Investors Like Yields on Venezuela's Debt, But Worry About Policy Risks - Wall Street Journal [getdailynow.blogspot.com]
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--Chavez's win puts a new turn on Venezuela's assets
--Investors like higher yields but worry about economy and policies
--Some buyers want to wait until currency is devalued to enter
By Prabha Natarajan
The resounding victory for Hugo Chavez in Venezuela has made the country's bonds a wild card for emerging market investors, many of whom hold the high-yielding paper but worry about unexpected changes in government policies.
Investors say in a world of low-yielding debt, Venezuela's 12% or more yield is an attractive option they can't afford to ignore. But they also realize the high compensation comes precisely because of a deteriorating economy and policy risks.
"The fundamentals of Venezuela's credit are not that great, but given the yield, and given the capacity and willingness to pay on their bonds, we will look more closely at their debt," said Anthony Simond, investment analyst at Aberdeen Asset Management with $ 296 billion in emerging market assets.
His firm, which has less than 3% exposure to Venezuela, will be keen to buy Venezuela bonds if prices drop as a result of Mr. Chavez's near 10-point margin of victory.
This year, Venezuela's debt has surged more than 32% as investors bought up these assets on the hope of a change in regime kindled by Mr. Chavez's poor health and a tightening of the polls in the election's prelude.
However, his decisive victory this weekend and vows in the wake of the vote to deepen the "socialist revolution" once again raise questions about the policies he will pursue and how much more it could harm Venezuela's ailing, oil-dependent economy. Widespread nationalizations, dual-fixed exchange rates and strict capital and price controls have all badly undercut investment and stoked double-digit inflation.
Thanks to a binge in pre-election government spending, economic growth this year is expected to run north of 5%. But next year, economists forecast a painful fiscal adjustment to cut a deep fiscal deficit as well as a devaluation of the heavily overvalued bolivar.
Economists predict a devaluation of 50%-70% to help close the gaping fiscal deficit and narrow the gulf between the currency's official and black-market rates. The bolivar is valued at more than VEF12 per dollar on the streets, compared with the government's fixed exchange rate of VEF4.3.
An adjustment to the exchange rate would help bond investors because it would increase Venezuela's bolivar revenues from oil sales and help balance its budget.
The currency devaluation will be an attractive entry point for investors, said Julian Adams, chief investment officer at Adelante Asset Management, which has $ 75 million in its global emerging market debt fund.
"For the next few months, there will be no point in holding Venezuela paper," he said.
Hedge funds like Adelante and investors with a shorter horizon subscribe to this view and suggest avoiding Venezuela debt until next year, when these asset prices are expected to settle down after gubernatorial elections are held in December.
But some investors may not have the patience, and may have a chance to jump on a price fall in the election's wake.
There may be some initial knee-jerk selling of Venezuela bonds when markets reopen Tuesday, said Siobhan Morden, head of Latin America strategy at Jefferies & Co., even though many investors had already taken profits ahead of the weekend presidential election amid the uncertainty about the outcome.
Citigroup projects as much as 100 to 150 basis points in immediate weakening, yet just how much of it will stick remains unclear. Many investors say they are looking to buy Venezuelan debt if prices weaken sharply, but also add that much depends on the outlook for oil prices and the extent to which Mr. Chavez pursues the necessary post-election fiscal and currency adjustments.
Further, between now and then, there's a chance of slow and steady erosion on some of the gains Venezuela's debt has made this year, said Adelante's Mr. Adams.
Currently, Venezuela's benchmark 2022 bond with a 12.75% coupon trades at a premium price of 107.50 cents per dollar, a 19.4% increase in price from the start of this year, according to MarketAxess data.
For around 14 years, Mr. Chavez has run Venezuela on an anti-U.S. and anti-globalization stance. The country's oil reserves were nationalized and now is the main source of government revenues and employment. The global slowdown, however, has stoked fears of a cheapening of oil prices and slowing demand. Also, the U.S., typically a large purchaser of resources, is likely to become a net exporter of gas thanks to discovery of shale gas and increasing output of unconventional oil, as well, thanks new technology that allows the extraction of it.
"In the long run, Chavez's re-election means Venezuela missed a chance to adopt market-friendly policies," said Joaquin Cottani, chief economist for Latin America at Citigroup. But in the near term, potential currency devaluation and expectations for stable oil production are expected to result in more revenues for the government, balancing of Venezuela's budget and the possibility that Venezuela will continue to honor its sovereign debt and that borrowed by state oil producer Petroleos de Venezuela.
Write to Prabha Natarajan at prabha.natarajan@dowjones.com
Suggest Investors Like Yields on Venezuela's Debt, But Worry About Policy Risks - Wall Street Journal Articles
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