LatinFinance - March/April 2013 - 30

Venezuela

Making change
By Girish Gupta

V

enezuela’s financial woes are
plain to see on arrival at Caracas’
Maiquetía international airport.
Hawkers vie for hard currency, offering
more than three times the official
exchange rate of 6.3 bolívares fuertes
(VEF) per US dollar.
But it’s not only the hawkers who
are after foreign currency. Venezuela’s
government faces a severe shortage of
dollars.
In February, Venezuelan authorities
devalued the bolívar fuerte by 31.7%
to bring down a budget deficit that had
been forecast by analysts at more than
9% of GDP this year. But the concern
is that the action will do little to meet
growing demand for hard currency to pay
for imported goods – and could stoke yet
more inflation, already at rates of over
20%.
“It’s very worrying that with oil at
over $100, the country hasn’t managed
to put in order its fiscal situation in a
very distorted economy,” says Carlos
Bellorin, oil and gas analyst at Petroleum
Economics and Policy Solutions for IHS in
London.
Last year, Venezuela’s president Hugo
Chávez won his third six-year term with
a spending spree that nearly tripled
the budget deficit. Despite his return to
Venezuela in February from Cuba, where
he had been undergoing two months of
treatment for cancer, whether he is able
to return to the presidency remains in
doubt. Fresh elections would ensue should
Chávez be declared permanently unable to
govern.

Outperformer

Venezuelan bond yields in part reflect a
view on the socialist president’s future.
When Chávez announced in December
that his cancer had returned, the yield

30 LatinFinance March/April 2013

Despite devaluing the bolívar in February, Venezuela’s chronic dollar
shortage continues. Another devaluation may well be on the cards

A bird in the hand: Venezuela devalues
on Venezuela’s dollar-denominated 2027
benchmark bond fell to a five-year low.
Investors, hoping for a more marketfriendly government, pushed its price
up to nearly 103 cents on the dollar.
Venezuela’s bonds have been the third
best performing of any emerging market
over the past 12 months, after the Ivory
Coast and Belize, according to the
JPMorgan EMBIG index.
“There’s a morbid inverse relationship
between Chávez’s health and bond
prices,” says Kathryn Rooney Vera, senior
strategist at Bulltick Capital Markets.
But an end to Chávez’s presidency
does not guarantee an end to the
country’s economic policies. “Chavismo
will probably last generations. It will not

die,” says Alberto Ramos, head of Latin
America economics at Goldman Sachs.
“The death of Perón was not the death of
Peronism in Argentina.”
The high yields on Venezuelan bonds,
especially compared to developed markets,
have long been attractive to investors. The
Chávez administration has not defaulted
on a payment. Nevertheless, some analysts
are starting to caution against buying
Venezuelan bonds now they are trading
above par.
“We recommended this bond back
in early December with the view that
there was going to be imminent regime
change,” says Rooney Vera. “At that
point it was trading below par. We’re not
recommending entry at current levels.”
LatinFinance - March/April 2013

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