil exports is likely to be siphoned off to pay for imports of consumer goods amid shortages of drinking water, toilet paper and medicine that have sparked anti-government protests, according to Daniel Volberg, an economist at Morgan Stanley in New York. After currency devaluations and energy output declines, President Nicolas Maduro is struggling to prop up an economy posting the world’s fastest inflation and facing the worst growth prospects outside Equatorial Guinea, according to the International Monetary Fund.

“The level of macroeconomic dysfunction is so deep that the story really isn’t about oil prices anymore,” said Alberto Ramos, the chief Latin American economist at Goldman Sachs in New York. “Unless policies change dramatically, I’d be concerned even with the oil price at $150.”

Currency Controls

Since Maduro succeeded his mentor, the late Hugo Chavez, in March 2013, the economy’s stagnation has deepened as currency controls impeded imports and factories shut down. The number of cars built in Venezuela fell 77 percent in the first five months of this year as automakers including Ford Motor Co. and Toyota Motor Corp. froze production while American Airlines Inc. and Air Canada have cut back flights to the country because of difficulty getting money out.

Still, the nation has kept paying its debt.

Venezuelan dollar bonds have returned 19 percent this year, the best performance among developing countries, as suppressed interest rates in the U.S. and Europe boosted demand for higher-yielding assets. The average yield on Venezuela’s dollar debt is the highest in the world at 11.16 percent, 0.8 percentage point more than lower-rated Argentina, which faces default as soon as July 30.

Bank Meetings

Venezuela will continue to meet its obligations, Rafael Ramirez, the economy vice president, said June 27. Officials are meeting representatives of Bank of America Corp. Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs in Caracas to discuss debt, Ramirez said.

Venezuela’s Finance Ministry didn’t respond to e-mail messages sent yesterday seeking comment on the government’s debt-payment policies.

Drew Benson, a spokesman for Credit Suisse in New York declined to comment, as did Kerrie McHugh, a spokeswoman for Deutsche Bank in New York. Press officers at Bank of America, Citigroup and Goldman Sachs didn’t respond to requests for comment.

Economic Fundamentals

This year’s rally in the bonds doesn’t “make sense given the direction fundamentals are going in Venezuela,” Volberg said.

The country’s international reserves fell 18 percent in the last 12 months to $21 billion on June 27. Arrears to importers and their banks may be worth as much as half the central bank’s reported reserves, Volberg said.

Annual inflation reached 61 percent in May after the government carried out its biggest devaluation since the introduction of currency controls in 2003. The economy will probably contract this year and next by as much as 1 percent, according to the IMF.

While higher oil provides some benefits, signs that Maduro is turning toward more pragmatic policies after four months of unrest across the country may be more encouraging to investors, according to Bank of America.

Last month Maduro fired Planning Minister Jorge Giordani, a long-term advocate of currency controls who taught Chavez economics in jail in the early 1990s. The country plans to merge its three official foreign exchange rates, Ramirez told investors in London in June.

Exchange Rate

The rates range from 6.3 bolivars per dollar to 50 bolivars per dollar. On the black market, the bolivar trades at 72.18 per dollar. The government is likely to unify exchange rates at about 25 per dollar, according to Bank of America.

The cost to the government of exchanging its oil dollars for bolivars at the official rate is the equivalent of 10 percent of gross domestic product, and authorities make that up by printing money, according to Francisco Rodriguez, an economist at Bank of America in New York.

“Venezuela has a source of revenue it can use and with unification it would pretty much solve its fiscal problem,” Rodriguez said by phone yesterday.

The country’s oil exports are falling as production wanes at state-run Petroleos de Venezuela SA. Oil sales declined 8.4 percent last year to $114 billion, the company said June 27. Output sank about 11,000 barrels a day in 2013 to a total of 2.9 million.

The extra yield investors demand to buy Venezuela’s bonds due in 2022 instead of U.S. Treasuries fell 0.1 percentage point today to 9.91 percentage points. The spread fell to a nine-month low of 9.56 percentage points on June 23.

“The question is how long the markets are willing to give Venezuela a free pass and how long this process can go on before you have a more disorderly adjustment,” Volberg said.

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