Monday, February 16, 2009

Venezuela Government Bonds Drop as Chavez Scores Voter Victory

By Laura Cochrane and Andrea Jaramillo

Feb. 16 (Bloomberg) -- Venezuela’s bolivar rose the most in a month on speculation President Hugo Chavez will take measures to offset a plunge in oil revenue after winning a referendum yesterday that eliminates term limits.

The bolivar jumped 2.7 percent to 5.65 per dollar in unregulated trading at 3:34 p.m. New York time from 5.80 on Feb. 13, traders said. It had slumped 4.3 percent over the past month amid concern that Chavez was putting off tax increases and spending cuts as he focused on winning the referendum, which allows him to extend his presidency beyond 2013.

“We’re not expecting Chavez to see the light and take a more pragmatic approach, but he will at least now be able to make the necessary adjustments to address the widening deficit,” said Edwin Gutierrez, who manages $5 billion of emerging-market debt, including Venezuelan securities, at Aberdeen Asset Management Plc in London.

Venezuelans turn to the unregulated market when they can’t get government authorization to buy dollars at the official rate of 2.15 per dollar. Chavez, who first took office a decade ago, has restricted currency transactions since 2003.

Barclays Capital Inc. said last week that the measures Chavez may take include the implementation of a financial transaction tax, an increase in the value-added tax rate, a devaluation of the official exchange rate and an increase in domestic gasoline prices.

No Immediate Plans

Finance Minister Ali Rodriguez said yesterday that the government doesn’t have any immediate plans to raise taxes or devalue the currency.

The 75 percent tumble in crude from a July record has throttled revenue in Venezuela, which gets more than 90 percent of its exports from oil. The plunge in oil has pushed the bolivar down from 3.38 per dollar in the parallel market six months ago.

The yield on the government’s benchmark dollar bonds due in 2027 rose 12 basis points to 18.6 percent, according to Bloomberg prices. The bonds’ price fell 0.35 cents to 51.54 cents on the dollar. Bond trading was light with U.S. markets closed, traders said.

The referendum, which allows Chavez to extend his drive to turn the oil-producing country into a socialist state, marked the second time in 14 months he sought to remove the limits that kept him from seeking unlimited re-election. The amendment carried with 54.4 percent of the vote to 45.6 percent, according to preliminary results, said Tibisay Lucena, president of the National Electoral Council.

‘Grey Political Scenario’

“It does present a grey political scenario: that Chavez will be there forever,” said Luis Costa, an emerging-market debt analyst at Commmerzbank AG in London.

The combination of Chavez’s political strategy and the plunge in oil is increasing investor concern about the country’s ability to pay its $46 billion of debt. Venezuela, the biggest oil exporter in the Americas, raised government spending to the equivalent of 36 percent of gross domestic product in 2007 from 23 percent in 1998, according to Standard & Poor’s.

Venezuela’s benchmark securities due in 2027 trade at a price that is about half their value of 99.2 cents a year ago.

“It’s an extremely shaky scenario to go long Venezuela bonds, especially with the prospect of oil trading in the low 30s,” Costa said.

In the first 10 months of the year the government had a 48 million bolivar ($22,354) budget deficit, according to the central bank. The budget report, based on information provided by the Finance Ministry, doesn’t include off-budget spending by the government’s National Development Fund or social spending by state oil company Petroleos de Venezuela SA.

‘Macroeconomic Weakness’

“Because of the macroeconomic weaknesses, social and political tensions could at any moment disrupt governance and oil shipments,” Benito Berber, an economist at RBS Greenwich Capital Markets, wrote in a report today.

The amendment allows Chavez, a former Army lieutenant colonel, to seek re-election as many times as he wants. The next presidential election is slated for 2012. Chavez, whose began his political career after leading a failed coup attempt in 1992, says he needs to rule beyond 2012 to carry out his “socialist revolution.”

Investors demand 18.05 percentage points more in yield on average to hold Venezuela’s dollar bonds rather than comparable- maturity U.S. Treasuries, according to JPMorgan Chase & Co. That’s more than four times the 4.24 percentage-point average yield spread for Brazil’s dollar bonds. Dollar-denominated bonds sold by Argentina, which defaulted on debt in 2001, carry yields on average 16 percentage points more than Treasuries, JPMorgan data show.

S&P’s Negative Outlook

S&P lowered Venezuela’s debt rating outlook to negative from stable on Dec. 10, saying the referendum will cause Chavez to put off “needed adjustments in economic policies.” S&P rates Venezuela’s foreign debt BB-, three levels below investment grade. Moody’s Investors Service, which rates Venezuela’s debt five levels below investment grade at B2, removed it from review for a rating increase on Jan. 15.

“We don’t expect any rating downgrade out of this,” Costa said.

To contact the reporters on this story: Laura Cochrane in London at lcochrane3@bloomberg.netAndrea Jaramillo in Bogota at

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