Venezuela Dollar Bonds Test New Lows

  • Currency continued collapse in August as country awaits reform
  • The bolivar has lost 82% of its value so far this year

Venezuela’s dollar bonds are testing all time lows as President Nicolas Maduro plots how to respond to new U.S. sanctions and revive an economy in shambles.

The country’s $4 billion of benchmark notes due in 2027 declined 4.6 percent in August to 39.65 cents on the dollar, just 7 cents away from the record low of 32.45 cents on the dollar seen in February 2016. State oil company PDVSA’s $3 billion of notes due in 2035 declined 5.8 percent in August to 35.3 cents on the dollar, only 6.2 cents above the record low.

While anti-government protests that left more than 100 dead this year have faded after Maduro moved to cement his rule by re-writing the constitution, the economy shows no signs of stabilizing. The bolivar had its second-worst month ever, loosing 37 percent on the black market in August to trade at 17,663 per dollar. That compares to an official rate of only 10 bolivars per dollar for the politically connected and an alternative legal rate of just 3,246 per dollar.

Maduro is expected to announce measures on Friday to bolster the economy, but if history is any guide, it will likely be too little, too late. Should he devalue the official exchange rate, it would be the sixth time the country has done so since currency controls were introduced in 2003. Past efforts to breach the gap with the black market have only resulted in further schemes involving multiple exchange rates that have maintained lucrative arbitrage opportunities for those with access to the legal rates.

Whatever Maduro announces, the real question will be how -- and even if -- Venezuela will pay the $1.6 billion it owes in interest and principal payments on its foreign debt in October and another $1.9 billion in November. After the U.S. expanded sanctions that prohibited trading in any new debt last month, Venezuela officials renewed rhetoric accusing the country of waging a “financial blockade” in an attempt to prevent it from making debt payments.

Any signals about possible new financing from either China, Russia or India would likely give investors a sigh of relief, but statements about willingness to repay debt will become just as important in the months ahead.

For a QuickTake Q&A on navigating financial sanctions, click here.

Venezuela Dashboard Indicators

  • The implied probability of the country missing a payment over the next 12 months rose to 64 percent in August, according to credit-default swaps data compiled by Bloomberg. That’s the highest level since February 2016
  • The odds of a credit event over the next five years increased to 96 percent last month
  • PDVSA’s oil export basket price increased 2.5 percent to $45.54 a barrel
  • Venezuela’s international reserves hit a new 15-year low, falling $206 million to end the month near $9.8 billion
  • The weakest official exchange rate, used mostly for imports deemed non-essential, was devalued 11.7 percent to 3,246 bolivars per dollar on the government’s Dicom auction system
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