Venezuela Bond Payment Spurs Rally in PDVSA Notes Due in October

  • Oil's biggest weekly rally since August bolsters outlook
  • Government says it will continue paying debt due this year

Bonds from Venezuela’s state oil company due in October surged after the country paid $1.5 billion of debt that matured Friday.

The $1 billion of notes from Petroleos de Venezuela climbed 3.2 cents to 73.14 cents on the dollar as of 2:06 p.m. in New York as the payment bolstered investor confidence and as oil, the country’s main export, headed for its biggest weekly increase since August. The country has another $2.05 billion bond payment due in November.

Trade minister Jesus Faria said this week that the government will honor all of its obligations this year, yet swaps traders see a 63 percent change the country will default sometime over the next year, the highest rate in the world. Venezuela’s foreign currency earnings fell to just $77 million in January from a monthly average of $3 billion to $3.5 billion, leaving President Nicolas Maduro with a shortage of dollars to import goods such as food or medicine as the debt payments loom.

“The Maduro administration will do whatever it can to raise cash to make those payments,” said Marco Santamaria, a portfolio manager at AllianceBernstein. “But given the steady drain of reserves over the last year, it doesn’t seem likely they will be able to make the October and November payments unless there is a rapid recovery in the price of oil.”

Venezuela relies on oil for 95 percent of its foreign-currency earnings and the price of the crude the country exports has fallen by more than half in the past year to $24.71 a barrel. That has generated a shortage of hard currency, helping drive the world’s fastest inflation. Including interest, PDVSA and the government have $8.3 billion in bond payments still to make this year. The central bank’s foreign reserves fell to a 13-year low of $14.6 billion on Monday.

Siobhan Morden, the head of Latin America fixed income strategy at Nomura Holdings Inc., said investors have been too focused on debt liabilities and not enough on the potential impact of declining imports, which some measures show have fallen as much as 60 percent. That’s resulted in daily shortages of goods from food to milk to toilet paper.

Customers line the streets at 3:30 a.m. every day to grab rations before the shelves are cleared. Meanwhile, the lack of medical supplies in national hospitals rivals a war zone, according to Human Rights Watch.

"The market has been worried about how much more can be cut," said Alejandro Arreaza, an analyst at Barclays Plc. "The truth is that it all depends on the government capacity to contain social and political pressures. So far they have been effective, but it is difficult to have a thermometer that measures the level of social unrest that may exist.”

--With assistance from Chiara Vasarri.

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