Venezuela’s Disenchanted Bondholders Tune Out Maduro

The collective shrug that greeted Venezuela President Nicolas Maduro’s newest policy pronouncements is the latest sign that bondholders are increasingly tuning him out.

In a speech last week after a fundraising trip to China and the Middle East, Maduro said that private companies and individuals will be able to trade the dollar through brokerages, and he asked lawmakers to consider raising the world’s lowest gasoline prices. The nation’s benchmark bonds barely budged, and are within one cent of the record low 35 cents on the dollar that Bank of America Corp. says they’d be worth in a default.

“The big question mark, of course, is their ability to pay, and that’s really what investors are trying to figure out right now,” Kevin Daly, a money manager at Aberdeen Asset Management who helps oversee $13 billion, said by telephone from Venezuela. He met with Venezuelan officials last week.

The muted bond-market response underscores the loss of confidence in Maduro’s ability to right an economy reeling from a shortage of U.S. currency and a plunge in oil prices that accounts for almost all of its exports.

To appreciate how Maduro’s announcements have reached the point of diminishing returns, consider the reaction to the currency plan he unveiled almost a year ago. That move spurred a 9 percent jump in the nation’s bonds the week it was announced.

‘Total Confidence’

The Finance Ministry’s press office didn’t respond to an e-mail yesterday seeking comment on the lack of reaction to Maduro’s speech in the bond market.

Following a meeting with investors and analysts, Finance Minister Rodolfo Marco Torres said Jan. 22 that bondholders “showed total confidence and interest in continuing to invest in Venezuela.”

The nation’s bonds have lost 20 percent this month, the most in emerging markets, as investors dump the securities on concern Venezuela will run out of money as oil prices hover close to a six-year low. Swaps traders are pricing in an 82 percent probability that Venezuela will miss bond payments in the next 12 months.

The 2027 bonds rose 0.07 cent to 35.95 cents on the dollar at 1:31 p.m. in New York.

Maduro said Jan. 21 that Venezuela would create its fifth parallel currency market in 12 years to boost the supply of dollars in a country where currency controls have proliferated since former President Hugo Chavez adopted them in 2003.

Still, Maduro said the country would continue to import essential products at the primary exchange rate of 6.3 bolivars per dollar, opting against weakening the official rate, which would help bolster the nation’s finances.

Gas Price

On the black market, one dollar sells for about 184 bolivars, according to dolartoday.com, a website that tracks the rate on the Colombian border.

While Maduro asked lawmakers to debate the domestic fuel price, the lowest approval ratings for a Venezuelan president in two decades suggests he’s likely to tread lightly on the matter. It costs about 0.2 U.S. cent to buy a gallon of gasoline in Venezuela, based on the black-market currency rate. The government last lifted the state-set prices two decades ago.

‘Untenable’ Situation

“The decline in oil prices has turned an already-challenging situation into an untenable one,” Mauro Roca, an economist at Goldman Sachs Group, said in a Jan. 23 report. “There is an increasing probability that the sovereign, or PDVSA, will at some point be unable to continue servicing its external debts.”

Jorge Piedrahita, the chief executive officer of Torino Capital LLC, says Maduro is doing what is possible given his lack of public support and that Venezuela still has the ability to raise cash to repay debt. The bonds should be trading closer to 50 cents, he said.

Citgo Petroleum Corp. is planning to raise $2.5 billion through loans and bond sales that it will use to shore up the finances of its state-owned parent company, Petroleos de Venezuela SA, according to a person with knowledge of the matter who asked not to be identified because the information is private.

“Bond prices are a little bit overdone for a country that continues to honor its commitments,” Piedrahita said by telephone from New York.

Growth Outlook

Still, with Venezuela’s economy mired in a recession and worsening shortages of everything from toothpaste to medicine, the country’s ability to pay its debt will remain in question, said Aberdeen’s Daly.

The International Monetary Fund forecasts Venezuela’s economy will contract 7 percent in 2015, the most since 2003.

“You’ve got a lot of headwinds out there,” Daly said. “It’s not just about getting through this year. It’s also about surviving in an environment where oil prices remain low.”

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